(DISCUSSION PAPER No 147) Review of Contract Law Discussion Paper on Interpretation of Contract discussion paper Review of Contract Law Discussion Paper on Interpretation of Contract February 2011 DISCUSSION PAPER No 147 This Discussion Paper is published for comment and criticism and does not represent the final views of the Scottish Law Commission. EDINBURGH: The Stationery Office £20.50 NOTES 1. 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ISBN 978-010-888255-5 ii The Scottish Law Commission was set up by section 2 of the Law Commissions Act 19651 for the purpose of promoting the reform of the law of Scotland. The Commissioners are: The Honourable Lord Drummond Young, Chairman Laura J Dunlop, QC Professor George L Gretton Patrick Layden, QC TD Professor Hector L MacQueen. The Chief Executive of the Commission is Malcolm McMillan. Its offices are at 140 Causewayside, Edinburgh EH9 1PR. The Commission would be grateful if comments on this Discussion Paper were submitted by Friday 20 May 2011. Please ensure that, prior to submitting your comments, you read notes 1-3 on the facing page. Comments may be made on all or any of the matters raised in the paper. All non-electronic correspondence should be addressed to: Mr Charles Garland Scottish Law Commission 140 Causewayside Edinburgh EH9 1PR Tel: 0131 668 2131 1 Amended by the Scotland Act 1998 (Consequential Modifications) (No 2) Order 1999 (SI 1999/1820). iii Contents Paragraph Page Chapter 1 Introduction The DCFR 1.2 1 Previous SLC Reports 1.8 3 Structure of the Discussion Paper 1.12 4 Advisory Groups 1.15 5 Impact assessment 1.16 5 Legislative competence 1.22 8 Chapter 2 Summary of Report on Interpretation in Private Law Background 2.1 9 Extrinsic evidence 2.3 10 General interpretative rule 2.6 11 Special rules 2.8 12 Rules of preference 2.11 13 Conclusion 2.13 14 Chapter 3 Tabular comparison of DCFR, the Report on Interpretation, and PICC (with comments) General approach 3.3 15 Material which may or may not be considered 3.7 17 Expressions used in a particular sense, which is known to other party 3.11 19 Extrinsic evidence and "entire agreement"/merger clauses 3.15 21 Rules of preference 3.20 23 Unilateral juridical acts 3.23 25 Conclusion 3.24 26 Chapter 4 Judicial developments since 1997 (1): England and the common law world Introduction 4.1 28 Lord Hoffmann's recasting of the approach to interpretation 4.3 28 Pre-contractual negotiations as part of the background 4.9 32 Conduct of the parties subsequent to the contract's formation as admissible background 4.17 37 Safety mechanisms: rectification and estoppel by convention 4.20 38 Chapter 5 Judicial developments since 1997 (2): Scotland The Scottish response to Lord Hoffmann's approach 5.1 42 iv Contents (cont'd) Paragraph Page Bank of Scotland v Dunedin Property Investment Co Ltd 5.2 43 Re-working the words 5.5 44 Principles of interpretation? 5.13 48 The exclusionary rule on pre-contractual negotiations 5.17 51 The exclusionary rule on evidence of subsequent conduct 5.21 53 Exception to the exclusionary rule on pre-contractual negotiations? 5.23 54 Conclusion 5.28 56 Chapter 6 Policy objectives Commercial background 6.2 58 Policy objectives 6.7 60 (1) A single set of rules on interpretation for all contracts? 6.8 60 (2) Clarity on the facts and circumstances to be taken into account 6.10 61 (3) Third parties and secret meanings 6.12 61 (4) The admissibility and relevancy of evidence 6.19 63 (5) Ascertaining common intention 6.24 65 Summary 6.29 67 Chapter 7 Possible reforms Options for reform 7.1 69 A new scheme 7.4 70 General rule 7.5 70 (a) Parties' statements of individual intention 7.10 72 (b) Pre-contractual negotiations 7.12 73 (c) One party's meaning known to the other party and not objected to 7.16 75 (d) Parties' subsequent conduct 7.18 76 Certainty and cost? 7.19 77 Contracting out of the new scheme 7.23 78 Other issues in the new scheme 7.30 82 (1) Third party reliance: the position of assignees 7.30 82 (2) Rules of preference 7.36 84 (3) Unilateral juridical acts and statements 7.41 86 (4) Rectification and personal bar 7.43 86 Chapter 8 List of questions and proposals 88 APPENDIX A Interpretation in private law 91 APPENDIX B Advisory Groups 97 v Abbreviations BoS v Dunedin, Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657 Burrows and Peel, Andrew Burrows and Edwin Peel (eds), Contract Terms (2007) CFR, Common Frame of Reference (as discussed in paragraphs 1.2-1.3) Chartbrook, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 CISG, Vienna Convention on the International Sale of Goods, 1980 DCFR, Draft Common Frame of Reference: Principles, Definitions and Model Rules of European Private Law (Full Edition: Christian von Bar, Eric Clive (eds), 6 vols, 2009; Outline Edition: Christian von Bar, Eric Clive and Hans Schulte-Nölke (eds), 2009) ICS, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) McBryde, Contract, William W McBryde, The Law of Contract in Scotland (3rd ed, 2007) McMeel, Construction, Gerard McMeel, The Construction of Contracts: Interpretation, Implication, and Rectification (2007) Multi-Link, Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47 (on appeal from [2009] CSIH 96; 2010 SC 302 (Inner House) and [2009] CSOH 114 (Outer House)) PECL, Principles of European Contract Law (Parts I and II: Ole Lando & Hugh Beale (eds), 2000; Part III: Ole Lando, Eric Clive, André Prüm and Reinhard Zimmermann (eds), 2003) PICC, UNIDROIT Principles of International Commercial Contracts (2nd ed, 2004) RIPL, Report on Interpretation in Private Law (Scot Law Com No 160, 1997); references to the "draft Bill" are to the draft Bill annexed to RIPL vi Glossary Contra proferentem: The rule of construction which says that where a term of a contract has more than one possible meaning, the meaning least favourable to the party which included that term is to be preferred. (See rule (2) in paragraph 2.12.) Entire agreement clause: A term in a written agreement stating that the agreement constitutes the whole terms of a contract. Under section 1 of the Contract (Scotland) Act 1997 such a contract term is effective to prevent enquiry beyond the written document for any further contract terms. Exclusionary rule(s): The rule or rules of evidence which say that evidence of pre-contractual negotiations or about the conduct of contracting parties subsequent to the conclusion of their contract may not be considered for the purpose of interpreting the contract. Extrinsic evidence: Evidence from outside a document about the meaning of that document.