Privity of contract
International
in the UAE: more
contracting:
power to third
parties
Workers with a hydraulic digger on a highway at Bissone, Switzerland.
Shona Frame
CMS Cameron
McKenna, Glasgow
Sam Moss
Lalive, Geneva
U K versus Swiss law on
contract interpretation:
which approach is best
suited to international
construction contracts?
In this article, the authors take a deliberately adversarial approach to the
above question in order to fuel debate, with Shona Frame arguing the case
for UK law, and Sam Moss arguing the case for SWISSlaw. *
Introduction
The differences between the approaches
English and Swisslaw are, respectively, the to the interpretation of contracts in the two
first- and second-most frequently chosen systemsare, at first glance, marked. The UK
governing lawsin international contracts, at law approach, and more generally that of
least according to the International Chamber common law systems,is often characterised
of Commerce (ICC)'s statistics on contracts as an 'objective' approach, which is focused
givingrise to arbitration under the ICCRules on the terms of the contract and shuns
of Arbitration.' A study on choice of law in extrinsic evidence. In contrast, Swiss law,
international construction contracts would along with other civilian systems, is usually
also likely show that English and Swisslaw said to adopt a 'subjective' approach, which
are predominant.
focuses on the real intentions of the parties.
CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 3 September 2015
9
UK VERSUS SWISS LAW
However, the distinction between the UK
and Swiss approaches, and more generally
between common and civil law systems, is more
nuanced than the subjective versus objective
dichotomy would suggest. Nevertheless, there
remain differences between the systems, which
give rise to the question of which approach is
better suited to the realities of international
construction contracts.
Outline of UK position
Shona Frame
The general rule in the UK, as expressed
by the leading Scottish textbook The Law
of Contract in Scotland.' is that a contract is
interpreted by considering the whole express
terms of the contract and any admissible
surrounding circumstances.
The value of the surrounding circumstances
is that these allow an interpretation based on
the meaning of the document to a reasonable
person having all the background knowledge
available to the parties at the time of the
contract, the first of the principles set out by
Lord Hoffman in I~tor'S
Compensation
Scheme v West Bromwich Building SoCîety.3
,
This rule of fr¡.terpretation recognises that
commercial contradts are not made in a
vacuum
and
that
id order
to aid
I
interpretation,
the
court
is
entitled
to be
-..
.::\
placed in the same posi-tion as the parties
who enteJed into the contract. In other
word~_the[e is recognition that the context
of the agreement is importãnt.
....
;,
l
Th e courtsI
also req1-ure
to app y a
i
. on tne
1...
commercia. III
y sensuìblei
e m terpretauon,
basis that
is considered ~t0 -be the
interpretatiorrmost
likely~to give-effect to the
intention of'th~ parties. .
_ 'IL
where th.t;.J::e
are problems in tlfêlanguage
. "" ....~-- a mista
. kee m
i t h e d r aftmg,
.
useqrl trh at po_mt.to
it
___;;;;..
....,.-;
- - _;-.-
•
•
\d
tlre~ court does not reqUIre to Impose on
parties an intentiõn -tney ~learly woulg not
have -had. ~Bearill'g in min~ the overriding
objectite of gi0ng effect to what a 'reasonable
person' as opposed to a 'pedantic laV\ryer'
would have understood the parties to mean
(as Lord Hoffman put it in Jumbo King v
Faithful Properties (1999) HKCFAR 279), the
courts will interpret contracts in such a way
as to achieve that aim.
That has involved the courts in reading
words into a shipping lcontract where it was
'clear both that words had bern omitted-and
what those omitted words wer¿¡- and being
prepared to substitúte the right word for a
10
VVhat business needs is certainty, predictability,
expeditious progress and proportionate costs in
resolving disputes, when and where these arise
wrong one or disregard words or insert
missing words."
In other cases, however, the courts have
sounded words of caution in doing so, urging
judges to guard against' excessive confidence
that [their] view as to what might be
commercially sensible necessarily coincides
with the views of those actually involved in
commercial contracts'." The starting point
remains the words of the contract and this
'reading in' exercise is only embarked upon
where it is clearly required in order to give a
sensible meaning to the contract.
