James helpfully highlighted the judgment on Wednesday of the UK Supreme Court in Aberdeen City Council v Stewart Milne Group. Though the judgment is a short one (reflecting the short debate before the Court - it was, I understand, over in half a day) it is, in my view, a significant one. It gets at the heart of the matter of what interpretation/construction of a written contract is about: is it about trying to understand what the contract entered in to by the parties means, or is it about to trying to determine what the underlying purpose of the parties' transaction was, even if this deviates from seemingly clear wording of the contract which does not produce an evidently absurd result? I would argue the former (and reserve the remedy of rectification for the latter), but it seems to me that in this decision the Supreme Court has adopted the latter view. It may represent an emerging shift in the courts' views on what it is proper for interpretation to do, but I worry about where this leaves rectification as a remedy.

I stuck my neck out, in commenting publicly in the Edinburgh Law Review on the earlier stages of the litigation, when I said that I thought both the decision at first instance and on appeal was wrong. Lord Hope in the Supreme Court made kind remarks about my published views, but he declined to follow them. I am going to stick my neck out again and say that I believe the result affirmed by the Supreme Court falls on the wrong side of the interpretation/rectification line. I am rather a lone voice, from what I can see, in this regard among my Scottish colleagues - certainly my contract colleagues in Edinburgh disagree with me (reference was made yesterday to a clear defence of the Supreme Court's view by a very experienced commercial law colleague of mine, Laura Macgregor, on the Edinburgh Law School's Commercial Law blog). However, sticking my neck out again, let me (relatively briefly) say why I believe the Supreme Court's approach to be wrong:-

1. Fundamentally, the Supreme Court is using the technique of interpretation/construction not for the purposes of trying to understand the contract made by the parties, but rather to say 'Here is what the parties meant to do, even though their contract - clear and ambiguous as it is - doesn't put that properly in to effect. We know what the contract says, it just isn't good enough, so we shall take it to mean something else'. In my opinion, though this is denied by the Court, violence *is* done to the clear and unambiguous wording of the contract by the approach they take (and is done because of an alleged common commercial intention of the parties about which I comment below). Adopting a natural meaning approach (pace Lord Mustill), it seems to me that the meaning of the phrase 'gross sale proceeds' is not in doubt - gross sale proceeds means the sum one gets for selling something, before any deductions are made. The phrase means that both in ordinary speech and, I would suggest, within the particular commercial context of a land transaction of the sort at issue. While adopting a wider contextual approach (pace Lord Hoffmann) *might* have disclosed some other meaning, crucially (as I mention below) reference was not made to anything outside the contract itself, so that the Hoffmann approach was not employed to get to grips with any wider factual matrix. If the meaning of a phrase used is not in doubt, then there is no need to pray in aid the rules of interpretation to attempt to some other, counterintuitive meaning. The agreement expressed in the contract was to my mind clear, even though one of the parties might well have wished, in retrospect, that this clear agreement had said something else.

2. Though Lord Hope declares that the 'commercially sensible' reasoning often used by the courts to reach conclusions such as that reached in this case is 'simply a makeweight' (para 22), I am not convinced that this very approach is not the whole basis of the Supreme Court's decision. In fact it seems to me that Lord Hope's entire approach is based upon looking at what the Court argues is the commercial purpose and sense of the transaction. Oddly enough, however, there is no evidence of this supposed commercial purpose anywhere other than in the wording of the contract itself, as interpreted by the Court. Lord Hoffmann's wider matrix of fact would have provided no answer here because, from what I can see, there was no reference by either party to any other document or communication between them supporting the supposed common intention that, in the case of a sale, 'gross sale proceeds' was intended to mean 'open market sale price'. The Supreme Court's conclusion that this was in fact so rests entirely upon the assertion by the Court that each of the three possible events triggering payment to the Council must (so the Court reasons) have been intended by the Council to produce a broadly similar 'open market' profit uplift. Perhaps they were (and my detractors will say that this is enough to justify the decision), but this conclusion is deduced from an admittedly 'reasonable assumption' (per Lord Hope) about the commercial purpose rather than any extrinsic evidence supporting such, and upon the negative reason (per Lord Clarke) that counsel for the appellants couldn't suggest any good reason why a 'gross proceeds' basis must, as the plain meaning of the wording suggests, have been intended (why should it have been appellant counsel's job to justify the meaning of the words used?).

