[2024] EWHC 1435 (TCC)

Interpretation of contracts: the law

Unsurprisingly, there is no issue as to the applicable law which I take as summarised by Lord Hodge in Wood v.Capita Insurance Services [2017] AC 1173 as follows:

“[10] The court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. In Prenn v Simmonds [1971] 1 WLR 1381, 1383H–1385D and in Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989, 997, Lord Wilberforce affirmed the potential relevance to the task of interpreting the parties' contract of the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations. When in his celebrated judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912–913 Lord Hoffmann reformulated the principles of contractual interpretation, some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past. But Lord Bingham of Cornhill in an extrajudicial writing, “A New Thing Under the Sun? The Interpretation of Contracts and the ICS decision” (2008) 12 EdinLR 374, persuasively demonstrated that the idea of the court putting itself in the shoes of the contracting parties had a long pedigree.

[11] Lord Clarke of Stone-cum-Ebony JSC elegantly summarised the approach to construction in the Rainy Sky case [2011] 1 WLR 2900, para 21f. In the Arnold case [2015] AC 1619 all of the judgments confirmed the approach in the Rainy Sky case: Lord Neuberger of Abbotsbury PSC, paras 13–14; Lord Hodge JSC, para 76 and Lord Carnwath JSC, para 108. Interpretation is, as Lord Clarke JSC stated in the Rainy Sky case (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause(the Rainy Sky case, para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 , paras 13, 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: the Arnold case, paras 20, 77.Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.

[12] This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571, para 12, per Lord Mance JSC. To my mind once one has readthe language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.

[13] Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance JSC spoke in Sigma Finance Corpn [2010] 1 All ER 571, para 12, assists the lawyer or judge to ascertain the objective meaning of disputed provisions.”

The parties’ submissions

Mr Alexander Nissen K.C., who appears on behalf of PCDL, submits that the Agreement provides for PCDL to claim Relevant Cost on a retrospective basis (as PCDL’s formulation of the proposed issue reflects). He draws attention to paragraph 4.2 to Schedule 12 and the investigation as to whether there “has been” a material increase or decrease in the frequency of Storm Events. In the context of consideration as to what has happened in the past, Mr Nissen highlights paragraph 4.3 to Schedule 12 which provides PCDL would only be entitled to claim a Relevant Cost due to there having been a material increase or decrease in Storm Events. In noting that such costs would largely have been incurred by the time of the Report envisaged by paragraph 4.2, he submits that the Agency’s position makes no commercial sense in depriving PCDL of those costs.

This submission is one of five reasons advanced by Mr Nissen as to why there is no limitation of PCDL’s entitlement to costs suffered or incurred in years after the material increase in Storm Events had actually occurred. I summarise below the balance of those reasons as set out in the skeleton argument of Mr Nissen and Mr David Sheard and on which Mr Nissen expanded orally:

The definition of Relevant Costs includes “costs suffered or incurred (at the relevant time or in the future) by [PCDL]…” (PCDL’s emphasis added). It is submitted this clearly covers costs already incurred as well as costs which may be incurred in the future and if it was only permissible to include costs suffered or incurred after the Proposal envisaged by paragraph 1.5 to Schedule 12 then it would give no meaning to the costs suffered or incurred “at the relevant time”;

Paragraph 4.6 of Schedule 12 and its reference to a Relevant Cost or Relevant Saving resulting from an increase or decrease in the frequency of Storm Events provides specifically in respect of the first decade that the Relevant Cost to which PCDL is entitled is Relevant Cost for the first decade and that such costs will necessarily have been incurred by the time that any material increase in the frequency of Storm Events would have been identified in accordance with paragraph 4.2 of Schedule 12;

