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1. 'Interpretation is not the same as the implication of terms. Interpretation of the words of a document is the precursor of implication. It forms the context in which the law may have to imply terms into a document, where the court concludes from its interpretation of the words used in the document that it must have been intended that the document would have a certain effect, although the words to give it that effect are absent.' (LORD
HODGE, Trump International Golf Club Scotland Ltd v. The Scottish Ministers (2015)).
Examine the roles of interpretation and implication of terms in the light of this statement.
Thesis: I argue, in agreement with Lord Hodge, that interpretation is not the same as implication; the two have different roles in the law of contract. (1) I begin by acknowledging conceptual similarities between the two exercises: in particular, as O'Sullivan notes, to give effect to the intentions of the parties, judged objectively - so that at a high enough level of abstraction the difference between them is merely one of degree. (2) It does not follow,
however, that they are so similar as to justify assimilation. I argue that it is possible to articulate a stable conceptual distinction between interpretation and implication: in brief, as
Davies argues, interpretation is concerned with ascertaining the meaning of words which are contained in a written document; implication is to supplement the document with terms that are additional to the express terms chosen by the parties. (3) It follows that interpretation and implication must remain distinct in two senses. First, they should be sequentially differentiated: the terms of the contract must first be interpreted before the court can sensibly decide whether additional terms should also be implied. (4) Second, different rules should apply to each exercise: because they are not identical in character, anomalies would result if implication is seen merely as an aspect of, and controlled by the same principles as,
interpretation. (5) In particular, I demonstrate that implication is a more intrusive power than interpretation, and should be governed by more stringent rules out of respect for the freedom of contract.
(1) Conceptual similarities between interpretation and implication
Lord Hoffmann in AG of Belize v Belize Telecom argued: "In every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean… There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?"
Expressing support for this approach, Arden LJ remarked in Stena Line Ltd v
Merchant Navy Ratings Pension Fund Trustees Ltd: "This development promotes the internal coherence of the law by emphasizing the role played by the principles of interpretation not only in the context of the interpretation of documents but also in the field of the implication of terms…. The internal coherence of the law is important because it enables the courts to identify the aims and values that underpin the law and to pursue those values and aims so as to achieve consistency in the structure of the law."
Finally, in Trump International Golf Club Scotland Ltd v The Scottish Ministers, Lord
Mance resisted the retreat from Belize in Marks & Spencer plc v BNP Paribas
Securities, saying: "I would not encourage advocates or courts to adopt too rigid or sequential an approach to the processes of consideration of the express terms and of consideration of the possibility of an implication… It appears to me helpful to recognise that… the processes of consideration of express terms and of the possibility that an implication exists are all part of an overall, and potentially iterative, process of objective construction of the contract as a whole".
This raises the question as to whether conceptual similarities between interpretation and implication can be identified.
According to Kramer, linguistic philosophy suggests that in the same way that meaning can be inferred, by reference to context, from words, meaning can be inferred, by reference to context, from silence. Much of interpretation is about supplementing the linguistic meaning of the words used by a process of pragmatic inference, against the broader context, because it is prohibitively costly (and probably impossible) to convey all intended meaning by "encoding" it linguistically. In particular, a communicator can intend what goes without saying and what does not cross his mind. As Lord Hoffmann puts it, "We use words in daily life against a background of knowledge which we assume that our listeners share and we need not therefore specifically mention". This does not even depend on conscious thought. The formulation of thoughts into words is an unconscious, reflex process. Kramer uses a famous example of the philosopher Ludwig Wittgenstein: if someone asks me to
"teach the children a game" they do not intend me to show them how to gamble with dice. This is true even though excluding unsuitable games with die was not present in the speaker's mind when he made the request. Every communicator intends his utterances to be interpreted using the background of social norms, understandings and expectations. Accordingly, the distinction between interpretation and implication breaks down. Both set out to ascertain what would reasonably be intended in the situation that has arisen, which is what the parties' (objectively ascertained) intention is.
Hooley also argues that there is a clear linkage between interpretation and implication. Whether you are interpreting the express words of a contract, or whether you are interpreting the gaps between the words of the contract as a whole, you are, in both cases, seeking to identify and give effect to the meaning or intention of the parties. Interpretation is the process by which the court identifies the common intention of the parties. This is an objective process. Interpretation is a necessary prerequisite before implication can take place. Implication of terms is a means (but not the only means) by which effect is given to the parties' intention once identified by the court. The basic principle that runs through interpretation and implication is the same: the need to identify and give effect to the meaning or intention of the parties.
