News Item
Contractual interpretation principles clarified by Lord Hoffman
22 July 2009
In his final case before retiring, giving the leading judgment in the recent Chartbrook Limited v Persimmon Homes Ltd & Others [2009] UKHL 38 , Lord Hoffman has further clarified the principles on the interpretation of legal documents.
The general principles of contractual interpretation were summarised by Lord Hoffman in the Investors’ Compensation Scheme Ltd case. In that case, Lord Hoffman held that a contractual term should be interpreted by ascertaining the meaning that a “reasonable person” would give to the term, having regard to the background information which would have been available to the parties at the time of the contract. In Chartbrook v Persimmon, Lord Hoffman, with the agreement of the other Lords, has clarified that commercial contracts should be interpreted purposively and by adopting a commercially realistic approach, rather than by using a literal interpretation of the contractual terms. The House also upheld a longstanding rule which excludes evidence of pre-contractual negotiations being used for the purposes of interpreting a contract.
Of course, it was Lord Hoffman, who, in Kirin-Amgen Inc & Others v Hoechst Marion Roussel Ltd & Others [2004] UKHL 46, gave clear guidance on how patent claims should be construed. In that case, Lord Hoffman stressed that, when looking at the meaning of the wording in a patent claim, the question that should be considered is what the person skilled in the art would understand that claim to mean in context.
The issues in Chartbrook v Persimmon related to a longstanding dispute between the parties, who had entered into an agreement for the development of a site in London. The development would contain both residential and commercial properties. The dispute related to the price payable under the contract, and specifically the definition of “Additional Residential Payment” (“ARP”). On Chartbrook’s literal construction of ARP, £4.5 million would be due. However, on Persimmon’s construction, only around £900,000 would be due. The definition of ARP, on a literal construction, seemed to be relatively clear, but this literal interpretation did not make commercial sense.
The Judge at first instance preferred Chartbrook’s literal interpretation of ARP. A majority of the Court of Appeal agreed with the judge, with Lawrence Collins LJ dissenting. He adopted a more purposive and commercial approach to the interpretation. Persimmon appealed to the House of Lords on the basis that its interpretation of ARP was the correct one. The House of Lords unanimously upheld the appeal.
Lord Hoffman found that the definition of ARP contained grammatical ambiguity, which could only be resolved by looking at the commercial purpose of the term. Further, the literal meaning of the term made other provisions in the contract appear arbitrary and irrational. He therefore accepted Persimmon’s construction of the term and allowed the appeal.
Persimmon also argued that the “exclusion of evidence rule” (i.e. the rule that evidence of pre-contractual negotiations is inadmissible when construing a contract), was illogical and prevented the court from putting itself in the position of the objective observer. However, the Lords all agreed that there was no reason to depart from the enshrined principle relating to exclusion of evidence.
Although this case related to the interpretation of a contract for land, the general principles are applicable to all contracts and have clear relevance for intellectual property rights holders. Agreements relating to intellectual property rights, such as patent licences, research and development agreements, should all be interpreted through the eyes of the “reasonable man”. In other words, one should consider what the reasonable man would understand those terms in context, taking into account commercial realities, to mean. Evidence of what the parties were actually saying before they had reached an agreement should not be considered.
For more information contact your usual Marks & Clerk attorney or solicitor, or Sarah Routledge at sroutledge@marks-clerk.com.