The use of evidence
as an aid to
interpretation is an important consideration,
Evidence of the subjective intention, bf a
party
to
the
contract,
ëvÍdence
of
pre-contract negotiations and etidence of
Ji!
circumstances since the contract cannot be
used in interpretation of con'rracts.
Of these; perhaps the most.controversial
- and where the biggest difference lies
between the UK position and that in othe~
- is in:ì¡@,rati0ntoevidenceo'f
J'urisdiài~n~s
."
. l¡' . " J!
•
-pre-contract
negouations,
In relation to
this,' a distinction nee~s~tõbe drawn between
'dence :,q.f' pnor
nri
~I t··
d o f·-t he
eVI
negotiatlOllS-an
subiective
'intention lof the par(ìës;~which
J
Il
~
are not admissible, and facts 'thar both
parties-- \tiould h~te',... had
in. minCl
at::'t:he:time
~
_
¡:j,I_
_,..""'f!F
.......
01 the, contract= - -tne backgr'ound'
brs..ûmst~~cëS - whic~ are a~m~~sible-\
The rationale
behmd this IS that l.such
evidence iSI considered
to be generally
'-unhelpful, .~FeflectiI¡g_only
[ "..changing
p-ositiD~theñe"gotiation
pr,oceed-s and
not a consensus8 and that negntiãti9hs can
often involve a compromise.9 Pre~c~ntract
communications
may simply reflect Rkrties'
-~
~
aspirations
and intentions
¡¡.fid· not the
reality of what is achieved in the ultimately
agreed cbntractual wording.
.
If.
:;:...
Further, it is thought that aH6wiñg such
,~
evidence would lead to ,great@p uncertainty
.Y_~ Id/'
of Lloutcome m d'
lspl,ltes
re ate. _to. l0ntrªct
ipterpretation ar¡.d a'dd to the cost of ad¥ice
and of litigation. I,D
In the Scottish Appeal Court, the Fu1e-is
justified on two grounds: namely irrelevance
and pragmatism.ll Irrelevance on the grounds
11
-
.rl
CONSTRUCTION LAW INTERNAl'IONAL Volume 10 Issue 3 September 2015
that consideration of previous formulations of
what one or other party was seeking in
negotiations may have no bearing on the
interpretation of the words finally agreed; and
pragmatism on the basis of considerations of
predictability of the outcome and economy in
reaching that outcome.
This is not to say that parties are denied a
remedy in the event that the intention of the
parties has not been accurately expressed in
the contract language. Where this cannot be
remedied by means of interpretation
on
commercially sensible grounds, as described
above, there is the possibility of the courts
rectifying the contract. That involves revising
the words of the contract to reflect the
common intention of the parties.
A rectification action will, in contrast with a
case based on interpretation,
allow evidence
of pre-contract negotiations. In appropriate
cases then, parties have recourse to a remedy
that allows them to take advantage
of
evidence available, which goes. above and
'I
1,
beyond that which could be used simply as a
matter of interpretation!
.
I
I
Outline of Swiss position
5 m M0SS,'
(
1
AS is the case in other civilianjurisdictions, the
starting point of contractual ifiterpretation
under SWisslaw differs signìfìcantly from that
in common ~awjurisdictions: a court or arbitral
tnibùrîal applying Swisslaw must first seek to
, determine the real and common intention
of the parties," which may 'be inconsistent
n
with the wording of the contract. The starting
pointI far seeking the parties' real and common
intention will be the wording of the contract,
which is referred to as the 'primary' means
ôf interpretation." However, the parties may
adduce any form of evidence that sheds light
on their intentions, including evidence of their
negotiations and subjective declarations of
intent, the circumstances in which the contract
wasconcluded, the parties' respectiveinterests,
the purpose or object of the contract, usage in
a specific industry, and the parties' conduct
after the contract wasconcluded.
