Disputes in Focus: Quick Q&A on contractual interpretation

Quick Q&A with Oran Gelb

Oran Gelb is the UK head of Banking Litigation at BCLP. He has acted on high profile litigation and investigations for some of the largest global financial institutions as well as clients in a range of other sectors, including technology, telecoms, retail and transport. He has represented clients in the High Court, Court of Appeal and Supreme Court. He has also represented firms and individuals in front of regulators and competition authorities in the UK, Europe, the US and Asia.

Established principles: interpreting contracts

Following a series of three Supreme Court judgments between 2011 and 2017, the general approach to interpretation of contracts under English law has been fairly clear. Very broadly, the English courts will construe a contractual provision objectively in their documentary, factual and commercial context in light of:

• the natural and ordinary meaning of the provision;
• any other relevant provision of the contract being construed;
• the overall purpose of the provision and contract;
• the facts and circumstance known or assumed by the parties at the time of execution; and
• commercial common sense but disregarding subjective evidence of the parties’ intentions.

Where the language used by the parties is unclear, the court can properly depart from its natural meaning where the context suggests that an alternative meaning more accurately reflects what a reasonable person (with the parties' actual and presumed knowledge) would conclude the parties had meant by the language they used. But the court is keen to ensure that they are not interfering with the bargain struck by commercial parties.

When considering the key principles or ‘tools’ of interpretation, the Supreme Court has made clear that the extent to which each tool will assist the court to ascertain the objective meaning will vary according to the circumstances of the particular agreement(s).

In your recent experience, are courts strictly adhering to these interpretation principles?

I think they are.  From your list of factors, the words on the page are clearly the most important consideration.  This is particularly true when looking at negotiated commercial contracts between sophisticated parties, as we typically are.  You need a good reason to depart from the literal meaning, whether by invoking commercial common sense, the contract as a whole, implied terms etc.  It can certainly be done – and we have done it successfully for clients – but it always takes a good argument (and a good advocate!).

Do the courts interpret exclusion clauses in the same way?

Yes they do.  But there are some additional principles that can be invoked when construing exclusion clauses.  For example, there is some authority for a general presumption that parties don’t intend to abandon remedies and clear words are required to do so.  Similarly, it is presumed that parties would not remove any sanction for non-performance of an obligation, and effectively deprive it of contractual force.  This is worth bearing in mind if you are facing a clause that seems on its face to exclude every type of loss under the sun (loss of business, loss of revenue, loss of profit etc).  The other general principle often cited is that if there is real doubt or ambiguity about its meaning, it should be resolved against the party seeking to rely on it.

What is your top tip for drafting exclusion clauses?

I would say don’t ever just insert common words and phrases into an exclusion clause unless you are very clear as to what they mean for that contract. 

For example, you often see exclusion clauses for gross negligence but in reality, there isn’t a settled meaning of that term under English law.  Some authorities even suggest it doesn’t add much to the usual standard of negligence.  Another common one we see is an exclusion clause for indirect losses.  That phrase does now have a settled meaning in caselaw – loss that doesn’t flow naturally from the breach (i.e. the second limb in Hadley v Baxendale) – but it’s amazing how many parties have the misconception that many direct monetary losses are indirect. 

Ultimately, an exclusion clause or a limitation of liability is one of the most significant sections of a contract, and drafters should not throw in words just because they have seen them used elsewhere.  That risks causing unintended consequences when claims begin to materialise.