Introduction
The area of contract interpretation has been heavily discussed in light of the Court’s seemingly conflicting case law on the shift towards the contextual approach. In particular, several commentators have wondered if the courts have taken a step back towards the traditional, textual approach after making giant strides towards contextualism.1 This essay shall seek to unify the conflicting case law on contract interpretation under a single, coherent theory of ‘individualisation’. Such a theory will illustrate that the court’s recent judgments have focused on enhancing the ‘freedom’ of the individual in achieving their own particular interpretation of the contract. While this article’s scope does not address how the ‘individualisation’ theory applies to all other doctrines of contract law, individualisation still rests on general liberal principles, which should serve as a good starting point for analysing the other doctrines. The article shall thus narrow its focus to only discuss individualisation within the context of interpretation.
A (Grand) Theory of Contract Law?
Before the article can proceed with discussion of the recent case law on contract interpretation, it will briefly discuss general theories of contract law. History begins not with a particular theory, but the oft-cited doctrine of ‘freedom of contract’. Central to the idea of freedom of contract was individual autonomy and its promotion through the realm of contract law.2 Free from interference by the courts and the government, contract law merely serves as the ‘vehicle’ for the courts to enforce contracts as the parties had intended.3 This distinctly liberal concept of contract law continues to pervade English jurisprudence, despite its supposed decline since the early 20th century.4 Meanwhile, liberalism became the predominant mode of contract law theories, and in 1981, Charles Fried published his seminal work Contract as Promise5in defence of a liberal contract law. Here, Fried’s theory will serve as an excellent starting point for analysis given its preeminent status as a modern defence of liberalism in contract law, and importantly because it couches contract law within the realm of morality. This can be contrasted with other, more practical theories of contract6 which may lack sufficient normative strength in justifying the operation of contract law. Given the article’s intention to propose a unifying theory of contract interpretation based on liberal principles, it would also be helpful to examine the value of liberal theories through Fried’s work.
To understand the significance of Fried’s theory, we must first distinguish between ‘foundationalist’ and ‘conventionalist’ theories of contract law. Saprai provides an excellent summary of the key differences: the former “presupposes a deontological moral outlook as a mode of justifying” contract law; while the latter serves “purely epistemic” ends and is more descriptive of contract law so as to make it more “digestible, predictable” and practicable.7 Before discussing the advantages and disadvantages of each school, it should be noted that the theory this article proposes will not simply be a descriptive and ‘epistemic’ theory, and instead intends to justify *why *the courts have chosen to develop the doctrine of interpretation in the manner they did. Regardless, the advantage of foundationalist theories is that they enhance the legitimacy of the operation of contract law doctrines by grounding them within a single principle, while conventionalist theories merely see contract law as an “arbitrary collection of doctrines”.8 Foundationalism also brings greater unity, as well as coherence to contract law and can help in predicting future developments of contract law (assuming that the theory is accurate).9 Lastly, as a *standard of justification *for contract law doctrines, it sets clear limits to the powers of the court when furthering the development of contract law.10 While conventionalist theories may be more practical insofar as they are able to better account for inconsistencies within the Court’s approach, it is only because they accept developments of the law as matters of fact and do not critically analyse the Court’s jurisprudence. They can thus barely be called ‘theories’ of contract law.
