Law360, New York (July 29, 2015, 1:58 PM ET) —
For lawyers in the U.S. and elsewhere working in finance, insurance and other areas where business is conducted through offshore financial centers, the English approach to interpreting commercial contracts matters. This type of business relies extensively on written agreements governed by local laws, which are in turn heavily influenced by the English approach to contractual interpretation. English law resorts to “commercial common sense” to interpret contracts. There is an evolving debate over how far commercial common sense should take the court. A recent U.K. Supreme Court decision, Arnold v. Britton & Ors, brings welcome clarity to this debate. This decision will almost certainly be followed in offshore financial centers that use English common law (e.g. the Cayman Islands, BVI and Bermuda) and therefore has significant implications for future interpretation of the sort of written commercial agreements used offshore
The tension between formalism (where the plain meaning of words dominates) and contextualism (where context introduces ambiguity and influences the meaning of words) when interpreting commercial agreements has been much discussed in the U.S. Different states take different approaches. Formalism reduces the cost of disputes, promotes the summary determination of contract disputes and places a premium on careful drafting of commercial agreements. Contextualism leads to more extensive examination of circumstances attending the making of the contract, perhaps with less certainty of outcome, but possibly with greater accuracy. Context has long had an established role in the interpretation of contracts in English law. As long ago as 1918, Judge Benjamin Cardozo drew on English law in support of a contextualist approach in his judgment in Utica City National Bank v. Gunn, when he pronounced:
The proper legal meaning, however, is not always the meaning of the parties. Surrounding circumstances may stamp upon a contract a popular or looser meaning. … To take the primary or strict meaning is to make the whole transaction futile.
But the modern English approach to commercial common sense did not really begin until 1971, when England’s highest court in its turn drawing on Judge Cardozo’s Utica City judgment established and explored the proposition that the commercial or business purpose of a contract may be an important piece of context: Prenn v Simmonds.