This article was originally written for Construction Law
Lagan v Ferrovial: How did we get here?
In England, Lord Hoffman gave a series of judgements in the 1990s where he placed significant reliance on surrounding circumstances and the knowledge of parties at the time of the contract. The high watermark came in Investors Compensation Scheme v West Bromwich Building Society, when he found that courts could consider: "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man."
This approach was subsequently followed in Chartbrook Ltd v Persimmon Homes and Rainy Sky v Kookmin Bank.
However, in 2015, the Supreme Court rowed back from this approach. In Arnold v Britton the Court held that contractual wording should be given its ordinary and natural meaning, and cautioned against the use of 'commercial common sense' as an aid to interpretation. This represented a major tide change in England, and was followed in 2017 in Wood v Capita, when the Supreme Court stressed that textualism and contextualism were both tools which could be used to ascertain the objective meaning of language used in a contract.
However, the Court maintained the finding in Arnold v Britton regarding the importance of the express wording of the contract – even where it creates a poor bargain for one of the parties. Ultimately, the Court decided Wood v Capita based "principally in a careful examination of the language which the parties have used."
What about Scotland?
Until recently, the Courts in Scotland have been more permissive when it comes to considering the context and surrounding circumstances as an aid to contractual interpretation. That changed, however, in a decision earlier this year from the Inner House of the Court of Session: Lagan Construction v (1) Scot Roads Partnership Project Ltd and (2) Ferrovial Construction (UK) Ltd .
Lagan and Ferrovial entered into a joint venture to provide works on certain motorways for Scot Roads Partnership (Project Co). The contract between Project Co and the JV required the JV to deliver letters of credit from each Contractor Company (Lagan and Ferrovial) to Project Co.
Clause 5.5.6 of the contract stated: "Project Co shall return to the Contractor by transfer into a bank account specified by such Contractor, an amount equal to such Contractor Company Contractor Security Account Balance…"
The difficulty for Lagan was that if construed literally, the balance of funds from Lagan's letter of credit would be remitted to the JV's bank account, since the JV was designated as the "Contractor" in the contract. This was problematic, because following Lagan's administration, the bank account was controlled by Ferrovial. Accordingly, Lagan contended that Project Co should not have transferred money to the JV, and that reference to "the Contractor" in Clause 5.5.6 should be construed as referring solely to Lagan.
At first instance, the commercial judge sustained Lagan's approach and ordered payment by Project Co to Lagan. The Inner House disagreed. Relying on the decisions of Arnold v Britton and Wood v Capita, Lord Carloway held: "It should identify what the parties agreed, not what it thinks that common sense may otherwise have dictated. Contracts are made by what people say, not what they think in their innermost minds (Muirhead & Turnbull v Dickson (1905)…). Where a contract is a complex and sophisticated one prepared and negotiated by skilled professionals, as is the case here, it may be successfully interpreted principally by textual analysis"
Where are we now?
To conclude, the Scottish courts affirmed the principle that contracts should be understood by what the parties say, not what they might have thought. In adopting this approach, the Scottish Courts have aligned with recent judgments from the UK Supreme Court, where the emphasis is on a more textual, literal interpretation of contracts, with primacy of the written word.
Therefore, when negotiating contracts, it is crucial that nothing is 'left to the imagination' and any provision that would have otherwise been implied is expressly stated within the contract.
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