The better approach is for the court to jettison the distinction between interpretation and implication. Lord Hoffmann did this in Belize when he decided that the implication of terms is, in essence, an exercise in interpretation. By doing this Lord
Hoffmann has placed the common intention of the parties centre stage. This is what links interpretation and implication. It is the common thread. Interpretation is used to identify the common intention of the parties and implication gives effect to that intention. There is no other basis for implying terms in fact into the contract. The whole process is informed by objectivity, which means that the "same background material that is admissible and relevant in aid of construction of the express terms of the [contract] may also be admitted in aid of the determination of the existence of an implied term".
Lord Hoffmann in Belize also made the argument from principle that "[t]he proposition that the implication of a term is an exercise in the construction of the instrument as a whole is… a matter of logic (since a court has no power to alter what the instrument means)".
(2) Conceptual distinction between interpretation and implication
Notwithstanding the similarities between interpretation and implication, it is important to acknowledge that there are significant differences between the two so that it is possible to articulate a conceptual distinction.
According to Davies, as a matter of logic, implication and interpretation are distinct.
Interpretation is concerned with ascertaining the meaning of words contained in the written agreement. By contrast, implication acts to supplement that instrument with terms additional to those expressly chosen by the parties. If the contract is silent on a point, by implying a term the court is supplementing, or replacing, this silence.
Indeed, a term which is implied into a contract still, strictly, needs to be interpreted.
In Marks & Spencer plc v BNP Paribas Securities, Lord Neuberger lent support to this view. He said: "I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. However, Lord Hoffmann's analysis in Belize could obscure the fact that construing the words used and implying additional words are different processes governed by different rules… Of course, it is fair to say that the factors to be taken into account on an issue of construction, namely the words used in the contract, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties, are also taken into account on an issue of implication. However, that does not mean that the exercise of implication should be properly classified as part of the exercise of interpretation, let alone that it should be carried out at the same time as interpretation. When one is implying a term or a phrase, one is not construing words,
as the words to be implied are ex hypothesi not there to be construed; and to speak of construing the contract as a whole, including the implied terms, is not helpful, not least because it begs the question as to what construction actually means in this context… the process of implication involves a rather different exercise from that of construction."
Furthermore, Davies argues that there is an important difference between what the parties choose to express and silence. If the parties have chosen a clear formulation,
that language should be given the utmost respect and interpretation should, generally,
be straightforward. By contrast, silence is inherently ambiguous, and it is difficult to know how the parties would have reacted if forced to consider a hypothetical term at the time of contracting; even if there would have been tentative consensus on a point,
it is impossible to ascertain precisely how the relevant term would have been drafted.
There should be no interpretation of silence. Rather, terms might be added to the contract by implication (not interpretation), using the distinct tests of The Moorcock and Shirlaw.
O'Sullivan also emphasises the difference between express words and silence. She argues that there is a real problem with assuming that silence admits of one reasonable, objective meaning, when silence is inherently ambiguous. The other traditional doctrinal test for implying a term in fact recognises this - the term must be so obvious that, when questioned by the hypothetical officious bystander, both parties reply that of course it forms part of their bargain. Such unanimity is extraordinarily unlikely to be satisfied in a commercial transaction. On the facts of Marks & Spencer,
for example, if the suggested "apportionment" implied term had been proposed in the negotiations, it would have been the subject of horse-trading and have had knock-on effects on the other terms on the table, such that many possible reasonable outcomes could have been reached. It is not possible to say that its absences give rise to just one reasonable interpretation.
Even Hooley concedes, that silence is inherently ambiguous because, given the rules which restrict evidence of the parties' intention when negotiating a contract, it may be doubtful whether the omission was the result of the parties' oversight or of their deliberate decision.
Finally, the seductively obvious point remains to be made that the assimilation of implication to interpretation is unworkable as regards unwritten contracts.
(3) Sequential difference
Interpretation and implication must be disaggregated because interpretation must precede implication. The express terms of the contract must first be construed before it can be determined whether additional implied terms are necessary.
