FEATURE


AD FONTES: The UK Supreme Court’s Renewed Approach to Contractual Interpretation in Wood v Capita Insurance



The UK Supreme Court’s latest decision in Wood (Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24 signals a change in the Court’s attitude towards contractual interpretation. This commentary considers the implications of Wood in light of the English cases that have come before it, and suggests that the approach taken in Wood coheres with the existing Singapore approach towards interpreting contracts.


Introduction
 
The recent UK Supreme Court decision in Wood (Respondent) v Capita Insurance Services Limited (Appellant)1 purported to assure its readers that the common law position on contractual interpretation was “one of continuity rather than change”.2 But tracing the UK position closely reveals that Wood is more correction than continuity. Wood appears to have recalibrated contractual interpretation back to an approach where the text assumes primacy.
 
This commentary will first set out the salient features in Wood and how this recalibrates the English approach. It then suggests that this recalibrated approach is already aligned with Singapore law.
 
Wood v Capita Insurance
 
Wood was a surprisingly straightforward case that only turned on one legal point. The parties entered into a sale and purchase agreement for some shares which contained an indemnity clause. The indemnity clause required Wood, the seller, to indemnify Capita, the buyer, in certain situations. The dispute was when the indemnity clause could be triggered. The indemnity clause provided as follows:
 
The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service.
[emphasis added]
 
There are two parts to this clause separated by the word “and” (which is emphasised in the quote above). The first refers to all “actions … and liabilities” and the second refers to all fines and related payments. Wood’s interpretation was that both parts were restricted by the two limitations found in the last few lines of the clause. First, the fine must be imposed because of a claim registered with an authority. Second, the fine must relate to the period prior to the completion date.3
 
Capita took a different interpretation. It agreed that there were two parts to the clause. But under Capita’s interpretation, the first part was only qualified by the final limitation, ie, that the “actions … and liabilities” must also be prior to the completion date and must pertain to mis-selling, but need not be triggered by a claim registered with an authority. The second part continued to attract both limitations.4 In Wood, Capita’s indemnity claim was not the result of a claim by any customer to a relevant authority, and so the court’s interpretation of the clause made all the difference.
 
The Court of Appeal found for Wood. Before the Supreme Court, Capita argued that the Court of Appeal had wrongly placed too much emphasis on the words of the clause and gave “insufficient weight to the factual matrix”.5 The Supreme Court upheld the Court of Appeal’s decision and dismissed the appeal.
 
The Court’s reasoning was as follows. First, it recognised that the clause was “avoidably opaque”6 in the sense that on either party’s interpretation, some part of the clause would be rendered otiose.7 However, the Court eventually preferred Wood’s interpretation. Capita’s interpretation would have meant that there was no limit to the identity of the persons who could trigger a claim under the first part of the clause. Although the general purpose of the contract was to indemnify Capita and its group against losses incurred by mis-selling, there were other wide-ranging warranties in the contract which gave Capita two years after completing the purchase to make a claim. It was more congruent with these other warranties to find that the indemnity clause provided for a protection which was not subject to a time limit (given that the other warranties were already limited by time) but was only triggered in certain circumstances (ie, when a claim had been submitted to the authorities).8 While this may have been a poor bargain from Capita’s perspective, the Court’s function was not to improve the parties’ bargain.9
 
In coming to this conclusion, the Court rejected several arguments made by Capita. First, the Court said that although an element of tautology was present in the clause in the sense that the “claims” in the first part of the clause needed to arise out of “claims” under the first limitation, this was difficult to avoid in the drafting of commercial contracts.10 Second, the Court said that the use of commas was not a strong indication in favour of Capita’s position because there were no set rules for the use of commas and there was no consistent use throughout the clause.11 Third, the court said that it was not significant that the first part of the clause used adjectives while the second part of the clause used a relative pronoun; since the clause was opaque to begin with, such detailed rules would not assist the Court.12 All three arguments were detailed and nuanced points that were rejected by the Court even though the Court recognised that the parties were “commercially sophisticated” and had experience in the relevant industry.13
 
General Implications
 
Wood affirms that, in carrying out the task of contractual interpretation, the Court should go back to the source of the agreement as expressed between the parties: the contract. Under the approach in Wood, the Court’s job is to “ascertain the objective meaning of the language which the parties have chosen to express their agreement”.14 In doing so, the literal language of the text is not the only useful indicator, but must be seen in the wider context of the contract as a whole. The weight to be given to each of these indicators depends on the particular agreement and parties. For instance, the text takes on more importance where the agreement is “negotiated and prepared with the assistance of skilled professionals”.15
 
These statements may seem unexceptional at first glance, but take on significance when considered against the cases that have come before Wood.
 
