Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98

KEY POINTS

• The principles of interpretation of contractual law can be summarised as follows: 

  1. Interpretation involves understanding the meaning that the contract would convey to a reasonable person with the background knowledge available to the parties at the time of the contract

  2. The background knowledge includes anything that would have influenced the way the language of the contract would be understood by a reasonable person, subject to the requirement that it should have been reasonably available to the parties

  3. The law excludes previous negotiations and subjective intent declarations of the parties from the admissible background, except in cases of rectification

  4. The meaning of the contract is not confined to the literal meaning of its words but is what the parties using those words against the relevant background would reasonably have been understood to mean

  5. The "natural and ordinary meaning" rule assumes that people do not make linguistic mistakes in formal documents, but if the background suggests a mistake, judges are not required to attribute an intention that the parties could not have had.

FACTS

• Investors received negligent advice from various financial institutions, including West Bromwich Building Society (West Bromwich BS), resulting in losses due to "Home Income Plans" investments.

• Under the Financial Services Act 1986, section 54, the Investors Compensation Scheme Ltd. (ICS) was established to compensate investors directly for their losses. Investors assigned their claims to ICS in order to receive compensation.

• However, section 3(b) of the claim form excluded claims against West Bromwich BS based on undue influence or rescission. This raised a dispute regarding whether claims for damages were also excluded from the assignment, with West Bromwich BS claiming that claims for damages were not assigned, while ICS argued otherwise.

• The case revolves around the exclusion clause in the assignment and whether claims for damages against West Bromwich BS were validly assigned to ICS.

COMMENTARY

• The court's decision emphasised that exclusion clauses, like any other contractual provisions, should be interpreted in a manner that is clear and understandable to the parties involved. The focus shifted from strict technicalities to a more pragmatic understanding of the contractual language. 

• This new approach aims to promote fairness and justice in contractual relations by ensuring that parties are fully aware of the implications of the clauses they agree to.

• By assimilating judicial interpretation with common-sense interpretation, the court aimed to bridge the gap between legal language and ordinary language. It sought to avoid overly technical interpretations that might lead to unfair outcomes for one party and embraced a more reasonable and intuitive understanding of the contractual terms.

ORIGINAL ANALYSIS

• HL expands the interpretation of contracts to “contextual objectivity” i.e. interpretation of persons, not words, including anything relevant to a reasonable person’s interpretation (CW). 

Lord Hoffman

• He restated 5 principles of contract law:

  1. Objective intention i.e. what would the reasonable bystander with same background knowledge as the parties believe the intention to be;

  2. The scope of context/background facts to be taken into account is wide. “subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything that would have affected the way in which the language would have been understood by the reasonable man.”;

  3. Previous declarations of intent and previous negotiations are NOT admissible as relevant background facts (since parties are free to change their bargaining postures);

  4. The courts are concerned with the “meaning of persons” i.e. the courts are not bound strictly by the words of the document and can conclude that the wrong syntax etc was used or the wrong words;

  5. There is a presumption against irrationality i.e. unless we conclude that something “must have gone wrong” with the language used, we are to interpret the words within the “natural and ordinary meaning”.