Isn’t it obvious?

In the case of Charter Reinsurance vs Fagan, Lord Hoffman related a fictional dialogue involving a husband and his wife about her new dress. The purpose was to illustrate the way in which words do not always have their “obvious” meaning. The words in question were part of a contract under which a reinsurer agreed to reimburse an insurance company for “the sum actually paid” by that company under a policy. Surely, argued the reinsurer, those words meant that it only had to stump up if the company had actually paid out under the policy, i.e. if the money had left its bank account.

Not necessarily so, said Lord Hoffman. He took the example of a wife who comes home with a new dress. The husband asks, “What did you pay for it?” Lord Hoffman noted that the wife would not be understanding the husband's question properly if she answered, “Nothing – the shop gave me 30 days’ credit.”

The reinsurer went on to argue that the word “actually” was surely intended to make it absolutely clear that money must have changed hands before it had any obligation to reimburse. Not so, said Lord Hoffman again, and reverted to his example.

Suppose that the wife had answered the husband’s question by saying, “£300, but they were having a sale.” If the husband had then asked, “So what did you actually pay?”, and the wife had given the same answer as previously, she would still not be understanding his question. The husband wanted to know what the dress cost, not whether money had changed hands.

The reinsurer lost the case. The “obvious” meaning of “actually paid” was rejected. The court held that one of the purposes of this clause was to protect the insurance company’s cashflow. Thus, despite the words “actually paid”, it could claim reimbursement before money had left its bank account – provided that it had at least incurred a liability to pay up on the policy.

In the recent case of Yorkshire Water Services vs Taylor Woodrow Construction Northern, one party tried to argue that the same sort of approach should apply to a process plant contract for the improvement of a sewage treatment works. The judge was asked to decide a large number of issues. One of these concerned a provision in a schedule. This dealt with the consequences to the contractor if it failed to pass certain performance tests. The tests were to take place once the work was complete. The provision stated that if a certain sludge content figure could not be met by the contractor, it would pay to Yorkshire Water (YW) their “actual costs incurred” for staff, experts and others to achieve the required standards.

YW said that, as in Charter Reinsurance, it was important to look at the words in context. “Actual”, they argued, must mean “when finally ascertained”; and “incurred” meant “exposed to liability”. In other words, said YW, if the contractor fails its performance tests, we can claim for the probable costs of experts and subcontractors who will be engaged to get the plant up to the standard to meet the appropriate sludge content – even if those contractors and experts have not yet invoiced or been paid.

The judge disagreed. By contrast with the Charter Reinsurance case, the overall scheme of the schedule was to require the contractor to reimburse only those costs actually paid out by YW. The words had their ordinary meaning. Estimated or predicted future costs were not intended to be covered.

Each case has to be seen in context. In one case “actually paid” did not mean that money had had to change hands, because the purpose of the clause was to protect cashflow. In the other, by contrast, “actual costs incurred” only covered sums that had been paid out because one of the purposes of the clause was to avoid claims for estimated or future costs.

Words similar to these are often used in construction contracts but as Lord Hoffman showed, the apparently “obvious” meaning of a phrase is not always the right one.