11. Same approach in law and equity

The same approach to the construction of contracts is adopted at common law and in equity (BCCI v Ali).

B. Continuing relevance of traditional rules of construction

Some traditional rules or "canons" of construction play a continuing role in interpreting contracts.

1. Lawful effect

A meaning that ensures the validity or lawful effect of a transaction will be preferred to one that renders it invalid or too uncertain or ambiguous to enforce. The old maxim is ut res magis valeat quam pereat (the contract should be interpreted so that it is valid rather than ineffective). This principle was considered by the court in Lancashire County Council v Municipal Mutual Insurance Ltd [1996] EWCA Civ 1345 where an insurance company tried to argue that adopting the claimant’s construction of an indemnity clause to cover exemplary damages would go against public policy that no one should be able to insure himself against liability for criminal conduct. The court did not accept that argument since the liability in question was vicarious (not direct) and noted:

“The only way in which public policy can properly be invoked in the construction of a contract is under the rule ut res magis valeat quam pereat: if the words are susceptible of two meanings, one of which would validate the particular clause or contract and the other render it void or ineffective, then the former interpretation should be applied even though it might otherwise, looking merely at the words and their context, be less appropriate.”

2. A party may not take advantage of its own wrong

It is presumed that a party to a contract is not entitled to take advantage of his own wrong as against the other party (Cheall v Association of Professional, Executive, Clerical and Computer Staff [1983] 2 AC 180). The wrong must be a breach of a contractual duty, express or implied, or possibly of another legal duty, owed to the other contracting party (Petroplus Marketing AG v Shell Trading International Ltd [2009] EWHC 1024 (Comm)).

3. Excluding or modifying legal remedies

Clear words are required in a contract to exclude rights or remedies which arise by operation of law. Lord Diplock stated:

"In construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut that presumption." Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 (HL)

This means that clauses limiting liability are likely to be strictly interpreted. The Court of Appeal has affirmed this principle for commercial as well as other contracts (Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128).

4. Strict interpretation against one party (contra proferentem)

A contract or clause may be strictly interpreted against a party in certain circumstances.

There are two Latin maxims relevant to the contra proferentem rule:

• Omnia praesumuntur contra proferentem (everything is presumed against the one who proffers).

• Verba chartarum fortius accipiuntur contra proferentem (the words of documents are to be taken strongly against the one who puts them forward).

This rule may apply against either a party responsible for drafting or incorporating a clause for its own benefit, or where a clause is relied on that benefits or is likely to benefit only the party relying on it.

Accordingly, where a document is a joint drafting effort there is little or no room for the operation of the contra proferentem rule.

The word or phrase being construed must be ambiguous. This is a precondition of the application of the contra proferentem rule. In Egan v Static Control the court stated that this “canon of construction can only apply if a document, properly interpreted, admits of doubt”. Where, however, there is relevant background evidence, the document should be construed by reference to such evidence and the contra proferentem rule shall not apply.

While some modern cases (such as Egan v Static Control) suggest the courts are more reluctant to have recourse to the contra proferentem rule, it was applied in Lexi Holdings plc v Stainforth [2006] EWCA Civ 988. The appellant company (L) appealed against the decision that the liability of the respondent (S) for a loan had been discharged by agreement. S had obtained a short-term loan from L to purchase a tenanted residential property. S had difficulty in refinancing the loan and asked L if they knew of anyone who might be interested in purchasing the property. A property investor known to L expressed an interest and L and S entered into an "exclusive sale agreement". L purported to rescind that agreement, served a demand for repayment on S and appointed a receiver of the property. S asserted that he had been discharged or released from any liability pursuant to the exclusive sale agreement. The judge held that the agreement had the effect of discharging S's liability in return for his relinquishing his rights to the subject property. L argued that the judge's construction of the agreement was wrong and that its primary purpose was simply to confer authority on L to sell the property, the discharge of S's liability being dependent on such a sale.

The court held that that the judge had been entitled to find that although clauses 5 and 6 of the agreement were consistent with an agency arrangement under which L was empowered to sell the property and discharge the debt out of the proceeds, the effect of clause 4 and its wording, "relinquishing all rights", was that S was required to transfer to L all his beneficial interest in the property and that, at least by implication, his liability was discharged at the same time. If the terms of the agreement were inadequate and ambiguous then they should be construed against L, which had put them forward, in accordance with the rule of contra proferentem.

