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15 Canons of Construction (to read business contracts the right way)

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   by Leigh Ellis

Canons of construction were one of the centrepieces to the way courts interpreted contracts.

Now it's different.

Of late, many of them have been downgraded in importance. But there are some that you just can't live without, if you've got anything to do with reading and interpreting contracts.

Get to know them, and your understanding of the legal effect of your own contracts should move to the next level. Know what you are looking for. Read it more like a lawyer would.

You could even have more even-keeled discussions with your own lawyers. Get better advice by being able to poke and prod your lawyer on what they tell you, and test them. Really see if they know what they are talking about.

How do canons of contractual construction help?

The emphasis these days is that words used in a contract are read with commercial common sense. They take their natural and ordinary meaning, as a reasonable reader would read the contract. The natural and ordinary meaning is not necessarily the dictionary meaning.

The documentary and factual context of the contract is meant to be enough to determine the meaning of a contractual provision: K/S Victoria Street v House of Fraser (Stores Management) Ltd 2011 EWCA (Civ) 904, Lord Neuberger.

But much of the time, it’s not.

Here’s why.

The factual background just might not be there. It may not be in evidence before the court.

The parties might not have actually thought of the turn of events that take place.

It turns out to be complete guesswork.

Then you have canons of construction to help resolve the uncertainty.

What are canons of construction?

Once upon a time, they were strict rules applied to contract. That's where the “canons” bit comes from.

Now most of them aren't.

Some apply to every contract. Some apply only in particular situations.

Some are applied with a frequency that, well, you can't not know them if you want to read the contract properly.

Others rarely have any scope to come into play.

We've categorised them, so you can get a sense of the relative importance of the rules.

Rules which are always applied

These rules of construction are always applied to every contract. These are in a tier of their own, because that are applied so often.

You could think of them as cardinal rules.

Applied where ambiguity arises

When problems such as ambiguity and internal conflicts arise in contractual interpretation, these rules begin to feature.

The facts of the case determine which of them - if any - are applied.

Weak Presumptions

Also used, and easily overridden by the rules listed above.

When Reading a contract:

The overarching objective is to identify the contractual intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean: Arnold v Britton [2015] UKSC 36.

These rules are applied on a case by case basis to arrive at what is known as "the proper construction of the contract".

That's the single legal meaning that every legal contract has, after it has been interpreted.

 

Rules of Construction: Always Applied

#1 - Read the contract as a whole

This is one of the fundamental rules of contractual interpretation, along with Rule #2.

Courts try to give effect to the entire agreement. Not just part of it.

How do they do that?

A few basic principles apply:

  1. Each clause of the contract is presumed to serve its own intended purpose (read that again, it's easy to miss the importance of it)
  2. The meaning of isolated words or phrases within the contract are considered within the context of the clause that it appears in, and whole of the agreement
  3. Individual and collective words in a contract obtain their meaning from the use of other words used in the contract: Multi-link Leisure Developments Ltd v Lanarkshire Council [2010] UKSC 47, per Lord Hope

If at all possible, each clause will be read in harmony with every other provision of the contract.

To do so, courts check each of the rival meanings against other clauses of the contract and investigate its commercial consequences.

It does so to decide the common intention of the parties.

What Materials can be considered?

Amongst the materials can be taken into account include:

  1. Clause headings: are a marker to the structure of the agreement and what the parties intended to deal with in separate parts.
  2. Recitals: maybe used to set the context for operative provisions. However, recitals:
    1. do not have contractual effect.
    2. can’t be used to render clear and unambiguous operative provisions uncertain.
  3. Several contracts: When several contracts are signed at once, those several contracts probably combine together to achieve a particular overall objective of a larger transaction.

It is not necessary for all of the contracts to be executed at the same time.

If they were all executed at the same time, it is analogous to one contract being agreed.

The overall scheme of the agreements is probably relevant. The individual clauses and provisions are read in the context of the overall scheme.

  1. Other contracts: Say you have a contract that has been agreed. Then you vary it. A supplemental agreement like this is read with the backdrop of the first agreement. The first contract might be thought to be contained - in its entirety - in the recitals of the supplementary agreement.

 

#2: All parts of a contract must be given effect where possible

It may seem that this is the same rule as #1. It isn’t.

It is one of the consequences of reading the contract as a whole.

The starting point is that every clause in a contract is presumed to have some effect on a party’s rights or obligations.

It is presumed that each word was intended to have been included for some reason. Especially contracts which were freely negotiated.

