Contract interpretation—the guiding principles

The following Dispute Resolution practice note provides comprehensive and up to date legal information covering:

  • Contract interpretation—the guiding principles
  • ICS v West Bromwich Building Society—Lord Hoffman's guiding principles
  • A reasonable person—the objective test
  • Background knowledge and matrix of fact—relevance
  • Previous negotiations and subjective intent excluded
  • The meaning of words
  • Defined terms in a contract
  • Natural and ordinary meaning
  • The guiding ICS principles of contract interpretation in practice
  • The ICS principles and subsequent decisions in Rainy Sky, Arnold and Wood
  • More...

Contract interpretation—the guiding principles

Key questions for any litigator when reviewing a contract will be:

  1. what does the contract mean?

  2. what are the parties’ respective rights and obligations under the contract?

This Practice Note sets out the five principles of interpretation used by the courts to answer these questions, as formulated by Lord Hoffmann in 1998 in the leading case of Investors Compensation Scheme v West Bromwich Building Society ('ICS') and the further guidance provided in the subsequent Supreme Court decisions in Rainy Sky v Kookmin (2011), Arnold v Britton (2015) and Wood v Capita (2017), see further below.

This Practice Note should be read in conjunction with Practice Note: Contract interpretation—rules of contract interpretation.

Depending on the court in which your matter is proceeding, you may also need to be mindful of additional provisions—see main section further below: Court specific guidance.

ICS v West Bromwich Building Society—Lord Hoffman's guiding principles

In Investors Compensation Scheme v West Bromwich Building Society, Lord Hoffmann said:

‘Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarised as follows:

(1) 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.

(2) The background was famously referred to

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