The court referred to Lord Mustill's explanation of the rule in Tam Wing Chuen v Bank of Credit and Commerce Hong Kong Limited [1996] 2BCLC 69, 77 PC :

“… the basis of the contra proferentem in principle is that the person who puts forward the wording of a proposed agreement may be assumed to have looked after his own interests, so that if words leave room for doubt about whether he is intended to have a particular benefit there is reason to suppose that he is not”.

In its final conclusions the court said:

“I find it very difficult to read paragraph 4 as meaning anything other than that Mr Stainforth was giving up all his rights over the property. This would only make sense if it was intended that all his liabilities should be discharged at the same time. Otherwise, as the judge said, the proposed “alternative solution” was no solution at all. Mr Stainforth would be giving up his right to realise his own asset for an indeterminate period, while facing continuing liability for interest at the default rate, without any correlative obligation on Lexi to do anything…I think this is one of those rare cases where the contra proferentem rule may assist in the final solution. As we now know, Lexi were in the position of having a potential purchaser, unknown to Mr Stainforth, at £4.3m. The potential attractions of the arrangement were obvious, but they may also have wished to hedge their bets. The inadequacies of the agreement may reflect a non-lawyer's attempt to reconcile those competing objectives. Whether or not that it is the correct explanation, there is no unfairness in holding that, having presented the agreement in that form, they should bear the risk of any resulting ambiguity, if it cannot be resolved by more conventional interpretative tools.”

In Pratt v Aigaion Insurance Company [2008] EWCA Civ 1314 the appellant trawler owner (P) appealed against an order dismissing his claim against the respondent insurance company (D) under a contract of marine insurance.

The contract contained a warranty given by P to the effect that there would be a "Warranted Owner and/or Owner's experienced skipper on board and in charge at all times and one experienced crew member". The vessel caught fire while in port. No one was on board because the crew was ashore. It was believed that the fire was caused by malfunction of a deep fat fryer or the fridge. The generator, as was usual, had been left running while the crew was ashore. The judge found that P could not recover in respect of loss sustained by the fire on the ground that he had not complied with the warranty, as at the time of the fire no one was on board, and that the natural meaning of the words was that the owner or the owner's experienced skipper had to be on board and in charge at all times. P submitted that, in the context of the industry, the words "at all times" could not have been intended to be read literally, and that such a reading of the contract was inconsistent with other terms of the contract. P also submitted that the clause was obviously directed to periods when the vessel was navigating or working and if applied literally would lead to absurd results.

The court allowed the appeal and applied the contra proferentem rule. The primary purpose of the warranty, which was a standard trawler wording of the insurers, was to protect the vessel against navigational hazard. The warranty could not be read literally, some qualification of the words "at all times" must have been intended. The question was how far the expression "at all times" should be qualified. The clause should be interpreted against D. At the time the crew left the vessel it was safely tied up alongside. If D wanted the owner or skipper and an experienced crew member on board whenever the vessel was left with the generator still running, it should clearly have so provided. So too, if the insurer wanted them on board whenever the vessel was left, it should clearly have so stipulated. It had not done so. D had not established that there was a breach of warranty.

In relation to clauses limiting liability, the Court of Appeal has suggested that the principle of strict interpretation should apply wherever there is ambiguity (Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128).

The rule is embodied in statutory form for business-to-consumer transactions under section 69(1), Consumer Rights Act 2015 and its predecessor, Regulation 7, The Unfair Terms in Consumer Contracts Regulations 1999. It was suggested that regulation 7 goes further than interpretation contra proferentem, because it called for the interpretation most favourable to the consumer. However, that view was rejected in a decision at first instance (AJ Building and Plastering Ltd v Turner [2013] EWHC 484 (QB)).

Some contracts include express terms that purport to oust the operation of the contra proferentem rule. Such a term may have limited effect, for the following reasons:

• In negotiated business-to-business contracts, the contra proferentem rule is already inapplicable to a term that is the result of a joint effort.

• In business-to-business contracts on one party's standard terms, the term would be subject to the reasonableness test under sections 11 and 13 of the Unfair Contract Terms Act 1977.

• In business-to-consumer contracts, such a term would be invalid under the consumer protection legislation.

• A clause may be strictly interpreted without invoking the contra proferentem rule.