Investors Compensation Scheme Ltd v West Bromwich Building Society [1997]
Court: House of Lords
Facts: Investors Compensation Scheme Ltd (ICS) was established to handle compensation claims for investors who had received negligent advice. ICS entered into a contract with investors to take over their claims. The contract contained a clause excluding from assignment "any claim (whether sounding in rescission for undue influence or otherwise)." West Bromwich Building Society argued that "or otherwise" meant claims for damages were not included in the assignment. ICS contended that "or otherwise" referred to claims for rescission other than those for undue influence.
Issue: Whether the clause in the contract excluded claims for damages from the assignment or if it only referred to types of rescission claims.
Held: The House of Lords upheld the trial judge’s interpretation of the contract. Lord Hoffmann articulated a new approach to contract interpretation, confirming that "any claim sounding in rescission (whether for undue influence or otherwise)" accurately reflected the parties' intentions.
Key Judicial Statement: Lord Hoffmann: The interpretation of contracts should be based on the reasonable person’s understanding, considering all relevant background knowledge. This approach includes:
Contextual Interpretation: Understanding the contract in the context of what a reasonable person would infer with all relevant background information.
Scope of Background Knowledge: Considering all information that could affect a reasonable person’s understanding of the contract.
Exclusion of Pre-Contractual Negotiations: Prior negotiations and subjective intent are generally excluded unless rectification is sought.
Substitution of Words: Context may allow for correcting apparent linguistic errors in the contract.
Business Common Sense: The interpretation should align with commercial realities, though there is a presumption against easily making linguistic mistakes.
💡 Leveluplaw: This case introduces a shift from a literal to a contextual approach in interpreting contracts. It emphasizes understanding contracts based on a reasonable person's perspective, incorporating broad background information while excluding pre-contractual negotiations. For those drafting and interpreting contracts, this decision highlights the need for clarity and alignment with commercial realities, ensuring that the contract's meaning reflects the practical intentions of the parties involved.