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INTERPRETATION OF CONTRACTS IN ENGLISH LAW AND EXPERIENCE FOR VIETNAMESE LAW (luận văn thạc sỹ luật)

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MINISTRY OF EDUCATION AND TRAINING
HO CHI MINH CITY UNIVERSITY OF LAW
INTERNATIONAL LAW FACULTY
--------

BACHELOR THESIS

INTERPRETATION OF CONTRACTS IN ENGLISH LAW
AND EXPERIENCE FOR VIETNAMESE LAW

Student Name:

NGUYỄN VŨ LIÊN QUỲNH

Class:

Advanced class 34

Student Numer:

0955010188

Supervisor:

Dr. Lê Thị Ánh Nguyệt

HO CHI MINH CITY, 2013


HO CHI MINH CITY UNIVERSITY OF LAW
INTERNATIONAL LAW FACULTY



BACHELOR THESIS

INTERPRETATION OF CONTRACTS IN ENGLISH LAW AND
EXPERIENCE FOR VIETNAMESE LAW

STUDENT NAME: NGUYỄN VŨ LIÊN QUỲNH
CLASS: 34

STUDENT NUMBER: 0955010188

SUPERVISOR: DOCTOR LÊ THỊ ÁNH NGUYỆT

HO CHI MINH CITY, 2013


ACKNOWLEDGEMENT
I hereby declare that this thesis is my own work. The figures used in the
thesis are authentic. The research results have not been published in any other work.
Ho Chi Minh City, July 2013
Nguyễn Vũ Liên Quỳnh


TABLE OF CONTENTS
INTRODUCTION ................................................................................................. 1
Chapter 1: INTERPRETATION OF CONTRACTS IN THE ENGLISH LAW
OF CONTRACT............................................................................................... 4
1.1.

The English Common Law System ................................................... 4


1.2.

The English Law of Contract ............................................................ 6

1.3.

Interpretation of Contracts in the English Law of Contract ......... 15

Summary of Chapter 1 ............................................................................... 17
Chapter

2:

GENERAL

PRINCIPLES

OF

INTERPRETATION

OF

CONTRACTS IN THE ENGLISH LAW OF CONTRACT ........................ 18
2.1.

The Language of A Contractual Document .................................... 24
2.1.1. The Terminology of “Contractual Document” ........................ 25
2.1.2. The Determination of the Meaning of the Language of A

Contractual Document............................................................. 27

2.2.

Contractual Document to Be Interpreted to Reflect the
Understanding of A Reasonable Person ......................................... 28
2.2.1. The Terminology of “Reasonable Person” .............................. 28
2.2.2. The Determination of the Understanding of A Reasonable Person
30

2.3.

Contractual Document to Be Interpreted in the Light of
Circumstances .................................................................................. 32
2.3.1. The Terminology of “Circumstance”....................................... 32
2.3.2. The Determination of Surrounding Circumstances .................. 35

SUMMARY OF CHAPTER 2 ................................................................... 38
Chapter 3: A COMPARATIVE STUDY OF VIETNAMESE LAW AND
ENGLISH LAW ON INTERPRETATION OF CONTRACTS................... 40
3.1.

Applicable Law of Contract in Vietnam ......................................... 40

3.2.

Overview of Interpretation of Contracts in Vietnamese Law ........ 42

3.3.


Interpretation of Contracts in Comparison .................................... 50


3.3.1. Similarities .............................................................................. 50
3.3.2. Differences .............................................................................. 51
3.3.2.1. The Source of Law ...................................................... 51
3.3.2.2. The Role of A Reasonable Person ............................... 51
3.3.2.3. Surrounding Circumstances........................................ 52
Summary of Chapter 3 ............................................................................... 53
CONCLUSION ...................................................................................................... 1



1

INTRODUCTION
1.