If the real and common intention of the
parties cannot be established, a judge or
arbitrator will resort to an 'objective' or
'normative' interpretation, based on the
so-ca!lled'principle of trust' (' Vertrauensprinzip'
or 'principe de la confiance'). Interpretation in
accordance with the principle of trust, which is
based on the general duty of good faith
CONSTRUCTION LAW IN;FERNATIONAL 1Volume 10 Issue 3 September 2015
enshrined in Article 2 of the SwissCivilCode,
consistsof establishing how each of the parties'
'declarations' of intent could and should have
reasonably been understood, in good faith, by
the other party under the circumstances.
As is the casefor subjectiveinterpretation, the
starting point for the analysisis the text of the
contract. However,a court or tribunal cannot
adopt a purely literal interpretation of the text,
even if it may appear to be clear," It must
examine the wording of the contract in its
context, taking into account 'all the
circumstances'whichpreceded or accompanied
its conclusion.IS These circumstances include
the other clausesof the contract, itspurpose, the
parties' interests, usage in the parties' industry
or field, and the parties' negotiations."
The Swisscourts will,in particular, givemore
or lessweight to the apparently clear meaning
of the text of the contract depending OR the
background of the parties. A stricter
interpretation of the text of a contract can, for
instance, be appropriate if the parties are
commercially experienced and familiar with
the type of transaction and the meaning of the
~ermsused in the' contract." However,a more
careful analysis of the other circumstances
surroundirg a contract may be necessary, for
jnstp.l'ld!, if a party is foreign or if the party's
declaration of intent is made in a foreign
language. IS Nevertheless, the text of the
contract is considered to have priority over
other evidence, and a court or tribunal willnot
move awayfrom the literal meaning of the text
if there isno 'seriousreason' to think that it does
not correspond with the parties' intention.'?
Despite the nominal primacy of subjective
interpretation in the two-tiered approach to
the interpretation of contracts under Swiss
law,'objective' (or 'normative') interpretation
ispredominant from both a legal and practical
point of view.In practice, the two tiers,overlap
and can be difficult to distinguish." From a
legal point of view,a party seeking to rely on
an alleged real and common intention of the
parties has the burden of proving it.
Under Swisslaw,the burden of proof, which
is a substantive rather than procedural
question, falls on tile party seeking to rely on
an alleged intention of the parties that diverges
from the 'normal' or 'objective' meaning of
the text of the contract." This rule emphasises
both the importànce of the text of the contract
as the 'p>rimary'means
of interpretation, as
,
well as the practical importance under Swiss
law of objective interpretation in comparison
to subjective interpretation, despite the
11
UK VERSUS SWISS LAW
nominal primacy of the latter. Objective
interpretation might even be said to have, in
effect,priorityoversubjectiveinterpretation in
light of the allocationof the burden of proof,
given that it will be determinative unless and
until a real and common intention of the
partiesis allegedand proven."
As a result, the Swissand UKlawapproaches
to contract interpretation are far closer than
they appear to be at first sight. In fact, the
modern,
contextual
approach
to
interpretation under UK law is, to a large
extent,
indistinguishable
from
the
predominant form of interpretation under
Swiss law. In particular, the 'background
knowledge' referred to by Lord Hoffman in
Investors Compensation Scheme v West Bromwich
Building Societj3 is similar to the set of
circumstancesthat must be taken into account
in objectiveinterpretation under Swisslaw.In
addition, as under UK law, the text of the
contract will have priority over any such
circumstances, and a court or tribunal will
only move awayfrom the literal meaning of
the text of the contract if there is a 'serious
reason' to do so.
Which position is more suited to
international construction contracts?
Arguments for the UK position
SHONAFRAME
The Swissposition, in taking as its starting
point the ascertainment of the 'real and
common intention of the parties' - even if
this is at odds with the contract wording and not the expressed intention as contained
in the contractual language, opens up the
possibility of wide-ranging evidence on all
aspects of the contract.
Where a party submits evidence that the
contract wording does not reflect that
parties' intentions, Swissjudges may take
account of any form of evidence that sheds
light on these intentions. This allows for a
very wide-ranging and almost unlimited
enquiry to be undertaken. This is the case
even in circumstances.where the contract is
clear and unambiguous.
