Charterbrook v Persimmon

Disputes frequently arise on the meaning of particular terms of the contract and there can be considerable sums dependant on which interpretation is correct.

The relevant principles of interpretation were set out by Lord Hoffman in the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] HL. Interpretation is the meaning that a 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 ate the time of the contract. The background knowledge is anything which would have affected the way in which the language of the document would have been understood by a reasonable man. For policy reasons the law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.

The boundaries of the exception are not clear and there has recently been limited inroad upon the negotiation exclusion which has been explored by Mr Justice Briggs in Charterbrook Limited v Persimmon Homes Limited [2007] EWHC409(Ch).

The main inroad was referred to by Briggs J as the “private dictionary” principle first established in The Karen Oltmann [1976] 2LloydsRep708 and by the Court of Appeal in Proforce Recruit Limited v The Rugby Group Limited [2006] EWCA Civ 69. The principle is that where the term in issue had not been judicially considered and did not have an obvious and natural meaning, then evidence of what the parties said in negotiations was admissible to show that the parties negotiated on an agreed basis as to the meaning of the term.

Briggs J had serious doubts about the “private dictionary” principle but nonetheless considered himself bound by it. He held however that the “private dictionary” principle did not extend to cases where the word, phrase, clause or term was itself subject of an express definition in the contract itself. The existence of the definition of a term is a clear record of the parties’ understanding of that term and the meaning to be applied in the interpretation of the contract.

What This Means

Often when a complex contract is entered into, the parties will have been in negotiation for some time. During that period they will adopt as shorthand phrases and terms to define a particular aspect of the contract. If such a term finds its way into the contract, in order to avoid disputes about the meaning the parties should carefully and precisely define the term. The term is then stripped of its natural meaning and used as a label. The detailed definition provides legal precision.

Otherwise the term will be given its ordinary objective meaning in the context of the other terms of the contract. Applying to the Courts to adopt the “private dictionary” principle in interpretation is an expensive alternative to defining the term and may not always meet with success. If for instance the term has a clear meaning it may well be argued that there is no need for any assistance from the “private dictionary” principle and that the appropriate remedy is instead rectification of the contract to give effect to the intention of the parties.

Rectification however requires convincing proof because it must overcome the inherent probability that the parties intended to express themselves as they did in the contract.

The answer then is to step back from the negotiations and examine the terms before execution of the contract. Even if the meaning is clear to the parties, define special terms so that the meaning is expressed in the contract.