The basis of the thesis

Contracts are today a popular social phenomenon. It can be a phone call, a
simply drafted paper, or a carefully negotiated document. People cooperate with
each other and enter into a contract for the purpose of minimizing potential and
unforeseeable risks of their cooperation. The language of a contract is a device of
managing such risks. Therefore, it is suggested that people should use their words
in a cautious manner.
In reality, there are a lot of disputes over the language of a contract. Such
disagreements usually result from vague words which the parties may not discover
when they enter into their contract. Under these circumstances, the question is how
Vietnamese law, especially the law of contract, governs the vague language of a

contract. This question relates to the methodology of explaining what the contract
means. Some relevant provisions in Vietnamese law are Articles 126 and 409 of the
Civil Code of 2005, Article 21 of the Law on Business Insurance of 2000 (recently
amended in 2010) and Article 15 of the Law on Consumer Rights Protection of
2010.
Learning from other legal systems and international conventions is one of
the routes to acquiring selective knowledge of how similar matters are governed in
the other legal systems and the international conventions. Accordingly, lawmakers,
experts, researchers, and law students review statutory provisions in Vietnamese
law.
Therefore, the author choose to approach the interpretation of contracts in
the Vietnamese Civil Code of 2005 by way of learning from the interpretation of
contracts in the English law of contract. The title of the author’s thesis is thus


2

“Interpretation of Contracts in English law and Experience for Vietnamese
Law”.
2.

Purpose and Delimitation of the Thesis

The purpose of the thesis is to introduce the methodology of interpreting
contracts in the English law of contract, to compare the methodology of
interpreting contracts in both Vietnamese and English law, and to make several
recommendations for Vietnamese Law.
The objects of the thesis are words and provisions which are facially
expressed in written contracts. In terms of the English law of contract, the thesis
concerns with general principles of interpretation of contracts, such as contracts for

the sale of shares, charterparties, and contracts for the assignment of claims.
According to the results of research, the primary source of English law is judicial
decisions established in England. Moreover, the scope of the source of both
Vietnamese law and English is the sources of the domestic law.
3.

The Status of the Study

There are a large number of books on interpretation of contracts in the
English law of contract. Some examples are Interpretation of Contracts (Current
Controversies in Law Series) which was written by Catherine Mitchell and
published by Routledge-Cavendish in 2007, The Interpretation of Contracts (5th
edition) which was written by Sir Kim Lewison and published by Sweet and
Maxwell in 2011, and Chitty of Contracts – Volume 1 – General Principles (31st
edition) which was written by Professor Hugh Beale and published by Sweet and
Maxwell in 2012. The authors of the books discuss different aspects of the
interpretative method in the English law of contract, such as general principles of
interpretation, canons of interpretation, available materials for interpretation, and
legal effects of interpretation.


3

However, there are a limited number of books and academic papers on the
interpretation of contracts in Vietnamese law. Some are Textbook on the
Vietnamese Civil Law which was published by Hanoi Law University in 2009,
Textbook on Contract Law and Tort Law in Vietnam which was published by Ho
Chi Minh City University of Law in 2011, and The Law of Contract under The
Vietnamese Civil Code) which was written by Nguyen Ngoc Khanh and published
in 2007. These books to some extent give readers a general picture of interpretation

of contracts in Vietnamese law.
4.

Methods

In this thesis, the author have adopted the method of dialectical
materialism, the method of analysis and synthesis, and statistical method. Those
methods are carried out at different parts of the thesis in order to achieve the
purpose of the thesis.
5.

Contributions

The thesis is expected to provide a theoretical and practical perspective on
the methodology of contract interpretation in English law, and to contribute
towards further studies of the interpretation of contracts in Vietnamese law. In
addition, the thesis also emphasises the value of the language of a contract and the
skill of drafting and understanding a contract.
6.

Structure of the Thesis

The thesis contains three following chapters:
Chapter 1. The Interpretation of Contracts in The English Law of Contract
Chapter 2. General Principles of Interpretation of Contracts in The
English Law of Contract
Chapter 3. A Comparative Study of Vietnamese and English Law on
Interpretation of Contracts