This, it is considered, can lead, in those
cases, to uncertainty and unpredictability of
outcome in contractual matters where
international business has a preference for
certainty and predictability.
Further,it seemsanomalousin the context of
the construction industry where contracts
regularlyrun to many hundreds .ofpages and
12
are often negotiated over extended periods of
time to ensure that the finallyagreeddocument
is one that has been agreed to byboth parties.
It can also lead to significantly increased
costs. The consideration of all draft
contracts and correspondence during the
negotiation phase of a construction contract
would be onerous involving voluminous
documentation, often running to many
thousands of pages exchanged over an
extended period of time.
ln a court hearing, the evidence on this
could take many days, if not weeks, and it is
difficult to know what a court could make
of the huge volume of potentially
conflicting material it might then be
presented with. Witness evidence may
prove unreliable or incomplete given the
passage of time. Such evidence might not
even assist since disputes often arise due to
circumstances that no one anticipated at
the time of entering into the contract.
Even if the focus was on one or two key
provisions, the remainder of the material
would still need to be considered since it is
often the case in a negotiation that a party
willtake a commercial decision to giveawaya
point on one clause in order to secure
advantage on another.
It is easyto see how this approach could lead
to a disproportionate
amount of time, effort
and costbeing expended
to reach a conclusion.
It is also an approach
that could result in the
creation of disputes
that may not otherwise
arise. For example, a
party may see a tactical
benefit
to
raising
arguments
aver
interpretation,
thus
taking advantage of the
lack of predictability of
outcome or the huge
costs of such a wideranging enquiry. This is
in contrast to the
approach
in many
construction contracts
that contain provisions
aimed
at
dispute
avoidance
through
mechanisms such as
mediation, adjudication
and dispute boards.
CONSTRUCTIONLAW INTERNATIONAL Volume 10 Issue 3 September 2015
Lake Emoss,
Swiss law goes even further, however, and if
the parties' intentions cannot be established,
it allows the court to establish the presumed
intention in accordance with the principle of
trust, basically an application of the principles
of good faith to parties' declarations of
intention, which must surely lead to further
uncertainty for parties.
It is true that in the final analysis, having
been presented with all of the evidence, the
Swiss courts must have a 'serious reason' to
move away from the literal meaning of the
text. However, the route to that conclusion
appears circuitous and painstaking.
It may be said that, despite the differences
in the UK and Swiss approaches, there may
not be, in practice, wildly diverging outcomes.
However, this then begs the question of what
best serves the needs of international
construction contracts.
It is considered that what business needs is
certainty, predictability, expeditious progress
and proportionate costs in resolving disputes,
when and where these arise. The restrictions on
evidence available to parties to interpret
contracts in the UK are arguably more likely to
achieve these aims than the much wider enquiry
available under the Swissrules. In those cases
where the contract wording does not in fact
match parties' intentions,
rectification (along with
wider evidence of precontract
negotiations)
remains possible.
Arguments for the
Swissposition
SAM Moss
l and a hydroelectric dam near the village of Chatelard, Switzerland.
As already mentioned
above, the UK and
Swisslaw approaches to
contract interpretation
are far closer than they
appear at first sight. In
particular, an 'objective'
in terpretation similar
to the modern UK
law approach is the
predominant form of
interpretation
under
Swiss law, and courts
or tribunals applying
Swisslawwill only move
away from the text of
the contract if there is
CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 3 September 2015
[The UK] rule of interpretation
recognisesthat commercial
contracts are not made in a
vacuum ... there is recognition
that the context of the
agreement is important
compelling evidence that it does not reflect
the intentions of the parties. Therefore,
the argument that the Swisslaw approach
could lead to greater uncertainty and
unpredictability has no basis.
Nevertheless,there are differencesthat make
the Swiss law approach better suited to
international constructioncontracts.The most
significantof these is that Swisslaw does not
imposeanyrestrictionson the typesofevidence
that can be adduced in aid of interpretation.In
contrast, while the modern approach to
interpretation under UK lawallowsajudge or
arbitrator to look to a broad range of
circumstances,twoimportantformsofextrinsic
evidenceremain excluded,namelythe parties'
negotiationsand subsequentconduct.