3. Though the argument of the Supreme Court is strongly that the contract wording, taken as a whole, supports the conclusion reached, there is no good reason why, if 'gross sale proceeds' was meant, despite the language used, to mean 'open market sale price', that was not plainly stated. It would not have been difficult to do so - there was, after all, a definition of 'open market valuation' in the contract that might easily have been referred to, but it was not. The simple reason appears to have been that it was an oversight of drafting, but therein lies the absolutely fundamental issue about this case: this litigation was *not* really a case about giving the correct meaning to a less than transparent contract phrase at all (despite what the Court says); it was about a piece of bad drafting, and where the economic consequences of that should fall. The Supreme Court in effect holds that the client adversely affected by a legal agent's bad drafting should be protected from this, to the disadvantage of the other party. Yet why is it obvious that that should be the result? Why not place the economic costs of bad, but perfectly clear, drafting on to the careless drafter? If my lawyer drafts something badly, thereby disadvantaging me, I expect to be able to sue him or her, but should I really have an expectation of being able to argue my way out of the contract I have concluded, unless there is a clearly established route for such avoidance?

4. There *are* clearly established routes to avoid the consequences of a 'bad' contract. One is to plead the Unfair Contract Terms Act. But there are restricted circumstances in which the Act can be used, and these were not applicable in this case. Yet the Supreme Court's decision feels to me like an attempt to treat the relevant contract clause as unfair, and (in effect) strike it down using the technique of interpreting wording against its clear meaning. Another way to avoid the consequences of a 'bad' contract is to ask a court to use its power to rectify a contract, a course of action available in both England and Scotland. In Scotland, this requires to be done under section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, in which provision a court is given a power to rectify in cases where a document does not accurately reflect 'the common intention' of the parties. The existence of such a 'common intention' has to be demonstrated to the court. Given the frequent reference in the Supreme Court's judgment in this case to the underlying commercial purpose of the parties, it is as if the Court is, having identified what it believes to be such a 'common intentiuon', rectifying the contract, even though it says it is just interpreting it. But if there *was* a clear common intention of the parties not properly reflected in the contract documentation, the Council should have (and I suspect would) have pled rectification: it did not, indicating perhaps a concern on its part that it would be unable to show any such common intention in a way that would have satisfied the requirements of the remedy of rectification. A decision tantamount to rectification is thus given in circumstances where rectification was not sought, and might not have been granted had it been. Interpretation is used to subvert and shortcut the remedy of rectification. This decision is another example of an unhappy blurring of the lines between interpretation and rectification that has been going on for some time now.

5. The passing references in both Lord Hope's and Lord Clarke's judgment to the fact that, had the parties been asked when they were contracting whether they meant 'gross sale proceeds' to refer to a market price sale, they would have said yes, is redolent of an implied terms approach (and smacks heavily of the officious bystander test). Yet neither side argued implied terms in the litigation. Had such an implied term argument been pled by the Council, then it could have been properly considered and commented on by the court; it was not. To add in judicially such reasoning, en passant, to bolster an argument about interpretation seems to me to suggest an underlying shakiness in the alleged interpretative basis of the decision.

6. I am prepared to concede that the Council (if not Stewart Milne) would have wanted the contract expressly to say what the Supreme Court holds implicitly it did say. But the contract didn't expressly say this. This underlines the point I made in the ELR article to which Lord Hope refers in his judgment: a party might well have a commercial purpose in mind, but if it carelessly fails to reflect such a purpose in contractual language effecting this purpose, why should such (what I have called) commercial fecklessness be corrected by a court through the court's improving the drafting of the contract for such a feckless party? This contract was badly drafted (as Lord Hope notes in his judgment at para 9). Many contracts are badly drafted, doubtless disadvantaging those affected by them. But I do not believe this contract was worded in a way which properly gave rise to any problem of interpretation. In my view, while there may be solutions to the sort of bad drafting we see in this case (I reference what I said earlier about a possible professional negligence claim against the drafter, and especially my remarks about the remedy of rectification), I cannot see why one such legitimate solution should lie in interpretative techniques in contracts whose wording discloses no lack of clarity about a phrase used. We should be interpreting what a contract says, not what one of the parties may have wanted it to say. If, outside the remedy of rectification, we are going to open up contracts just because, though clear, they don't adequately achieve what someone may have wished them to, then we may as well throw a desire for commercial certainty out the window.