4

Chapter 1: INTERPRETATION OF CONTRACTS IN THE ENGLISH LAW
OF CONTRACT
There are different approaches to the interpretation of contracts in the
English law of contract. One can approach the source of judicial decisions relating
to the interpretation of contracts. This thesis has adopted another method of
studying the matter. Chapter 1 will place the interpretation of contracts in the scope
of the English common law system and the English law of contract. Accordingly,
Chapter 1 will answer the question whether the sources of law, types of contracts,
the contents of a contract and forms of contracts influence the interpretation of
contracts.
1.1. The English Common Law System
There are two main types of legal systems in the world, namely, common
law legal system and civil law legal system. Countries belonging to the former
include England, Wales, the United States, Canada, Australia, New Zealand, Hong
Kong, Singapore, etc. Indeed, the English common law system, which refers to the
legal system of both England and Wales, is the basis of the common law legal
system.
In English common law, the law is classified into civil law and criminal
law. There are three main sources:
Firstly, that is legislation. In England, the law-making powers rest with the
United Kingdom Parliament, the supreme legal authority in the United Kingdom. It
can create or end any law. The courts cannot overrule its legislation. When two
Houses of Parliament (the House of Commons and the House of Lords) approve a
draft law (known as “bill”) and the reigning monarch agrees with the draft, it will
become an “Act”, which creates a new law or changes an existing law. Acts are


5


considered as the primary legislation which are altered or supplemented by the
secondary legislation – that is delegated legislation.1
Secondly, that is case law or judicial decisions. There are two important
events in the English legal history, namely, (i) the judicial decisions of the Royal
Courts (known as “the common law courts”) became the main source of law in the
whole country from the 12 th century, and (ii) the writ system.2 As to the latter, only
when there was an existing writ, a person was then entitled to take legal action
against someone else. However, because of the limited types of writs, in the 14th
century, the Courts of Chancery were established to supplement the writ system.
The Courts of Chancery developed a separate body of law from the common law of
the Royal Courts. This body of law was known as “equity”. In the late 19 th century,
pursuant to the Supreme Court of Judicature Act 1873-1875, both equity and
common law were joined together.3
Thirdly, that is customs. Customs are accepted ways of behaving or doing
something in England. For example, in Suffolk, a thousand means 1,200. This
custom is written in a judicial decision.4 Therefore, one of the sources of customs is
judicial decisions. As a consequence, when judges seek a customary meaning, they
will consult relevant judicial decisions.
In relation to the courts system of England, civil cases may go to
Magistrates’ Court, County Court, High Court, Court of Appeal and Supreme
Court. Meanwhile, criminal cases may go to Magistrates’ Court, Crown Court,

1

See more />
2

Peter De Cruz, Comparative Law in A Changing World, Routledge-Cavendish, 3rd edition, 2006, p.101.


3

Ibid.

4

Smith v Wilson (1832) 3 B. & Ad. 732.


6

High Court, Court of Appeal and Supreme Court.5 Alongside the systems of courts
in England, there is a system of tribunals which also deal with civil cases. The
tribunals are governed by local authorities, government departments, or an agency
of the Ministry of Justice (known as “Her Majesty's Courts and Tribunals
Service”).6
1.2. The English Law of Contract
The law of contract is a branch of the civil law in the English common law.
The English law of contract is defined as “the study of the legal principles which
underline all contracts; it is not (generally) concerned with particular types of
contracts and their specialized rules”.7 The main sources of the English law of
contracts include decisions of the courts and statues; indeed, the law of contract is
based primarily on judicial decisions.8 There are some important statues governing
the law of contract: the Law Reform (Frustrated Contracts) Act 1943, the
Misrepresentation Act 1967, and the Contracts (Rights of Third Parties) Act 1999.
What is the definition of the term “contract” in the English law of contract?
A contract is determined as “a legally enforceable agreement giving rise to
obligations for the parties involved.”9 There are six essential elements of a valid
contract, namely, (i) an intention to create legal relations, (ii) an agreement, (iii) a
consideration, (iv) capacity, (v) genuine consent, and (vi) legality. In case there is

lack of one of the first three elements, the court will hold that there is no contract

5

See more />
6

See more />7

Laurence Koffman and Elizabeth Macdonald, The Law of Contract, 6th edition, Oxford University Press,
New York (2007), p. 2.
8

Ibid.

9

Ibid, p.1.