Both of these types of evidence can be
important tools to interpret a contract, and
this is particularly true of international
construction contracts, as they are often:
• concluded between parties that have
different cultural, commercial and
legal backgrounds (unlike domestic
construction contracts);
• concluded by party representatives with
an imperfect command of the language of
the contract, which can lead to imperfectly
worded clauses, with misused words and
connectors, grammaticalerrors, convoluted
or unusual sentence structures, and literal
translations that the parties mayor maynot
have understood in the same way;
• basedon standardform contractswithwhich
one or both of the parties are not familiar,
and that are sometimes mechanically
adopted without anysignificantnegotiation
or a fullunderstanding oftheir requirements
and implications; and
• governed by lawsthat are at odds with the
origins of the contractual terms the parties
have negotiated.
For instance, when faced with a clause
containing misused terms, it may only be
possibleto shed light on the parties' intention
- and therefore to avoid holding them to
13
UK VERSUS SWISS LAW
an interpretation which is contrary to their
intention - byresorting to their negotiations.
UKlawyersoften argue that admitting such
evidence would lead to uncertainty in the
interpretation of contracts, and to longer
and costlier proceedings as a result of courts
and tribunals being faced with large volumes
of extrinsic evidence. However,the outcome
of contract interpretation cases are in any
event difficult to predict, and the exclusion
of certain evidence may in fact promote
uncertainty by allowing a party to argue for
an interpretation that it knows was not
intended. The floodgates argument is also
largely speculative, especially taking into
account that the admission of such evidence
for the purposes of interpretation is 'perfectly
workable+' in civilianjurisdictions. Even a
number of prominent common law
commentators argue that there are no
convincing reasons for the exclusion of the
parties'
negotiations and subsequent
conduct, and predict that UK law will
ultimately shed the exclusion."
The utility of evidence of the parties'
negotiations and subsequent conduct is
also recognised by UK practitioners who
often seek to invoke myriad exceptions
under UK law to introduce such evidence,
for instance, by relying on the doctrine of
rectification. While these exceptions open
the door to such evidence in certain
circumstances, they are complex and their
scopes are often uncertain. As a result,
they can lead to disputes over the
admissibility of evidence, potentially
adding to the costs of proceedings, and
require judges and arbitrators to make
difficult
and
seemingly
artificial
distinctions to decide whether or not
evidence is admissible. In contrast,' the
Swiss approach is simple and eschews
disputes over the admissibility of evidence,
as there are no restrictions on admissibility.
Finally,the ability under Swisslaw to look
to the parties' real intentions allows for a
greater flexibility and sensitivity to the
realities of international construction
contracts. In addition, despite the similarities
between Swiss law and the modern UK
approach to contract interpretation, Swiss
law is not burdened by the heritage of a
literalist approach, which has an impact
more generally on the flexibility of its
approach to interpretation.
14
Shona Frame is a partner at CMS Cameron
McKenna and can be contacted at shona.frame@
cms-cmck.com.
Sam Moss is at Lalive in Geneva
and can be contacted at [email protected]
Notes
This article is based on the authors' presentations at
the ICP Committee's session entitled 'Say what? The
rules of interpretation at civiland common law' at the
2014 IBAAnnual Conference in Tokyo.
ICC International
Court of Arbitration, '2013
Statistical Report' (2013) 25(1) ICC International
Court of Arbitration Bulletin 5. The ICC's statistics
show that, in the cases submitted to ICC arbitration,
15.64 per cent of contracts that contained a choice
of law provided for the application of English law,
while 10.09 per cent provided for the application of
Swisslaw.
2 William W McBryde, The Law of Contract in Scotland
(3rd edn, W Green/Scottish
Universities Law
Institute, 2007).
3 Investo-rsCompensationSchemev WestBromwichBuilding
Society[1997] UKHL 28.
4 The Starsin [2003] UKHL 12.
5 Credential Bath Sheet v Venture Investment Placement
[2007] CSOl-l208.