In Investors Compensation Scheme Ltd v West Bromwich Building Society,16 Lord Hoffmann sought to summarise contractual interpretation in five principles, under which almost all the “old intellectual baggage” of contractual interpretation had been discarded.17 Essentially, the Court would interpret a contract to find the “meaning which the document would convey to a reasonable person”.18 It does so by considering the relevant background material, which includes “absolutely anything” not specifically prohibited.19 Lord Hoffmann specifically disavowed using dictionaries and grammar, since they reflect only the meaning of the “words” and not the “document”.20 In fact, the words appeared to take on so little importance to Lord Hoffmann that the court could use the contractual background to conclude that “something must have gone wrong with the language”.21
 
ICS was followed by Rainy Sky SA v Kookmin Bank,22 which appeared to take this view even further. The leading judgment was delivered by Lord Clarke. He said that contractual interpretation is “essentially one unitary exercise” which considers the language used from the lens of what a reasonable person would have understood the parties to mean.23 But where a term is open to more than one possible interpretation, it would generally be appropriate to adopt the interpretation most consistent with business common sense.24 In adopting this business meaning, it is not necessary that the natural meaning of the words is “so extreme” before the Court can depart from the plain words.25 Given that Lord Clarke also noted that the parties’ language will “often” have more than one potential meaning,26 the sum total of this decision is that contractual interpretation would be determined more often than not by what makes business common sense to the Court. It is telling that Lord Clarke described Patton LJ’s approach in the Court of Appeal, which emphasised the meaning of the words,27 as a “significantly different”28 one that he was not prepared to follow.
 
ICS and Rainy Sky therefore appeared to have moved further and further away from the meaning of the words in the document.
 
A different approach was taken a few years later in Arnold v Britton.29 Lord Neuberger, delivering the leading judgment in the Supreme Court, reasserted some of the “old intellectual baggage” apparently discarded by ICS. Indeed, Arnold appeared to be a point-by-point rebuttal of Rainy Sky even though the law lords said otherwise. Lord Neuberger emphasised six points of general application which mostly limited the role of the commercial context that played so large a role in Rainy Sky. Among other things, the commercial context should not be used to undervalue the language or to facilitate a departure from the text;30 it should not be an ex post facto analysis of what the parties should have done at the point of contracting;31 and it should not be used to correct a term that appears imprudent to the court.32 Instead, the Court is concerned with “identify[ing] the intention of the parties” with a focus on the meaning of the relevant words.33
 
In light of the route taken by ICS, Rainy Sky, and Arnold, Wood becomes significant as a potential turning point. It may help confirm that Arnold was not an aberration but a concerted judicial effort to reaffirm the “old intellectual baggage” that was unceremoniously thrown away nearly two decades ago. Wood is not the final word on the matter but with hindsight it may well show the shift back to the importance of the contractual document.
 
Implications for Singapore
 
Unlike how Wood may prove to be a turning point for English law with the benefit of hindsight, it is unlikely that Wood will be a similar watershed moment for Singapore law. Instead, the Singapore cases have already been plodding along the same path that Wood is only now beginning to return to.
 
The consistency in the Singapore approach is exemplified by the recent decision in Ngee Ann Development Pte Ltd v Takashimaya Singapore Ltd,34 where the Court of Appeal cited a pair of its own previous cases (which themselves cited previous Court of Appeal decisions) and reaffirmed the same principles. Essentially, the first port of call in contractual interpretation is the text of the contract, since it is the primary source of understanding what the parties meant.35 The Court then looks at the context of the entire contract, including its other clauses, to determine whether the parties’ commercial expectations square with the textual interpretation.36 Significantly, unlike the previous position at English law, it appears that the text has always been given primacy under Singapore law. In Yap Son On v Ding Pei Zhen,37 a Court of Appeal decision pre-dating Ngee Ann by a few years, the court rejected a proposed construction of a clause that was not within the range of permissible interpretations given by the text of the clause. Going even further back to its decisions in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd in 200838 and Citicorp Investment Bank (Singapore) Ltd v Wee Ah Kee in 1997,39 the Court has consistently stated that the interpretation ultimately chosen by the Court must be one which the words are “reasonably adequate to convey”. Indeed, the Court of Appeal in Y.E.S. F&B Group Pte Ltd v Soup Restaurant Singapore Pte Ltd (formerly known as Soup Restaurant (Causeway Point) Pte Ltd even went as far as to say that an absurd result arising from the plain meaning of a clause could potentially be sustained if it could be shown that the parties had intended the absurd result.40
 
This limited role given to the parties’ background expectations in favour of the parties’ expressed intentions is entirely consistent with Wood. As will be recalled, the Supreme Court noted in Wood that the purpose of the entire contract was to indemnify Capita and its group against losses incurred by mis-selling. Yet the Court refused to use this broad, imprecise purpose to found an interpretation that would subordinate the other existing warranties in the contract. And although the Court ultimately chose an interpretation that would render some words nugatory, it was at pains to emphasise that the alternative interpretation would also render other words otiose.
 
Recognising the importance of the parties’ expressed intentions (in both Wood and the existing Singapore jurisprudence) is sound in principle. When parties negotiate a contract they each have, in their minds, the benefits they wish to gain and the burdens they are able to bear. They each reveal just enough of these expectations that the other party can agree with them and enter into the contract; these limited, mutual areas of consensus are recorded as the contractual terms. What they leave unsaid is, therefore, deliberate: if they had said it out loud they may not have come to the agreement that they were otherwise able to. In interpreting the contract, then, the Court should also place more importance on what they were able to express to each other to achieve their bargain. Their background thoughts – or commercial expectations – should not dominate the discussion now since they did not do so at the time of contracting.
 