I expect all of this may be mark me out as adopting an old fashioned view of interpretation, and that the tide of using interpretation to solve rectification-like problems like has already turned. But I would have preferred to reserve to interpretation of a written contract the limited function of assessing what the agreement reached by the parties means, rather than giving to it the rectification function of improving upon a contract just because one side didn't ensure it was drafted robustly enough to meet its commercial aspirations. I do not doubt that the judgment reaches what the Court believes was a just result, but it seems to me to assist a party which ought properly to have attempted other means to have corrected a contractual instrument which had been bungled.

In case I feel tempted to put pen to paper about this decision, it would be useful to know if there is anyone else who takes my view or whether indeed I am in a minority of one!

Martin Hogg
Edinburgh Law School


On 8 Dec 2011, at 03:04, James Lee wrote:

> Dear Members,
>
> In the light of last month's discussion on contract interpretation, a couple of recent cases might be worth reading. First, yesterday's short decision of the UK Supreme Court in Aberdeen City Council v Stewart Milne Group Limited (Scotland) [2011] UKSC 56 (http://www.supremecourt.gov.uk/docs/UKSC_2010_0229_Judgment.pdf). The case concerned a property development, under which the appellants were required to pay an uplift, subject to allowable deductions, to the respondents if they sold the land. The appellants sold the land to a company within the same group, for an amount which was less than the open market value and less than the allowable costs, and therefore declined to pay the uplift to the respondents. The contract made reference in other clauses to the open market value of the land, but not in the specific provision relating to the uplift. The Supreme Court unanimously takes the view that the calculation should be by reference to the open market value, notwithstanding that that approach is not expressly stated anywhere in the contract, and pointing to awkward drafting of the agreement. Lord Hope (mentioning fellow ODGer Martin Hogg) and concludes
>
>
> "[22]... It seems to me that the position here is quite straightforward. The context shows that the intention of the parties must be taken to have been that the base figure for the calculation of the uplift was to be the open market value of the subjects at the date of the event that triggered the obligation. In other words, it can be assumed that this is what the parties would have said if they had been asked about it at the time when the missives were entered into. The fact that this makes good commercial sense is simply a makeweight. The words of the contract itself tell us that this must be taken to have been what they had in mind when they entered into it. The only question is whether effect can be given to this unspoken intention without undue violence to the words they actually used in their agreement. For the reasons I have given, I would hold that the words which they used do not prevent its being given effect in the way I have indicated."
>
>
>
> So there is some reference to the commercial good sense approach, although it is not viewed as crucial. Lord Clarke gives a brief concurring opinion, preferring a slightly different view on to reach the same outcome:
>
>
>
> "If the officious bystander had been asked whether such a term should be implied, he or she would have said “of course”. Put another way, such a term is necessary to make the contract work or to give it business efficacy. I would prefer to resolve this appeal by holding that such a term should be implied rather than by a process of interpretation. The result is of course the same."
>
>
> Lady Hale, Lord Mance and Lord Kerr record that they agree with both judgments.
>
>
> The other case is from Western Australia: The City of Subiaco v Local Government Advisory Board [2011] <http://www.austlii.edu.au/au/cases/wa/WASC/2011/322.html> WASC 322<http://www.austlii.edu.au/au/cases/wa/WASC/2011/322.html>. It contains a valuable survey of the present state of Australian law on interpretation/construction (not limited to contract) and extrinsic evidence, and considers the 'vexed question':
>
> [116]... whether extrinsic evidence can be relied upon where the evidence was not known to one of the parties but was reasonably available to him or her. .. [with the answer that on] the state of the law at the moment, reasonably available evidence which is unknown to one party would not be admissible for the construction of a contract.
>
> Another reason why the case is of particular note is that we have the benefit of careful analysis from the judge, Edelman J.
>
> Best wishes,
>
> James
>
>
> --
> James Lee
> Lecturer and Director of Careers
> Academic Fellow of the Inner Temple
> Birmingham Law School
> University of Birmingham
> Edgbaston
> Birmingham
> B15 2TT, United Kingdom
>
> Tel: +44 (0)121 414 3629
> E-mail: j.s.f.lee@bham.ac.uk<mailto:j.s.f.lee@bham.ac.uk>
>
>
>
> Web: http://www.birmingham.ac.uk/staff/profiles/law/lee-james.aspx
>
>


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