7

between parties. In addition, in case there is an apparent contract which lacks one
of the three remaining elements, the court will decide that the contract is invalid.
Firstly, that is an intention to create legal relations. This element will be
adopted to avoid the enforcement of casual social arrangement, promises made as
jokers and informal domestic arrangement.10 For example, a mother promised that
she would give her daughter £200 a month if the daughter gave up her job in the
USA and completed her studies for the English bar. A majority of the Court of
Appeal refused to enforce the agreement because there was no intention to create

legal relations.11 In terms of commercial transactions, they are generally presumed
to have an intention to create legal relations. However, this presumption may be
rebutted. In 1891, a company advertised in magazines and newspapers that who
bought its products (smoke balls) and used in the prescribed manner he could not
have got influenza. If not, it would pay £100 to any who caught influenza. Then a
woman purchased a smoke ball and used as it directed. However, she still caught
influenza. She sued the company for a £100 promise. The company attempted to
argue that there was no intention to create legal relations. However, the court
rejected the argument because the fact the company had deposited £1,000 with its
bank indicated that the advertisement created an intent to be bound.12
Secondly, that is agreement. An agreement is usually thought to arise via a
process of offer and acceptance. An offer is a legal commitment which signifies the
willingness to contract.13 It must be made with legal intent. In the above example
relating to the company which advertised its smoke balls in newspapers and

10

Hugh Collins, The Law of Contract, 4th edition, Butterworths, London (2003), p. 68.

11

Ibid. This was the case Jones v Padavatton [1969] 1 All ER 616.

12

Laurence Koffman and Elizabeth Macdonald, The Law of Contract, 6th edition, Oxford University Press,
New York (2007), p. 101. This was the case of Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256, CA.
13

David Oughton & Martin Davis, Sourcebook on Contract, 2nd edition, Cavendish Publishing Ltd, United

Kingdom, 2000, p. 26.


8

magazines, the court held that the advertisement was an offer to members of the
public. There are four most widely accepted circumstances in which there is no
offer, namely, displays of goods in stores, advertisements, auction sales, and
invitations to tender.14 Indeed, the four cases are prima facie presumed as
invitations to treat – that is invitations to offer to negotiate or make offers in their
return and so incapable of acceptance in themselves. An acceptance is an
unconditional assent to the terms proposed in the offer. A valid offer contains the
following conditions:15 (i) the offer must still be in force and open to acceptance,
(ii) the acceptance must be unconditional and must not introduce any fresh terms of
a significant or material nature, and (iii) the acceptance is only valid, in general,
when received by the offeror. The first condition means that there is no lapse,
rejection, or revocation made by the offeree. Indeed, an offer will lapse when there
is no acceptance within a reasonable time, or a stated time period expires, or there
is the death of the offeror or offeree. An offer can be revoked at any time before it
is validly accepted. For a revocation to be effective, it should be communicated by
a reasonably reliable source. For example, in a case in 1894, a man wrote to a
landowner and offered to buy his land for £1,450. He then received a letter from the
landowner’s solicitor which purported to accept the offer and attached a document
for his signature. However, the document contained important new terms which
were not stated in the original offer. Therefore, the man refused to sign the
document. It was held that there was no contract between two parties because the
letter from the landowner’s solicitor was not an acceptance.16
Thirdly, that is consideration. There are various definitions of
consideration. One of the definitions is “a valuable consideration, in the eyes of
law, may consist either in some right, interest, profit, or benefit accruing to the one


14

Ibid, p. 29.

15

Ibid, p. 38.

16

The Law of Contract, pp. 22-23. This was the case Jones v Daniel (1894) 2 Ch. 332.


9

party, or some forbearance, detriment, loss, or responsibility given, suffered or
undertaken by the other”.17 For example, during divorce proceedings, a husband
agreed to pay his wife an allowance of £100 each year. After several years later, the
wife sued her husband because he had never paid her the allowance. The court
rejected the wife’s claim on the ground that she had given no consideration for the
promise of the husband.18 Besides, there are a number of rules of consideration:19
(i) consideration needs not be adequate, (ii) consideration must be sufficient, (iii)
consideration must not be past, and (iv) consideration must move from the
promisee. According to the first rule, it does not mean that the wife, in the above
example, had to give her husband something of equal value in exchange for the
husband’s promise. She could have given him something which had a small value.
In terms of the second rule, how much consideration is sufficient to make a promise
enforceable? It is not easy to determine the extent of sufficiency. However, the
second rule means that the value is not approached on a completely subjective

basis.20 In terms of the third rule, if the wife had exchanged an act which she had
executed before the making of the husband’s promise, the act was considered as a
past consideration which did not provide a good reason for enforcing the promise.
According to the fourth rule, the promise moved from the husband, in other words,
he was expected to use his money to pay his wife the allowance.
Fourthly, the law prima facie presumes that everyone has a capacity to
contract. However, there are three classes of individuals who are subject to some
degree of personal contractual incapacity, namely, minors, persons lacking the

17

The Law of Contract, p. 57.