But not all situations are equal. In some situations, of course, the parties should be held much more closely to their language than in other situations. This did not escape the attention of the Supreme Court in Wood, where the court noted that the text would take on more importance where it was “negotiated and prepared with the assistance of skilled professionals”41 (see above at [9]). A similar realisation has permeated the Singapore courts. In Zurich Insurance, the Court of Appeal noted that different contracts have different starting points. In standard form contracts and commercial documents, the “presumption that all the terms of the agreement between the parties are contained in the contract will be almost impossible to rebut”.42 While this statement was made in the context of admitting extrinsic evidence to interpret a contract, it appears to be a statement of general application. Indeed, following Zurich Insurance, several other Court of Appeal cases have applied this principle. For instance, the courts in Xia Zhengyan v Geng Changqing43 and in Soup Restaurant44 have taken into consideration the fact that the contracts were drafted without any legal assistance in deciding how much weight to give to the contract’s plain meaning.
 
As can be seen, the careful negotiation of when the text of the contract assumes primary importance, and the recognition that it does not invariably do so in all situations, is a common hallmark of both Wood and the Singapore cases.
 
But despite these similarities with Wood, the Singapore courts have been careful to emphasise that the Singapore position is, in fact, not too different from the English position through all its twists and turns. In Soup Restaurant, the Court of Appeal considered and approved both Rainy Sky and Arnold as being consistent with Singapore law,45 even though Rainy Sky and Arnold arguably represent very different philosophies of contractual interpretation. However, it should be noted that the Court of Appeal cited these cases in a very specific context. Rainy Sky was cited for the proposition that contractual interpretation was “essentially one unitary exercise”46 in the sense that the context may shed light on what the plain meaning of the text would be; they are not sequential steps. As for Arnold, the court in Soup Restaurant said that the “absurd result” in that case was “aptly justified” given that the context shed no light on what other alternative interpretations could be taken apart from the “clear and unambiguous language” of the text.47 In this limited sense, both Rainy Sky and Arnold are consistent with the Singapore jurisprudence; the Court did not need to go further to resolve the other apparent controversies relating to those cases.
 
Hence, although the Singapore courts have sought to straddle the middle ground between the slowly diverging routes taken by Rainy Sky on one hand and Arnold on the other, there may be no need to do so in the future following Wood.
 
Syntax and Grammar: A Point for Future Consideration
 
Thus far we have seen the dance between text and context and the different situations where each assumes importance. A final point that merits consideration, which has not been taken up in detail in any Singapore case, is the extent to which syntax and grammar matter. In Wood they did not since the Supreme Court was of the view that there was no correct standard to measure the syntax and grammar against.
 
This is also the most likely view that will be taken by the Singapore courts. Much like what is a commercially reasonable bargain, there is no one-size-fits-all standard of the syntax and grammar all parties aspire towards. Rather, the use of certain turns of phrases or typographical quirks should be evaluated against the standard that the parties had set for themselves in their use of syntax and grammar throughout the rest of the contract. We can only await the court’s guidance on this point.
 
Leong Hoi Seng Victor*
    Justices’ Law Clerk
    Supreme Court of Singapore
    E-mail: Victor_LEONG@supcourt.gov.sg
 
* The views in this article are the author’s own and do not represent the views of his employer.
 
Notes

1 [2017] UKSC 24 (“Wood”).

2 Wood at [15].

3 Wood at [32].

4 Wood at [31].

5 Wood at [8].

6 Wood at [26].

7 Wood at [33].

8 Wood at [40].

9 Wood at [41].

10 Wood at [36].

11 Wood at [37].

12 Wood at [38].

13 Wood at [28].

14 Wood at [10].

15 Wood at [13].

16 [1998] 1 WLR 896 (“ICS”).

17 ICS at 912G-H.

18 ICS at 912H.

19 ICS at 913A.

20 ICS at 913C.

21 ICS at 913E.

22 [2011] 1 WLR 2900 (“Rainy Sky”).

23 Rainy Sky at [21].

24 Rainy Sky at [30].

25 Rainy Sky at [20].

26 Rainy Sky at [21].

27 Rainy Sky at [18]-[19].

28 Rainy Sky at [30].

29 [2015] AC 1619 (“Arnold”).

30 Arnold at [17]-[18].

31 Arnold at [21].

32 Arnold at [19]-[20].

33 Arnold at [15].

34 [2017] SGCA 42 (“Ngee Ann”).

35 Ngee Ann at [61].

36 Ngee Ann at [63].

37 [2017] 1 SLR 219.

38 [2008] 3 SLR(R) 1029 (“Zurich Insurance”) at [122].

39 [1997] 2 SLR(R) 1 at [63].

40 [2015] 5 SLR 1189 (“Soup Restaurant”) at [32].

41 Wood at [13].

42 Zurich at [110].

43 [2015] 3 SLR 732 at [74].

44 Soup Restaurant at [63].

45 Soup Restaurant at [48] and [52].

46 Soup Restaurant at [48].

47 Soup Restaurant at [55].