As a consequence, the meaning of one clause in a contract may affect the interpretation of other clauses.

A clause will not be given legal effect where it is inconsistent with or conflicts with the rest of the agreement.

It has been said authoritatively:

One must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract: Glynn v Margetson 1893 AC 351

Wasted Words: Surplusage

There is related presumption: the rule against surplusage (ie wasted words).

The presumption is that the parties do not intend to use extra words to express their contractual intention. See #11 below. It's easily overridden.

 

#3: Reasonableness of the result

This canon is captured with the following statement, made in Wickman Machine Tools Sales Limited v Schuler AG [1974] AC 235 by Lord Reid:

The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.

So, when a clause has different possible interpretations, you presume that the parties didn’t intend a result which is:

  • absurd
  • fanciful or fantastic or
  • unreasonable.

Whether or not that’s the case depends upon the factual background and commercial common sense.  The more commercially sensible interpretation wins between two competing interpretations.

So the commercial consequences of a particular construction is a “check on an obvious meaning or a restraint upon adoption of a conceivable but un-businesslike meaning”.

That's a process of verifying that the meaning selected is commercially sensible.

Where meaning is unclear, courts have a licence to interpret the language so as to come to “the sensible and realistic commercial result”.

The clear and plain meaning of words may only be ignored if they produce a "commercial absurdity": Lord Dyson in Thompson v Goblin Hill Hotels Ltd [2011] UKPC 8.

 

#4: Clear Words Principle

Historically, courts stretched and strained the meaning of words to avoid what they saw as unfair results.

Courts don’t like unfair results.

In BCCI v Ali (2002), Lord Hoffman said that was an application of prevailing rules of construction at the time, and to obtain a fair result between the parties.

Since that time the way contracts are interpreted has completely changed.

The leading incarnation of the clear words principle is:

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 this presumption.

The principle applies to a series of types of clauses which are intended to deprive a party of what the law views as fundamental rights or premises.

In the context of limitations of liability, it requires clear and unequivocal words to:

  1. exclude liability for negligence
  2. exclude any remedy for breach of contract, which includes:
    1. damages and
    2. the general law right to terminate a contract for repudiatory breach
  3. exclude or limit liability using a limitation of liability provision in a contract. That is, "escape from the consequences of one's own wrongdoing"
  4. obtain a release or discharge legal rights that the parties were unaware of at the time an agreement is made
  5. exclude a right of set off
  6. vary a contract to the detriment to the other party

Exclusion clauses and limitations of liability often get attacked for not using clear words.

This is how it has been said by a leading judge:

The general rule should be applied that if a party, otherwise liable, is to exclude or limit his liability or to rely on an exemption, he must do so in clear words; unclear words do not suffice; any ambiguity or lack of clarity must be resolved against that party.

(The resolution of the lack of clarity is an application of the contra proferentem rule, below)

Also, in 2007 it was said:

It is certainly true that English law has traditionally taken a restrictive approach to the construction of exemption clauses and clauses limiting liability for breaches of contract and other wrongful acts.

However, in recent years, it has been increasingly willing to recognise that the parties to commercial contracts are entitled to apportion the risk of losses as they see fit and that provisions which limit or exclude liability must be construed in the same way as other terms.

The stronger the impression of unfairness, or the more valuable the rights surrendered by the contract the clearer the words need to be.

Clear words are also required to agree that a term that would ordinarily be considered a warranty should be interpreted as a condition of a contract.

So, not only however must the words be clear. Also, any ambiguity or lack of clarity must be resolved against the party relying on the clause. That’s an application of the contra proferentem rule.

That’s up next.

 

#5: Contra proferentem rule

Often, the words used in a contract can be read at least 2 ways. That expression of the words leaves you court in a position where it cannot decide which interpretation is the right one.

The contra proferentem rule applies to resolve that ambiguity.

It’s a tie-breaker to resolve ambiguity.

One judge said it lucidly:

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

Another described the limits: 

“However, in cases where there is uncertainty about the parties’ intention, and therefore about the meaning of the clause, such certainty will be resolved against the person relying on the clause, and the more significant the departure is said to be from what are expected to be the obligations ordinarily assumed under a contract of the kind in question, the more difficult it will be to persuade the court that the parties intended that result.”

The judge is referring to #3: the reasonableness of the result.

The person presenting the words bears the risk of any resulting ambiguity, where that ambiguity cannot be resolved another way by the court.

