Improve Bad Bargains?

In professionally negotiated and formalized contracts, what the contractual words mean could be the job of top courts. Despite the need for the law's stability and certainty, the interpretative approaches can differ with the times. Should the approach be a textual (hard and restrictive) one, or contextual (equitable and liberal) one, or both?

Textualism gives contractual words used their plain (and not extraordinary or very unreasonable) meaning. Commercial common sense would not enable a court to override the language used: Sinoearn International Ltd v Hyundai-CCECC Joint Venture [2013] HKCFA 84. It does not matter whether the detailed analysis commences with the factual background and the practical implications of rival constructions or with an examination of the contractual language, so long as the court balances the indications given by each: Arnold v Britton [2015] UKSC 36 and Wood v Capita Insurance Company Limited [2017] UKSC 24.

Contextualism gives the contractual words used a purposive interpretation, deploying the common sense principles: (1) what would convey to a reasonable person having all the background knowledge, (2) what matrix-of-fact background and anything that would have affected a reasonable man's understanding of what the contract means, (3) what inadmissible are the parties previous negotiations or their subjective declarations, (4) what contract words against the relevant background would reasonably have been understood by the parties to mean, and (5) if natural and ordinary meaning flouts common sense, the contract must be made to yield to business common sense: Investors Compensation Scheme Ltd v West Broomwick Building Society [1997] UKHL 28 and Rainy Sky SA v Kookmin Bank [2011] UKSC 50. The recent UK authorities seem to suggest a change from this direction. And they have persuasive effect on the development Hong Kong law.

I believe the rule of thumb is to try to avoid needlessly confusing and obscure provisions during the contract drafting stage, although such provisions could be the result of a negotiated compromise. The English-speaking courts would probably be more alive to the possibility that one side may have agreed something which in hindsight did not serve its interest. It is no longer business common sense to leave unclear contractual provisions, hoping the courts would improve bad bargains!

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