Moving on to Fried, he proposes the idea of ‘promise’ as the foundational concept of contract law. Thus, promise transcends all communitarian understandings of contract law, and contract law ought to affirm promise because it is the basis by which individuals as “free and autonomous agents both serve their own ends and respect the humanity of other free autonomous agents”.11 Its key contribution to theories of contract law is therefore its respect of the “liberal ideal”, that any and all action must have some “terms and limits according to which we strive”.12 This provides a powerful basis for both justifying, as well as limiting the development of contract law. Given this, how would the theory function in practice? Saprai states that ‘promise’ as a foundationalist theory must operate in one of three ways: (1) as a necessity in any contract law doctrine (necessity); (2) as the primary principle behind doctrines (primacy); or (3) as a presumption of the validity of doctrines (presumptiveness).[13 In summary, the first two suggestions can be prima facie rejected due to their incompatibility with modern contract law.14 It is clear that not all contract law doctrines are justified based on the sanctity of promises, and to hold so would be to inaccurately describe the justifications behind such doctrines. Presumptiveness however, is more difficult to reject from the outset. It minimally recognises the existence as well as primacy of other principles, but still acts as the central principle justifying contract law.15 Yet, even such an accommodating perspective of promise fails to account properly for the actual relevance of other principles such as justice and fairness, which take centre stage in doctrines where promise plays little to no part (such as statutory implied terms). Since presumptions are inherently epistemic, i.e., that all doctrines should converge with the principle unless justified otherwise, it again serves as the first barrier of contract law doctrines when there is no reason to subsume them under promise in the first place.16 It is thus doubly undesirable: (1) it is a weaker form of primacy, failing to truly elevate promise as the principle of contract law; and (2) does not accord proper respect to alternative deontic principles of contract law.
Further criticism of Fried’s theory takes the form of practicability and functionality. Kostritsky argues that the promise theory, naturally being deontological, removes itself from the normative aspects of contract law — the purpose and reasons for the system of contracting, and why it is so valued in society.17 The theory ultimately fails to account for an “understanding of the [contracting] parties’ goals” and is unable to “craft rules which will work in reality”.18 However, given that the theory was not meant to be epistemic in nature, is the exclusion of contract’s functional role justified? As stated above, Fried’s theory is able to transcend communitarian understandings of contract law doctrines, and therefore protects contract law from arbitrariness and the majoritarian will (and abuse) of the community.19 Despite this, the theory still lacks normative pull given that *other *principles of contract law also aim to protect contract law from arbitrariness and majoritarian abuse; failing to recognise the plurality of these other principles also harms its credibility as a theory. Moreover, promise’s weight as a moral justification is arguably lacking — beyond literal pacta sunt servanda, promises hold little moral strength and fall flat in their attempt to justify judicial enforcement (or lack thereof).20 As has often been argued, autonomy does not simply mean non-interference, but also extends to the ability to choose freely from amongst many valid choices (including the ability to exit unfavourable circumstances).21
Promise Theory: An Alternative?
Given the above conclusions, are there any competing theories that may bridge the lacunae identified in Fried’s promise theory? How might the significance of foundationalist theories be maintained while accommodating for the functional and pluralist nature of other contract law theories? For this, we look no further than Saprai’s third understanding of promise theory: presumptiveness. While presumptiveness was earlier rejected, it nonetheless has redeeming qualities in its recognition of alternative deontological principles, and thus normative pluralism.22 Yet, it is not as simple as proposing a pluralist theory of contract law which recognises all principles equally. After all, much of the work the judiciary does is balancing between multiple competing rights.23 One possible solution comes from Saprai, who offers a completely new theory of contract law termed ‘republican contract law’.24 It thus emphasises the plurality of presumptiveness through a distinctly Dworkinian approach which creates a law that is essentially by the people, and for the people; through incorporating “popular views” regarding morality, limits, and purpose of the law, into the law itself.25 The theory goes beyond conventionalist theories because it is not merely an “epistemic device” which reflects what the law does, but builds the specific communitarian conception of the law into its deontology — making it the very “fabric of law”.26 While this open-endedness may lead to uncertainty and indeterminacy of legal standards, such uncertainties are balanced by individuals having a greater understanding of how the law shapes and affects their lives, thereby creating a deeper connection between themselves and the law.27