18

The Law of Contract, p.65. This was the case of Combe v Combe [1951] 1 KB 215, [1951] 1 All ER 767,
CA.
19

Sourcebook on Contract Law, p. 109.

20

Ibid, p. 110.


10

requisite mental capacity, and drunken persons.21 Indeed, a minor is a person who
is under the age of eighteen. In terms of the second class of individuals, that is

persons who are mentally disordered or otherwise lacking in mental capacity. In
justification for the personal contractual incapacity, the three classes of individuals
are not able to understand a transaction fully. 22
Fifthly, that is genuine consent. Genuine consent means the true or
authentic agreement of contracting parties. There are five scenarios which lack of
genuine consent: (i) mistake, (ii) misrepresentation, (iii) duress, (iv) undue
influence, and (v) unconscionable conduct. In terms of mistake, there are several
following circumstances: firstly, both parties agree on the terms of a contract but
enter into the contract under a shared and fundamental misapprehension as to the
facts or the law (known as “common mistake”);23 secondly, each party is mistaken
as to the terms intended by the other party (known as “mutual mistake”);24 thirdly,
only one party misunderstands over the terms of a contract or the identity of the
other party (known as “unilateral mistake”).25
In terms of the second scenario, there are now three types of
misrepresentation: fraudulent misrepresentation, innocent misrepresentation and
negligence misrepresentation. There are two factors which constitute effective
misrepresentation: firstly, false statement of facts,26 which is a statement and can be
determined to be true or false at the time it was made. For example, an owner of the
land had stated that his land was capable of holding 2,000 sheeps. Relying on this
21

Hugh Beale, Chitty on Contract, 31st edition, Sweet and Maxwell, United Kingdom, 2012, pp.755-756.

22

Ibid.

23

Ibid, p. 505.


24

Ibid, p. 502.

25

Ibid.

26

Ibid, p. 574.


11

statement of the owner, the respondent entered into a contract with the landowner.
Then the respondent discovered the fact that the land had never been used for sheep
farming in a long period of time. Besides, only a small part of the land had been
used for sheep farming. Therefore, the respondent refused to proceed with the
contract. Due to such a refusal, the landowner sued the respondent. The court held
that the landowner’s statement was a false statement. Hence, the court decided the
respondent won the case.27 Secondly, the false statement of facts made the other
party to contract with him or the other party had notice of the false statement.28 In
the above example, the respondent did not know the true fact before he entered into
the contract with the landowner.
In terms of duress, there is sufficient threats to induce a person to enter into
a contract. For instance, in a case in 1979, the respondent threatened not to
complete the construction of an oil tanker if the appellant did not prepare to pay
10% on top of the contract price. The appellant did not know that the respondent

was not entitled to the extra 10%. Therefore, the appellant paid the extra. After the
completion of the construction, the appellant sued the respondent for the recovery
of the extra payment. The court held that there was an economic duress.29 In terms
of undue influence, it appears in a relationship of trust and confidence where who
two parties enter into a contract as the result of an abuse of the relationship. For
instance, an elderly farmer had a son whose business was in financial difficulty.
Previously, the farmer had guaranteed his son’s debt and secured the guarantee on
his own house. A representative of the bank advised the farmer that it could only
continue to support the son’s business when he increased the charge on his house.
However, the bank did not explain clearly the true condition of his son’s business.
The farmer relied only on the advise of the bank to increase the charge. Then the

27

This was the case of Bissett v Wilkinson [1927] AC 177.

28

Chitty on Contract, p. 575.

29

North Ocean Shipping Co v Hyundai Construction Co [1979] QB 705.