In Marks & Spencer plc v BNP Paribas Securities, Lord Neuberger said: "In most,
possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term… Further, given that it is a cardinal rule that no term can be implied into a contract if it contradicts an express term, it would seem logically to follow that, until the express terms of a contract have been construed, it is,
at least normally, not sensibly possible to decide whether a further term should be implied."
In Trump International Golf Club Scotland Ltd v The Scottish Ministers, Lord Hodge agreed with this analysis. He said: "Interpretation is not the same as the implication of terms. Interpretation of the words of a document is the precursor of implication. It forms the context in which the law may have to imply terms into a document where the court concludes from its interpretation of the words used in the document that it must have been intended that the document would have a certain effect, although the words to give it that effect are absent.… See… Belize… as explained by this court in
Marks & Spencer…"
(4) The need for different rules across implication and interpretation
O'Sullivan points out another difficulty with the assimilation of implication and interpretation. Evidence of the parties' pre-contractual negotiations is inadmissible in disputes about contractual interpretation, a rule dating back to Prenn v Simmonds and confirmed more recently in Chartbrook Ltd v Persimmon Homes Ltd. However,
evidence of the parties' pre-contractual negotiations must surely be admitted when considering implied terms. If, for instance, on the facts of Marks & Spencer, the tenant had actually proposed the disputed "apportionment" term at an early stage of negotiations, but the landlords adamantly resisted it, regarding the point as a "dealbreaker", it would be perverse to suggest that a hypothetical reasonable observer should be free to "interpret" the absence of the term objectively, by reference to the rest of the commercial background but not that crucial fact.
(5) The need for more stringent rules for implication
In Philips Electronique Grand Publique SA v BSB Ltd, Sir Bingham MR said: "The court's usual role in contractual interpretation is, by resolving ambiguities or reconciling inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contact. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power".
Even Hooley - who supports Lord Hoffmann's approach in Belize - agrees that it is important, for three reasons, to exercise caution when implying a term into a contract.
First, the courts must not rewrite the parties' bargain. To do otherwise would undermine the principles of freedom of contract and autonomy of the parties. Given the rules which restrict evidence of the parties' intention when negotiating a contract,
it may be doubtful whether the omission was the result of the parties' oversight or of their deliberate decision. Silence is inherently ambiguous. The courts must only intervene where "confident" that an implied term is warranted, and most of the time it is not. The parties must be left at liberty to take their chance. Second, anything less than a stringent approach to the implication of terms would also increase the level of transactional uncertainty. The danger of judicial intervention would be ever present.
Third, the sparing and cautious attitude of the courts to implication gives the parties a real incentive to use express terms. The best way to deal with uncertainty is to remove the reason for having it by introducing a clear and unambiguous express term into the agreement.
The question then is whether an assimilation of implication to interpretation makes it easier, or substantially easier, to imply terms.
On the one hand, some argue that it does not.
First, the assimilation does not do away with the requirement of "necessity" that must be met before a term can be implied.
Hooley notes that Lord Hoffmann went out of his way in Belize to make clear that a court "has no power to improve upon" the contract, nor to "introduce terms to make it fairer or more reasonable". He stressed the use of the word "necessary" was designed to convey that it is not enough for a court to consider that the implied term expressed what it would have been reasonable for the parties to agree to.
It is for this reason that Morgan doubts Davies' fear that Belize has unsettled the law,
giving the courts too much scope to rewrite contracts, arguing that there is little evidence of this happening to date. He observes that, in Mediterranean Salvage &
Towage Ltd v Seamar Trading, the Court of Appeal refused to imply a term into a charterparty requiring the charterers to ensure that the ship would have a safe berth.
Indeed, Lord Clarke MR specifically observed that Lord Hoffmann's assimilation of implication and construction in Belize did not abolish the established test of necessity for a term to be added to the contract: "[Lord Hoffmann was] not in any way resiling from the often stated proposition that it must be necessary to imply the proposed term.
It is never sufficient that it should be reasonable."
Second, as Hooley notes, not only must the term be "necessary" in order to give meaning to the parties' intention; moreover, this must be the only meaning which the agreement can have. Where there are several ways in which the agreement could be performed, the court will not consider it necessary for the contract to be performed in the one way suggested by the implied term.
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