Contract are interpreted most strongly against the person referred to as the “proferens” (think “proffer”). This proferens is the party that:

  1. drafted the document
  2. drafted the clause; or
  3. has the benefit of the clause.

If you:

  • drafted the words in the contract, you are going to draft it in your own favour.
  • formulated the language and decided the final form of the wording, you'll take care of your own interests.

You are assumed to have looked after yourself.

If you have not, you should not have the benefit of it. It is your own fault, the courts say.

Also, if you rely on the clause for its benefit, the rule may also apply. The reason is that courts want to be sure that you fall properly within the terms of the clause.

In legal lingo the "proferens" is the person that comes to court and "proffers" the clause to the court to assert their argument or legal right.

When the proferens can’t be identified, the principle can’t be applied to resolve ambiguity.

How do you avoid the effect of the contra proferentem?

There really is only one answer. Clear drafting - clear expression of words that leaves no doubt to intention or interpretation.

Reliance on contra proferentem is a last resort.

It is applied when the background and the commercial purposes of the commercial arrangements are in doubt.

Ordinary rules of grammar are likely to be applied first: it may just be the that parties intended to use the words they selected for the contract.

For the Latin fans, its full form is verba fortius accipiuntur contra proferentem.

The rule can be excluded from the interpretation of a contract with a clause such as:

In this agreement the contra proferentem rule shall not apply, nor shall any similar rule or approach to interpretation.

But you’d be making things harder for yourself. You’re removing a tool available to resolve ambiguity.

And when push comes to shove, you do not know what the ambiguity will be.

Example: contra proferentem rule:

  1. Terms relied on were heavily negotiated by the parties
  2. The clause was jointly drafted
  3. the terms of contract may be a standard form of contract drafted by a [representative] body, such as an industry organisation such as the JCT Contracts

#6: Express terms prevent terms being implied into a contract

For a term to be implied into a contract, the term must be necessary for reasons of business efficiency.

This means that the contract would not work without the term. The term must be so obvious that “it goes without saying”.

Even then though, a term sought to be implied can’t be implied if it is inconsistent with an express term of the contract.

Superiority of Express Terms

If contracting parties think that words and clauses are important enough to include in their agreement, they take priority over terms which might have otherwise be implied later.

It doesn’t make sense for a court to reverse the legal effect of the express terms of a contract with an implied term which is inconsistent with it.

The courts say that if the term was that important, the parties would have said it in contract, in the first place.

Example: Implied Terms conflict

Suppose a licence software expressly states the licence to be "perpetual".

It is unlikely that a term would be implied to say that the licence is "revocable". There would need to be exceptional circumstances forming part of the matrix of fact to justify implication of such a term.

It's a head-on inconsistency.

 

#7: Contract interpreted to be lawful

Courts presume that parties don't intend to contract for an unlawful purpose. Put the other way, the parties are presumed to act lawfully.

And contracts are read this way.

So where there are two interpretations courts and one is unlawful, courts lean towards the interpretation which is lawful. Even when it is less obvious or natural interpretation of the words used.

We’re not talking about the supply of say, illicit drugs. Such contracts have an overtly criminal purpose, and no court will entertain legal proceedings.

Cases where it will apply is where the parties have agreed terms in a contract which run contrary to the provisions of statutory law or a restrictive covenant.

If the contract can be read in a way which is not in contravention of a statute, that is the preferred course.

Interpretation of restrictive covenants calls for an interpretation which provides reasonable protection of a legitimate business interest. If it's possible, the interpretation which renders the clause lawful would be accepted and the other which would make the clause void (and thereby a restraint of trade).

The Latin for the term is 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

Then there is the closely related verba ita sunt intelligenda ut res magis valeat quam pereat.

That is, the contract should be interpreted so that it is valid rather than ineffective.

That’s up next.

 

#8: Saving the document

Courts attempt to interpret legal documents in a way so as to avoid them being unenforceable.

Courts will read a contract as legally effective, as far as it can be.

That means giving them the fullest possible effect, consistent with #2 above, to give effect to the entire agreement.

Why uphold a contract?

Courts want to avoid destroying agreements. More so where one party has already performed their part of the agreement. It avoids frustrating the legal intentions of the parties.

Overall, the parties made their agreement, relied upon it, and then they should as far as possible expect it to be enforceable.

If there are two ways to read a contract, one which is enforceable and another that is not, courts will prefer the enforceable way. Even if the reading is not entirely natural.

It’s a final resort to find a contract is entirely ineffective.

Considering the principle may lay the foundation to imply terms into the contract. Or even lead to the conclusion that preconditions for enforceability were compiled with.