12

bank foreclosed the house since the debt was not paid off. The court held that the
farmer had place confidence in the bank to agree the increase. Therefore, there was
an undue influence in the case.30 In terms of unconscionable conduct (also know as

“unconscionable use of power”), it happens when a stronger party takes
unconscientious advantage of the weaker party’s disabling circumstances. For
example, in 1995, the respondent (A) of a case intended that the appellant (B) to be
mistaken and diverted the B’s attention from discovering the mistake by making
false statement. B then made a mistake which was same with A’s intention. The
court held that A had an unconscionable conduct.31
Finally, that is legality. This element requires a contract to adhere to the
state of law. In other words, a valid contract must follow the law which governs the
contract.
The word “term” has several meanings. It can be defined as “a word or
phrase; especially an expression that have a fixed meaning in some field”, or “a
contractual stipulation”, or “provisions that define an agreement’s scope; conditions
or stipulations”.32 The thesis concerns with the second sense of the word – that is, a
contractual stipulation. The question is whether a pre-contractual statement can be
terms of a contract. To answer the question, it is necessary to know what a precontractual statement is. Accordingly, a pre-contractual statement can be (i) puffs,
(ii) representations, or (ii) contractual terms. With respect to puffs, there is no
intention to create legal relations. Therefore, there is no contract. The distinction
between representations and contractual terms is “very imprecise”33. However,

30

This was the case of Lloyd’s Bank Ltd v Bundy [1975] QB 326, CA.

31

This was the case of Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259.

32

Bryan A. Garner, The Black’s Law Dictionary, 7th edition, West Group, 1999, p. 1481-1482.


33

Jill Poole, Textbook on Contract Law, 11th edition, Oxford University Press, United Kingdom, 2012, p.
191.


13

there are some guidelines which have been adopted to determine whether a precontractual statement is a contractual term or a representation. Judges start from
analyzing the intention of the person who makes a pre-contractual statement. In
case the statement maker asserts that his pre-contractual statement is true, his
statement is regarded as a binding promise. However, if the statement maker asks
or advises the other, his statement is not regarded as a binding promise that the
statement is true.34 For example, according to a case35 in 1913, the respondent sold
a horse to the appellant. Before they entered into the contract for the sale, the
respondent told the appellant that there was not need to continue examining the
horse because it was perfectly sound. Three weeks after the purchase, the appellant
discovered that the horse was not perfectly sound. Therefore, he sued the
respondent for beach of contract. The court held that the statement which the
respondent communicated to the appellant was a promise of the truth. Hence, the
respondent breached the contract. In another scenario, when a statement maker
realizes which is important to lead a person to enter into a contract, his statement is
regarded as a term.36 For example, there is a case37 in 1998 in which the appellant
relied on the specification of a car to buy one from the respondent. The appellant
then discovered that the car did not accord with the specification. Therefore, he
sued the respondent for breach of contract. The court held that the specification was
a term of the contract; therefore, the respondent breached the contract. In brief, a
pre-contractual statement in a negotiation can be a contractual term.
Relating to the contents of a contract, there are two main types of terms:

express terms and implied terms. The express terms include written statements of

34

Ibid. p.192.

35

This was the case of Schawel v Reade [1913] 2 IR 81.

36

Jill Poole, Textbook on Contract Law, 11th edition, Oxford University Press, USA, pp. 192-193.

37

This was the case of Pritchard v Cook & Red Ltd [1998] EWCA Civ 900.


14

an agreement and any oral agreement.38 The implied terms are additional terms
which have not been mentioned by parties, but the court deems that the parties have
agreed on them.39
In terms of written contracts, there are contracts which are wholly in
writing and contracts which are partly written and partly oral. With respect to the
former, are all contractual terms involved in the written documents? There is a
general principle which relates to this type of written contracts. That is the parol
evidence rule, which states, “if the contract is written then that writing is the whole
contract and parties cannot adduce extrinsic evidence, and especially oral

evidence, to add to, vary or contradict that writing”40. “Parol” or “extrinsic” means
outside. The rule can be reiterated that when there is a written contract, all forms of
evidence outside the contract are not generally permissible to contradict, vary or
add to the terms of the written document. The rule is aimed at protecting
contractual certainty. Besides, the rule only applies to express terms – that is
contractual statements what are stated or expressed in the contracts. In brief, all
facially expressed terms are contained in the written contracts which are wholly in
writing.
In terms of contracts which are partly written and partly oral, obviously, the
parol evidence rule does not apply in this case, since contractual terms are involved
not only in the written contracts. Contractual terms between parties, under these
circumstances, include written terms and oral terms, indeed, the written terms are
contained in a document.41

38

The Law of Contract, p. 222.

39

Ibid.