6 Ibid.
7 Bank of Scotland v Dunedin 1998 SC 657.
8 PrennvSimrnons[1971]l WLR1381 (HL).
9 The Rio Assu (N02) [1999] lLloyd's Rep 115.
10 ChartbrookHomesvPersimmonHomes[2009]1 AC 1101.
Il Luminar Lava Ignite v Mama Group [2010] CSIH 01.
12 Art 18(1) CO (unofficial translation): 'In order to
decide on the form and clauses of a contract, it is
necessary to seek the real and common intention
of the parties, instead of relying on the incorrect
expressions and terms that the parties used in error
or with the aim of dissimulating the real nature of
the contract.'
13 See Bénédict Winiger, 'Des obligations resultant d'un
contrat', in Luc Thévenoz & Frank Werro, Commentaire
Romand.' CodedesobligationsI -Art. 1-529CO(2nd edn,
Basel: Helbing Lichtenhahn. 2012) Art 18, N 32-41.
14 DIT 136 III 186,para 3.2.1;DIT 130 III 417, para 3.2.
15 DIT 140 V 145, para 3.3; DIT 132 V 286, para 3.2.1;
DIT SJ 1996549, para 3 (emphasis added). See also
DIT 125 III 435, para 2(a) (aa); 129 III 118, para 2.5;
DIT 123 III 165, para 3(a).
16 They do not, however, include the conduct of the
parties after the conclusion of the contract, which,
according to the SwissSupreme Court, only provides
an indication of the parties' real intentions at the
time of concluding the contract, but not of their
objective intentions (DIT 133 III 61, para 2.2.1; DIT
5A_204/2009, para 4.2.3).
17 DIT 129 III 702, at para 2.4.2.
18 DIT 129 III 702, para 2.4.1.
19 DIT 5C.21/2007 dated 20 Apri12007, para 3.1.
20 See Wolfgang Wiegand, 'Erster Abschnitt: Die
Entstehung durch Vertrag' in Heinrich Honsell,Nedim
Peter Vogt& WolfgangWiegand, eds., BaslerKommentar
- Obligauonenreclü1- ATt. 1-529 OR (5th edn, Basel:
Helbing Lichtenhahn. 2011), Art 18, N. 14.
21 DIT 121 III 118, para 4(b) (aa); Wiegand, Art 18, N.
16; Bénédict Winiger, 'Des obligations résultant d'un
contrat', in Luc Thévenoz & Frank Werro, Commentaire
CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 3 September 2015
Romand: Code des obligations 1- Art. 1-529 CO (2nd edn,
Basel: Helbing Lichtenhahn, 2012) Art 18, N 24. See
Peter Jäggi & Peter Gauch, Zürcher Kommentar- ATt. 18
OR, Auslegungder Verträge (3rd edn, Zurich: Schulthess,
1980) at N 33, 42, 46.
22 Peter Gauch, 'Auslegung, Ergänzung und Anpassung
schuldrechtlicher Verträge', in Die Rechtsentwichlung
and der Schwelle zum 21. Jahrhundert: Symposiurn zum
SduS ixerisdienPnuatredü (Zurich:2001)209,at para 3(b).
23 See n3 above.
24 Stefan Vogenauer, 'Interpretation
of Contracts:
Concluding Comparative Observations' in Andrew
Burrows & Edwin Peel (eds), Ctmtracl Tenns (Oxford:
Oxford University Press, 2007) 123, at 138.
25 DonaldNicholls,'MyKingdomfor a Horse:The Meaning
of Words' (2005) 121 Law Quarterly Review 577, at
582-583; David McLauchlan, 'Contract Interpretation:
What Is It About?' (2009) 31(5) SydneyLawreview5, at
8; Gerard McMeel,'Prior Negotiations and Subsequent
Conduct: The Next Step Forward for Contractual
Interpretation' (2003) 119 Law Quarterly Review272;
Andrew Burrows, 'Construction and Rectification' in
Andrew Burrows & Edwin Peel (eds), Contrnci Terms
(Oxford: Oxford UniversityPress, 2007) 77, at 84.
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