When can't a business agreement be saved?

I have an enforceable contract, you must have a complete agreement.

All the important terms need to be ascertained. That requires:

  1. identifying the express terms
  2. interpreting the language of the express terms
  3. application of the law can provide the missing terms and detail

Failing that, there can't be a legally binding contract.

It doesn't assist you when there are reservations, exceptions, restrictions, stipulations, and conditions to material terms of the agreement which cannot be supplied by interpretation or with implied terms.

 

#9: An express promise states the whole promise

Courts do not readily interfere with the express terms of an agreement. This includes extending it  with an implied term.

Expressly granted rights are also unlikely to be extended by implication, beyond that expressly stated in the contract.

In the words of Lord Denman CJ in Aspdin v Austin 1844 QB 671:

[…] the presumption is that [the parties] having expressed some, they have expressed all the conditions by which they intend to be bound under the agreement.

So were an express promise is given by a party in a contract, that promise constitutes the entire promise on the subject matter. A contract will not readily have terms implied in relation to an area covered by express terms.

Example implied term

A supplier is required to deliver goods to the premises of the customer.

It would be unlikely that a court would imply a term that the supplier must hand goods to a representative of the customer at the premises.

The Latin for the rule is expressum facit cessare tacitum

Remember, it is only a presumption and not a rule of law.

 

#10: Special conditions prevail over standard terms

Where a standard form or pre-printed of contract has had special conditions negotiated or agreed, they usually prevail over the general, standard terms of the contract.

The special terms might be identified by being handwritten, stamped or typed into contract. They take precedence where there is a conflict in the terms of the contract.

Where there is no necessary inconsistency between the words then the standard terms and special terms, then they probably have equal status within the contract. That is, the different terms coexist in harmony (See #2 above).

In a neatly packaged judgment, Denning LJ in Neuchatel Asphaslte Co Ltd v Barnett 1957   said:

If one party puts forward a printed form of words for signature by the other, and it is afterwards found that those words are inconsistent with the main object and intention of the transaction as disclosed by the terms specially agreed, the court will limit or reject the printed words so as to ensure that the main object of the transaction is achieved.

The parties are able to agree otherwise with an interpretation clause. The clause would structure the priority of the provisions in the contract. Courts give effect to such clauses.

 

#11: The Rule against Surplusage

It used to be the case that a court would think “long and hard before concluding that a part of a contract is redundant.

No more.

It's not a strong presumption.

Words can be ignored in a clause where it is impossible to reconcile them with another, more express or specific clause.

Torrential Drafting and Linguistic Overkill

In one case, it was said that in leases:

draftsmen traditionally employ linguistic overkill to try to obliterate the conceptual target by using a number of phrases expressing more or less the same idea.

They try and cover every conceivable angle. The intention is to leave no comeback or room for argument that the effect of the clause has been avoided.

There are  recent case examples that show that the presumption against surplusage is pretty weak. See for example Arbuthnott v Fagan [1995] C.L.C. 1396

When there is redundancy, specific conditions should win and outweigh the general.

The rule is more likely to play a role in lengthy business contracts where:

  1. the language states (and repeats) the obvious;
  2. the contract uses linguistic overkill to ensure the target is covered, where the words express more or less the same idea.

This has also been referred to as “torrential drafting”. See Wood v Capita Insurance Services (2017) if you don’t believe us.

In cases such as these, each and every word can’t be given a distinct meaning.

That means that all of the words in the contract can’t be given effect.

But you have try first. See #2 above.

 

#12: Ejusdem Generis Principle

Ejusdem generis applies where several specific words precede a general word - commonly a list of words separated by a comma.

Let’s take an exclusion of liability. This one has a string of general words like this:

Neither party shall be liable for Acts of God, flood, fire or otherwise.

The rule means that the general word (“or otherwise”) is restricted to the meaning of the preceding words, “acts of god, flood, fire”. The general word is not permitted to expand beyond the subjects or classes of the preceding words.

Applying the rule, the term "otherwise" is interpreted to include damage of the same class as “acts of god”, “flood” and “fire”. The “or otherwise” is redundant and ignored.

The result is that the clause would not exclude liability for damage caused by riots, industrial disputes, but may do for damage caused by gas leaks (ie "fire").

Courts say that it’s rule of common sense for reasonable people. 

It applies to cases of incorporation of terms, where the terms of a licence agreement were more specific than  the terms of the enabling agreement: Northrop Grumman Mission Systems Europe Ltd v BAE Systems (2014) (CA).