Given the ambitious nature of the theory, there is obviously much room to doubt whether it can actually achieve the lofty goals it has set out to accomplish. In fact, flaws can already be seen through an analysis of the theory’s unique conception of freedom as ‘non-domination’. A comprehensive account of what such freedom entails is provided by Pettit, who describes freedom as the characteristic of not being subject to the arbitrary will of others (as opposed to classical freedom as non-interference).28 The true extent of this freedom is its reach — it goes beyond preventing exercises of arbitrary will and attempts to remove the existence of such arbitrariness completely.29 Non-domination thus harkens back to the crux of the republican theory — to treat all individuals with equal concern and respect. Saprai states that one particular threat to non-domination is that of dominium, or being subject to the arbitrary will of individuals or individual entities; and that contract law can contribute to the creation of dominium.30 Despite his claims that a republican theory can prevent dominium, the self-contradictory nature of the theory is already apparent. While Saprai is confident that his theory “shows equal concern and respect” to individuals,31 he seems to forget that any communitarian understanding is made up of both majoritarian and minoritarian components. As a theory that incorporates abstract notions such as morality and justice into the law,32 the theory must necessarily incorporate majoritarian understandings of such abstractions if it is to be practicable and coherent. The framework thus facilitates the inequality, subjugation and control that the theory seeks to eliminate. If it were to attempt to generate a more comprehensive understanding by incorporating minoritarian understandings, it would lose its practicability due to the increase in complexity needed to express a fully comprehensive understanding of societal values — it simply is an impossible task to achieve. Indeed, the plurality which the theory achieves is simply a majoritarian plurality which excludes all other possible values; a plurality that is illusory at best.
This article therefore suggests that while the republican theory believes its strength to be its ability to engage greater participation in the shaping and understanding of the law (as mentioned above), its real strength is the value and dignity it accords to individuals.33 The true value of liberal theories is not the promotion of one particular conception of freedom, but the ability to freely pursue one’s own conception of liberal values (i.e., self-realised values).34 Even something as widely respected as autonomy is valuable insofar as it is “exercised in the pursuit of…valuable activities and relationships”.35 This article therefore proposes that a scoping down of the republican theory into an ‘individualisation’ theory achieves this. Individualisation is simply a theory which recognises that the principle behind contract law is that of promoting and upholding the individual’s right to self-realisation. Historically, individualism has been part of liberal contract theories since the very days of classical freedom of contract, and so it is not an unfamiliar concept to contract law.36 Moreover, it is the focus on the individual which was the key procedural aspect of Dworkin’s theory.37 By removing the need to incorporate popular views about morality, rights and other abstractions, and focusing merely on promotion of individual understandings of such concepts, the plurality of values is retained while removing the framework that necessarily promotes instances of abuse and arbitrariness.
Two points need to be addressed here. Firstly, one might worry that individualisation would lead to instability — after all, if we recognised all individual conceptions as equal, it would lead to endless conflict and unresolvable disputes. However, it is not us, but arbitrators of the law (i.e. the judiciary) who determine which individual conception would take priority over another, assuming that such conceptions are contradictory. In reality, contracting does not always result in conflicting interpretations, but rather compromise and mutual agreement; it is however, pertinent to address worst-case scenarios and problems with competing interpretations (individualisation is ultimately a pluralist theory at heart). What this means in practice is that the specific individual conception that is accepted by the court will only be valid in the specific circumstance in which it was raised, thus preventing one particular conception from defeating all others.38 It has little standing nor influence outside of its own unique circumstance, and so each interpretation has limited (but not no) precedential value.39 On a related note, a second issue arises: if individual conceptions have no ‘longevity’, who would trust the judicial system, and by extension, the legal order? Arguably, trust is ensured because the deontological role of the individual allows all viewpoints to obtain presumptive equality and value until proven otherwise. What this means is not that every person is essentially ‘correct’ until disproven in a court of law, but that all individuals possess the freedom to argue that their specific conception should be accepted by the majority. The