40

This is the statement in the case Henderson v Arthur [1907] 1 KB 10.

41

Textbook on Contract Law, p. 196.



15

1.3. Interpretation of Contracts in the English Law of Contract
The primary sources of interpretation of contracts in the English law of
contract are judicial decisions, because the law of contract is based mainly on
judicial decisions. In addition, there is no statutory definition of the concept of
“interpretation” of contracts in the source of legislation. In the source of case law,
it may be defined as “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.”42 This is the definition of the modern approach to
interpretation of contracts in England. Sometimes the term “construction” takes the
place of the term “interpretation”, which does not give rise to a change of
meaning.43 Furthermore, such a judicial definition indicates the interpretative
methodology adopted in England today. In general, the interpreter will construe a
contract due to a contract itself and surrounding circumstances.
The interpretation of express terms is not similar to the interpretation of
implied terms. This difference results from the different method by which each type
of term is made. The express terms are stated clearly in an agreement. However, the
implied terms can be made by custom, statue, or the courts.44 In the scope of the
thesis, it is concerned with interpretation of express terms in written contracts.

42

This definition is given by one of the five Lords decided the landmark case Investors Compensation
Scheme Ltd v West Bromwich Building Society [1997] UKHL 28.
43

In a judgment of the House of Lords held in 1995, Deutsche Genossenschaftsbank v Burnhope [1995] 1

WLR 1580, one of the Lords wrote that “It is true the objective intention of the construction of a contract is
to given effect to the intention of the parties. However, our law of construction is based on an objective
theory. The methodology is not to probe the real intentions of the parties but to ascertain the contextual
meaning of the relevant contractual language…”. And in another judgment of the High Court held in 2001,
HSBC Bank Plc v Liberty Mutual Insurance Co (UK) Ltd [2001] All ER (D) 61 May, one of the judges said
“The approach of the court to the construction of contracts and other document has been modified in the
light of the decisions of the House of Lords in Mannai Investment Co Ltd v Eagle Star Assurrance [1997]
AC 749 and Investors Compensation Scheme Ltd v West Bromwich Building Society (1998) 1 MR 896.”
44

Textbook on Contract Law, p. 211.


16

The interpreter of a contract can be parties of a contract, judges, or
arbitrators. An expert describes the process of interpretation of contracts as follows:
from the very first, contracting parties endeavor to interpret the meaning of words
or provisions; in the last resort, when the parties have still differing views about
what their contract means and bring the case to a court or arbitrator, judges or
arbitrators will then interpret the contract.45
The interpretation of contracts in the English law of contract applies
similarly among different types of contracts. It it because such an interpretation
governs legal principles which are applicable to all types of contract.
Today there are a lot of judicial decisions relating to the interpretation of
contracts. According to an opinion of a judge, he said “it is often suggested and
widely believed that our forebears of 50 to 100 years or more ago adopted a
strictly literal approach to interpretation of contracts, but we now adopt a much
more flexible and rationalist approach.” Therefore, the interpretation of contracts
in the English law of contract in this thesis is the modern approach. This modern

approach started in 1971 due to the following case Prenn v Simmonds [1971] 3 All
ER 237. This case will be later analyzed in the thesis.

45

The Interpretation of Contracts, p. 21.


17

Summary of Chapter 1
The English law of contract governs the general principles which apply to
all types of contract. Therefore, types of contract do not affect to the interpretation
of contracts. The sources of interpretation of contract are primarily judicial
decisions. The formalities of contracts make the difference in interpretation of these
contracts. For example, as to the interpretation of a contract which is wholly in
writing, the interpreter is not allowed to accept evidence which is outside the
contract and adds to or varies the meaning of the contract. As to the interpretation
of a contract which is partly written and pertly oral, the interpreter is permitted to
discover outside evidence. Additionally, elements of a valid contract also influence
the interpretation of contracts. For example, a pre-contractual statement may be a
representation or a contractual term. The interpretation of express terms is not
similar to the implication of implied terms. In conclusion, the thesis covers the
interpretation of express terms of written contracts under the English law of
contract.