There is another situation where ejusdem generis may be applied. This time, specific words follow general terms.

In these cases the general words are not restricted by the meaning of the specific terms – they are considered instances or examples of the general words which precede them: Ambatielos v Anton Jurgens Margarine Works [1923] AC 175.

In either case, the appropriate outcome is that the specific terms restrict the meaning of the general words.

It has been described it as:

… where a particular enumeration is followed by such words as ‘or other’, the latter expression ought, if not enlarged by context, be limited to matters ejusdem generis with those specially enumerated: Sunfire Office v Hart [1889], Lord Watson

The general words may refer to a class or category. “Whatsoever” probably falls on the other side of the line, so as to exclude ejusdem generis from operation altogether.

The reason for applying the rule to read down the meaning of the general words.

This reading down restricts their meaning. It limits the meaning of one word with interrelated words used in the same context. Application of the principle results in the general word becoming redundant.

There are cases where the list of words don’t constitute a class, and the rule still has been applied to restrict the meaning of the clause to those named instances in the list. It may be however that it could demonstrate an intention of the parties didn’t intend the words be limited to the list. Again, it depends upon the background facts.

Avoiding the Effect of Ejusdem Generis

The effect of the rule of interpretation is usually avoided by use of the words, "without limitation" or "without limit" in a contract clause.

Interpretation clauses can also displace the operation of the ejusdem generis rule with something along the lines of:

“In this Agreement ejusdem generis rule shall not apply”, or

“In this Agreement the words “including” shall not limit the scope of the ordinary meaning of the general statement.”

Clauses like this introduce real uncertainty to interpretation. It can be really difficult to work out what the clause covers, and more importantly, what it does not cover.

The term "ejusdem generis" may be read as "of the same class" (Latin: of the same kind).

If you want the benefit of a clause – say a limitation of liability - you want a wider interpretation. If you want to avoid the effect of the clause, you want a narrower interpretation.

 

#13: Expressio Unius

Expressio Unius is only applied when the written agreement records the entire agreement.

It comes into play where a legal right is made subject to a condition, and the right is subject to that condition and that condition alone.

Basically, they are conditions required to be satisfied for liability or the right to arise. No other circumstances will suffice.

It then presumed that other conditions which may have been included were deliberately excluded.

Example

  1. If you agree to get paid in subject to specific conditions, they are the only conditions that apply;
  2. Say you have a right to refuse to accept delivery of goods for named reasons, such as they are defective or the correct number of goods are not in the shipment. The rule would apply to prevent the customer to refuse to accept the shipment for any other reason.

If the omission arose because of inadvertence or accident and the outcome of the application of the rule would be unfair or result in an injustice, expressio unius won’t be applied. It may run against the commercial purpose of the contract.

In full, this principle is expressed unius est exclusion alterius.

 

#14: Noscitur a sociis

Words in the same phrase can be read as sharing common characteristics and meanings. If they do, the meaning of the phrase can be limited to that context.

In one case, it was said:

Words, however general, may be limited with respect to the subject-matter in which they are used.

So, context is all important for the rule to operate.

String of words which contain a word which has doubtful mean takes a similar meaning to those around it. The rule limits the meaning of the doubtful word, rather than expand it.

The must be some commonality or common characteristic must be able to be discerned for the doubt to be resolved using the rule.

Sometimes that just won’t be possible.

Noscitur a sociis: Example

The phrase “erasure loss distortion or corruption of information in computer systems” was used in a contract to exclude loss caused by those events.

It didn’t include loss suffered by theft of a computer. That’s what the Supreme Court decided in Tektrol Ltd v International Insurance Co of Hanover Ltd (2005).

 

#15: Rule of consistency of language

The same words don’t necessarily take the same meaning throughout a contract.

The word might be used in a different context in different places in the contract. Even in the same paragraph.

In one place in the contract the meaning might be clear an unambiguous and in other parts, may not. It’s a weak presumption and easily displaced by the background facts to the contract.

 

Conclusion

The application of any one of these rules will rarely decisive as to the meaning of a contract.

The rules and guides to interpretation may help get a better impression of where you are for your own situation.

The overall objective though is consistent with the preference of courts to promote commercial certainty of interpretation. They do so by applying a contextual and purposive reading of business contracts.

Our UK lawyers advise on the legal effect of business contracts and how canons of construction can be applied to clarify the terms of contracts.

Contact our business contract lawyers for help on +44 20 7036 9282.

 

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