trust is therefore placed in the fact that such freedoms will always be upheld in a court of law. Moreover, any arguments arising from conflicting conceptions will be dealt with objectively by the judiciary, thus preventing arbitrary subjection of the ‘losing’ individual (and it shall be shown that the court indeed has adopted such an approach). This follows a late-Rawlsian approach where “individuals are allowed to determine their own conception of the good”40 and where the government and the law remain fairly value-neutral insofar as they do not explicitly incorporate a specific understanding into the legal system.41 It is this which allows a departure from the ambitiousness of the republican theory, while retaining the pluralist appeal of modern liberalism.42 Individualisation is thus a hybrid-theory that takes advantage of the republican theory’s focus on freedom, while placing the individual, rather than their collective understandings, as the foundation of contract law. While it lacks certainty in application, such uncertainty can be tolerated given the normative value of the theory.43
Individualisation in Interpretation
In applying the individualisation theory to the doctrine of contract interpretation, there can be no better case than Investors Compensation Scheme Ltd. v West Bromwich Building Society46(ICS), and the contextual approach set out by Lord Hoffmann. The approach can be summarised below:
Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.45
This distinct departure from the textual approach (for example in Arnold v Britton (Arnold)46) has arguably been the most significant development to the doctrine of interpretation in recent time. ICS should be seen alongside a string of other cases (starting from Prenn v Simmons;47 with the most recent example being Wood v Capita Insurance Services Ltd48) which fully cemented the position of the contextual approach as the predominant approach towards contract interpretation. The approach taken by Lord Hoffmann contains two limbs, both of which shall be shown to adhere with the individualisation theory: (1) taking into account the “background knowledge which would reasonably have been available to the parties”; (2) the objective meaning of the text.
Beginning first with the background knowledge component, the full contours and limits of the contextual approach must be addressed. The relevant cases are that of BCCI v Ali49and Arnold v Britton. In BCCI v Ali, Lord Bingham qualified the contextual approach by saying that it can only be exercised within the limits of the “natural and ordinary meaning” of the contract’s wording.50 This echoes the words of Lord Neuberger in Arnold, who emphasised the textual limitation of the contextual approach, stating that “commercial common sense and surrounding circumstances […] should not be invoked to undervalue the importance of the language of the provision”.51 In contrast, Lord Hoffmann chose instead to limit the background knowledge to what the “reasonable man would have regarded as relevant [sic]”.52 Despite the above cases’ apparent disagreement with ICS, the individualisation theory still reveals itself in both the shift towards the contextual approach, as well as the limitations set on it. This is achieved through two different methods of enhancing individual freedoms. In the shift towards the contextual approach, the understanding and respect of the ‘specific’ individual is enhanced — the Court allowed interpretation to take into account the necessary knowledge needed to situate the individual within his unique circumstance, leading to a deeper level of understanding of that individual’s own conception of liberty. Additionally, the emphasis on the textual limitation, as well as Hoffmann’s ‘reasonable person’ limitation strengthens both the ‘collective’ individual and ‘specific’ individual. Firstly, it sets reasonable limitations to the doctrine of background knowledge — by qualifying the operation of the possibly wide doctrine with the certain existence of the contractual language, the freedom (in the late-Rawlsian sense) of the collective individual is enhanced by preventing arbitrariness. Secondly, it enhances the freedom of the particular parties of the case by limiting interpretation to the exact words they had agreed upon, thus respecting their ‘term freedom’.53
Subsequently, the objective understanding of the text (as affirmed by Scottish Power UK Plc v BP Exploration Operating Co Ltd54) also complies with the individualisation theory. This is relatively straightforward, and the only aspect that needs to be addressed is the trade-off between enhancing the ‘specific’ or ‘collective’ individual. Given the binary nature of litigation, the objective approach to understanding results in an asymmetric balance between one specific individual’s freedom being narrowed, and one specific individual’s freedom being broadened. However, objectivity as explained above leads to the strengthening of the collective individual — the only question that need be answered then is whether the narrowed freedom of the specific individual can outweigh the enhanced freedom of both the collective, and another specific individual. There can be no definitive answer to this, but it would be reasonable to conclude that consistent application of the objective approach will more likely result in overall enhancement of freedoms, so long as the standard of objectivity is one of reasonableness.