18

Chapter 2: GENERAL PRINCIPLES OF INTERPRETATION OF

CONTRACTS IN THE ENGLISH LAW OF CONTRACT
Chapter 2 is aimed at analyzing the principles of interpretation. A principle
is defined as a basic rule, law or doctrine.46 In order to grasp the overall insight into
a matter of law, it is necessary to start at principles. Accordingly, the principles of
interpretation of contracts are the basic rules which are to construe contracts. The
issue is what the sources are. In the English law of contract, the sources are judicial
decisions. Besides, there are important cases relating to the principles of
interpretation of contracts.47 However, the thesis only studies three following cases:
Prenn v Simmonds [1971] 3 All ER 23748 (hereafter referred to as “the case 1971”),
Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co
[1976] 3 All ER 57049 (hereafter referred to as “the case 1976”), and Investors
Compensation Scheme v West Bromwich Building Society50 [1998] 1 All ER 98
(hereafter referred to as “the case 1998”).

46

The Black’s Law Dictionary, p.1211.

47

The important cases are Arbuthnott v Fagan [1996] LRLR 135; BCCI v Ali [2001] UKHK 8, [2001] 1 All
ER 961; Chartbrook Homes Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 4 All ER 677; Charter
Reinsurance Co v Fagan [1997] AC 313, [1996] 3 All ER 46; Cosmos Holidays Plc v Dhanjal Investments
Ltd [2009] EWCA 316, [2009] All ER (D) 161 (Apr); Eridana v Oetker [2000] 2 All ER (Comm) 108; HIH
Casualty & General Insurance v New Hamsphire Insurance Co [2001] EWCA Civ 735 [2001] 2 All ER
(Comm) 39; HSBC Bank Plc v Liberty Mutual Insurances [2001] All ER (D) 61 (May); Investors
Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98; KPMG v Network Rail
Infrastructure [2007] EWCA Civ 363, [2007] All ER (D) 245 (Apr); Mannai Investments Co v Eagle Star
Life Assurance Co [1997] 3 All ER 352; Prenn v Simmonds [1971] 3 All ER 237; Sirius International Co v
FAI General Insurance Ltd [2004] UKHL 54, [2005] 1 All ER 191.

48

Source: All England Reporter; Published Citation: [1971] 3 All ER 237; Court: House of Lords; Judges:
Lord Reid, Lord Donovan, Lord Wilberforce, Lord Pearson, and Lord Diplock; Judgment date: 20 July
1971; Appellant: Prenn; Respondent: Simmonds.
49

Source: All English Reporter; Publisher Citation: [1976] 3 All ER 570; Court: House of Lords; Judges:
Lord Wilberforce, Viscount Dilhorne, Lord Simon of Glaisdale, Lord Kilbrandon, and Lord Russell of
Killowen; Judgment date: 7 October 1976; Appellants: Reardon Smith Ltd (in the first appeal), HansenTangen (in the second appeal); Respondents: Hansen-Tangen (in the first appeal), Sanko Steamship Co (in
the second appeal).
50

Source: All England Reporter; Publisher Citation: [1998] 1 All ER 98; Court: House of Lords; Judges:
Lord Goff of Chieveley, Lord Lloyd of Berwick, Lord Hoffmann, Lord Hope of Craighead, and Lord Clyde;


19

There are some reasons for such a selection of the three cases: firstly, they
are the judgments of the House of Lords, the most powerful legislative authority in
the United Kingdom. Secondly, these decisions are cited as the primary sources of
legal principles in many decisions, especially at Court of Appeal and High Court.51
Thirdly, there is a consistent connection among the three cases, which is stated
clearly in the case 1998. Indeed, the case 1998 inherited the legal principles of
interpretation in the cases 1971 and 1976. Fourthly, there are some important
textbooks on the English law of contract which relate to the three cases when the
authors discuss the general principles of interpretation of contracts. Fifthly, the
three cases were hold by two well-known Lords of the House that is Lord
Wilberforce and Lord Hoffmann. Lord Wilberforce is appreciated as “one of the

most civilized and balanced judges of the 20th century”52, and Lord Hoffmann is a
“noble and learned friend” of other Lords of the House.
The study of the three cases will clarify how judges, in England, address
the question of interpretation, how they read a contract, what they rely on to
construe a contract, what they would do if there is a vague or self-contradictory
terms, and which materials are accepted as an aid in the interpretation.

Judgment date: 19 June 1997; Appellant: Investors Compensation Scheme; Respondent: West Bromwich
Building Society.
51

See Appendix.

52

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