It is only once the existence or otherwise of a material increase in frequency of Storm Events has been determined to exist that the event specified in Schedule 12, paragraph 1.2(g) will have arisen. If the claim for Relevant Cost was limited to future cost, and excluded past cost, the recoverable amount of Relevant Cost would be impacted by the random nature of the determination process in which PDCL provides such supporting information to the Agency as it may reasonably require, and this is an uncommercial outcome. Similarly, the right to recover any Relevant Cost would on the Agency’s construction, limit recovery until after completion of the dispute resolution procedure provided by paragraphs 4.4 and 4.5 of Schedule 12 as it would only be costs after the entitlement was established which would be future costs;

Finally, reference is made to other provisions of the Agreement which, Mr Nissen submits, envisage the recovery of historically-incurred costs. Reliance was placed on:

Paragraph 1.2(b) to Schedule 12 which provides that a breach of the Agreement by the Agency can be a Change in Circumstances. Mr Nissen submits that parties would not wish to limit the Relevant Cost recoverable as being dependent on whether the breach caused continuing loss or was itself continuing and exclude recovery for loss which had already been caused;

Schedule 12, paragraph 1.2(t) where, similarly it is submitted that the consequences of such a strike are likely to be felt at the time at which it occurs which will necessarily pre-date any Notice/Proposal and that the same could be said of the delay consequences of a power failure under paragraph 1.2(r);

Clause 7.5 of the Agreement providing a sole remedy for fraudulent misstatement as an extension of time and/or payment of compensation in accordance with the provisions of Schedule 12 and that it cannot have been intended that compensation was limited to prospective future losses.

By reference to those examples PCDL submits that if costs already incurred at the time at which any Notice/Proposal is submitted are recoverable then the same would apply to paragraph 1.2(g).

Ms Sarah Hannaford K.C., who appears for the Agency makes two main submissions. Firstly, that the construction for which PDCL contends disregards the regime for a Proposal in Schedule 12 in relation to the circumstances in paragraph 1.2(g). Secondly, that such a construction for the purpose of paragraph 1.2(g) would require the Court to re-write the terms of Schedule 12 so as to exclude paragraph 1.2(g) from the regime for a Proposal and/or to convert Schedule 12 into a regime for payment of past costs, rather than a regime for identifying future changes.

In reality, the two submissions are related. Ms Hannaford submits that the necessity to rewrite Schedule 12 is impermissible as a matter of contractual construction and would also involve a fundamental change in the balance of risk to which the parties agreed in the Agreement.

Ms Hannaford identifies provisions in Schedule 12 which, in her submission, would have to be disregarded if paragraph 1.2(g) permitted recovery of Relevant Cost on a retrospective basis. These include paragraphs 1.5(b)(i), (the date from which the Proposal is likely to impact or will impact), 1.5(b)(iii), (an assessment of whether a Relevant Cost or Relevant Saving is likely to be involved” together with “anestimate” of the same), 1.5(b)(iv) (any other impact the Proposal may have on the Project or PCDL’s ability to comply with the Agreement) and 1.5(b)(vi) (mitigation measure “being undertaken”).

The words italicised are Ms Hannaford’s emphasis. They are emphasised in the context of what the parties accept to be mandatory language of the procedure in Schedule 12 (paragraph 1.5(b) refers). This procedure allows the Agency:

to accept or reject the Proposal (paragraph 1.6(a) and (e))

to give notice requiring long term monitoring to verify a Relevant Cost or Relevant Saving (paragraph 1.6(c))

To reduce the Service Levels if it would obviate the necessity for the Proposal (paragraph 1.6(f))

Further to this procedure, PDCL can either withdraw the Proposal if the Agency objects (paragraph 1.7) or implement the Proposal in accordance with the Agency’s agreement (or determination in accordance with the Dispute Resolution Procedure) (paragraph 1.10).

Subject to an obligation on the parties to mitigate both delay and Relevant Cost (paragraph 3.5(a)), paragraph 3.1 provides that payment of any Relevant Cost shall be on completion by PDCL of “all steps required to be taken in order to implement the relevant Proposal” or earlier if agreed by the Agency.

Again, the words emphasised in italics are submitted to be inconsistent with a retrospective claim for payment.