Finally, the elephant in the room shall be addressed — that of the exclusion of pre-contractual negotiations in background knowledge. This exclusion was affirmed by Lord Hoffmann himself in Chartbrook Ltd v Persimmon Homes Ltd (Chartbrook)55 where he emphasised the need for certainty and predictability when determining what comprises relevant background knowledge. This is arguably a difficult development to fit within the scope of individualisation. Normatively, pre-contractual negotiations are not more indeterminate than concepts such as “commercial common sense” or what a “reasonable man would have regarded as relevant”.56 While Lord Hoffmann did identify that allowing pre-contractual negotiations may pose a risk to third-parties, such evidence was inconclusive to warrant a definitive basis for exclusion.57 Nonetheless, even if such a rule did have the effect of contradicting the individualisation theory, its scope was nonetheless narrowed to only apply within the context of interpretation, and could see possible use in other doctrines of contract law.58 While this does not fully resolve the problem, Ogilvie contends that doing so would at least weaken the effect of the rule by subsuming it within the principles of interpretation.59 Thus, the exclusion of pre-contractual negotiations remains as the unaccounted exception to the general application of the individualisation theory. However, given that courts are at least sceptical of its exclusion, there is a possibility that said exclusion may be removed (or at least revisited) in future cases.
Concluding Thoughts
Individualisation has been shown to be able to explain the shift from textual to contextual; its further suitability can be seen as even a more nuanced analysis of contract interpretation fits within the theory. Tan argues that the reductionist perspective of distinguishing between textual and contextual should be abandoned for a more iterative process of “contextual coherence” which can fully account for the “fault lines” which the above approaches are unable to adequately address60 Yet even his suggested theory of interpretation seems to agree with individualisation, as the process does enhance both specific and collective individual freedoms through objective and rational selections of the most “coherent” text from multiple competing interpretations.61) Consequently, individualisation does present itself as an attractive and, most importantly, reasonable principle behind the development of contract interpretation. The only problem faced by the theory is difficulties in proving its foundational aspect; all the evidence that has been presented merely demonstrates that the case law fits within the scope of the theory, thus fulfilling the conventionalist aspect. To confirm the deontological aspect of the theory will require an explicit mention by the judiciary that individualisation has been its guiding principle. Unfortunately, no amount of analysis will bring us to such an answer.
[1] David McLauchlan, ‘Continuity, not change, in contract interpretation?’ (2017) 133 LQR 546; cf Havelock, ‘Return to Tradition in Contractual Interpretation’ (2016) 27 King’s Law Journal 188
[2] Simon Whittaker, ‘The Optional Instrument of European Contract Law and Freedom of Contract’ (2011) 3 European Review of Contract Law 372
[3] Printing and Numerical Registering Co v Sampson(1875) 19 Eq 462, 465
[4] PS Atiyah, The Rise and Fall of Freedom of Contract(OUP 1985)
[5] Charles Fried, Contract as Promise: A Theory of Contractual Obligation (2nd edn, OUP 2015)
[6] For a good discussion of such theories, as well as an example of such a theory itself, see RE Barnett, ‘A Consent Theory of Contract’ (1986) 86 Columbia Law Review 269.
[7] Prince Saprai, Contract Law Without Foundations: Toward a Republican Theory of Contract Law (OUP 2019) 15-16
[8] ibid 16
[9] JM Lipshaw, ‘Contract as Meaning: An Introduction to Contract as Promise at 30’ (2012) 45 Suffolk University Law Review 601, 605
[10] This is an extension of theories of constitutional interpretation, on which see J Wilkinson, Cosmic Constitutional Theory: Why Americans are Losing Their Inalienable Right to Self-Governance (OUP 2012) 6. While this may seem inappropriate, foundationalist theories do share similarities with constitutional interpretation theories, they share similarities in their methodology. Thus, I felt the extension was appropriate.
[11] Lipshaw (n 9) 612
[12] Fried (n 5) 7-8
[13] Saprai (n 7) 18-20
[14] ibid 22-33
[15] ibid 20
[16] ibid 34
[17] JP Kostritsky ‘The Promise Principle and Contract Interpretation’ (2012) 45 Suffolk University Law Review 843
[18] In the approach of Ken Binmore, see Natural Justice(OUP 2005) Chp 1.
[19] Kostritsky (n 17) 849-50
[20] ibid 857
[21] For a more recent discussion of such see Hanoch Dagan & Michael Heller, ‘Freedom of Contracts’ (2013) Columbia Law & Economics Working Paper No. 458
[22] Saprai (n 7) 18
[23] A general example of this is the entire field of unfair contract terms.
[24] Saprai (n 7) 40
[25] ibid 58
[26] ibid 57
[27] SV Shiffrin, ‘Inducing Moral Deliberation: On the Occasional Virtues of Fog’ (2010) 123 Harvard Law Review 1214, 1222-23
[28] Phillip Pettit, *Republicanism: A Theory of Freedom and Government *(OUP 1997) 31-32
[29] ibid 5
[30] Saprai (n 7) 126
[31] ibid 127
[32] ibid 62-64
[33] ibid 44
[34] Dori Kimel, From Promise to Contract: Towards a Liberal Theory of Contract (Hart 2003)
[35] ibid 131
[36] Atiyah (n 4) 256-291
[37] Jeremy Waldron, ‘The Rule of Law as a Theater of Debate’ in Scott Hershovitz (ed), Exploring Law’s Empire: The Jurisprudence of Ronald Dworkin (OUP 2006)326, 330-31
[38] Surrey Health BC v Lovell Construction Ltd(1990) 48 Build LR 113, 118
[39] Ewan McKendrick, Contract Law (13th edn, Red Globe Press 2019) 175-176
[40] In the context of contract interpretation, “good” would mean their own understanding of the contract. While this does seem like a logical leap, I propose that an Aristotelian good is something that is constitutive of the entirety of our lives, even our ability to understand contracts in our own individual and unique way.
[41] Curtis Bridgeman ‘Liberalism and Freedom from the Promise Theory of Contract’ (2004) 67 MLR 684, 694
[42] ibid 686
[43] Shiffrin (n 27)
[44] [1998] 1 WLR 896
[45] ibid 912-13
[46] [2015] UKSC 36
[47] [1971] 1 WLR 1381
[48] [2017] UKSC 24
[49] [2001] UKHL 8
[50] ibid para 8
[51] Arnold (n 46) para 17
[52] BCCI v Ali (n 49) para 39
[53] Of course, where such freedom is illusory — as in the case of duress, unconscionability, in consumer contracts, etc. — the law intervenes.
[54] [2015] EWHC 2658 (Comm)
[55] [2009] UKHL 38
[56] BCCI v Ali (n 49) para 39
[57] Chartbrook (n 55) para 40
[58] ibid paras 42, 47
[59] MH Ogilvie, ‘Reconsidering the Interpretation and Implication Rules in the Law of Contract: An English-Canadian Comparison and a Proposal for a New Unified Rule’ (2013) 28 Banking & Finance Law Review 187, 205
[60] Zhong Xin Tan, ‘Beyond the Real and the Paper Deal: The Quest for Contextual Coherence in Contractual Interpretation’ (2016) 79 MLR 623
[61] ibid 637
Tai Shen Wong
LLB (LSE) ’22, Obligations Law Notes Editor of the LSE Law Review 2020-21 and Private Law Notes Editor of the LSE Law Review 2021-22
thanks for info.