Interpreting statutes and contracts: What are the differences? Part II

Context

All interpretation is contextual, but some is more contextual than others. In principle, the interpretation of statutes should require less context than the interpretation of contracts. This is for the practical and constitutional reasons which are discussed in the first part of this article.

On the practical level, there is much less need to read statutes contextually than contracts. Contracts are entered into by all sorts of different types of people in all sorts of different circumstances and for all sorts of different reasons. Statutes, on the other hand, are always issued by the same person for broadly the same purpose and to broadly the same audience. There are few formal requirements for contracts; but statutes are formal instruments – normally drafted by Parliamentary draftsmen in a particular style. There is therefore much less need for context.

Perhaps even more importantly, there are strong constitutional reasons why statutes should take effect in accordance with their terms without too much reference to external influences. As citizens, we accept that we are bound by legislation. But it is axiomatic that we must know the laws by which we are bound. Parliament expresses those laws in statutes which are published. We should be able to understand the laws by which we are governed by reading those statutes. Of course, we need to understand them in the light of the existing law, and the citizen may require a lawyer to explain the intricacies. But it should not be incumbent on the interpreter to have to trawl through reams of extrinsic material in order to understand what it is that Parliament intends. The words of the statute should speak for themselves.

This distinction between statutes and contracts manifests itself in two ways in relation to context. It affects both the extent of available background materials and also the circumstances in which they can be used.

The first issue concerns the extent of available context. In the contractual sphere, the starting point is that context is always relevant in the interpretation of contracts. The interpreter must be put in the position of having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract (as Lord Hoffmann said in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at [912-13]). Certain types of background are excluded (for instance pre-contractual negotiations and subsequent conduct), but the starting point is that everything is relevant.

The position is the opposite in relation to statutory interpretation. Here, it is only certain types of material which are available in the interpretation exercise – for instance, judicial interpretation of the statute and its predecessors, the legislative history of the statute, explanatory notes, public reports on which the statute is based and ministerial statements in Parliament.

In spite of this, in some ways the history of the last twenty five years has seen precisely the opposite approach. The House of Lords has deliberately and substantially reduced the amount of background material available when interpreting contracts (in Chartbrook v Persimmon Homes [2009] 1 AC 1101) and it has deliberately and substantially increased the amount of background material available in the interpretation of statutes (in Pepper v Hart [1993] AC 593). In practice, therefore, the distinction may be honoured more in the breach than the observance.

The second issue concerns the circumstances in which context is available. There is no doubt that, when interpreting a contract, a court is entitled – indeed bound – to consider relevant background even if the words of the contract themselves are unambiguous on their face (R v National Asylum Support Service [2002] 1 WLR 2956 at [5] – Lord Steyn). There is some suggestion that the same principle applies to statutory interpretation, but the preponderance of authority – at least for most types of context – is that the court should only look at external materials if the words of the statute, read as a whole, are ambiguous. This is certainly true of legislative history (Mitsui Sumitomo Insurance Co v Mayor’s Office for Policing and Crime [2016] AC 1488) ministerial statements in Hansard (Pepper v Hart [1993] AC 593) and explanatory notes (R (D) v Secretary of State for Work and Pensions [2010] 1 WLR 1782 at [45-48] – Carnwath LJ).

In summary, it is suggested that it is – and should be – more difficult to use external materials to interpret a statute than to interpret a contract.

Always speaking

It has been seen in the first part of this article that the principle that words are generally given their ordinary meaning in context is a principle of universal application. It applies to statutes as much as to contracts. But there is a difference between the two in relation to the time at which that meaning is established. Should the meaning be established at the time the document is issued, or at the time the question comes to be determined?

The general position in relation to contracts is that the words of a contract are to be interpreted in the context of the relevant background at the time the contract was entered into (Lloyds TSB Foundation for Scotland v Lloyds Banking Group [2013] 1 WLR 366). Of course, this is subject to anything the parties may say about the issue in the contract; and contracts frequently do contain specific provisions dealing with potential changes to laws and regulations. But the starting point is to assume that, when the parties use particular words and expressions, they intended them to have their natural meanings at the time the contract was entered into.

Statutes are different. They are expected to remain in place for a considerable period of time. Many statutes now in force trace their antecedents back over the centuries. There are therefore a large number of cases in which the courts have had to grapple with this question: should they give the words of an old statute the meaning which they bear now, or should they look to see what those words meant at the time the statute was passed?

There are cases in which the courts do look back to the time the statute was passed (The Longford (1889) 14 PD 34 at [36]), but the more prevalent view, particularly in recent times, is that the words of a statute are “always speaking” and that the words they contain need to be read in accordance with their meaning at the time the question arises. So, if the meaning of the relevant words has changed since the statute was passed, then it is that new meaning which will be applied (Fitzpatrick v Sterling Housing Association [2001] 1 AC 27).

The reason for this approach is essentially that it probably represents what the legislature intended. Parliament understands that its legislation may remain in force for a considerable time. It also understands that the meaning of words can change over time, and that it is not normally practicable to require the interpreter of a statute to delve back into the meaning its words had at the time it was passed – or, indeed, the time a predecessor statute was passed. The basic constitutional principle is that citizens should be able to understand the laws which govern them by reading the words of the statutes. As a general rule, it is just not practicable to require anyone reading a statute first to understand when the predecessor of the relevant statute was passed and then to consider whether the words used carried a different meaning at that time.

In practice, it is often the case that the meaning of the words themselves has not changed, but that the application of those words to the decision of any question will depend on our current understanding, not on what might have been thought in the past (Morris v KLM [2002] 2 AC 628 at [149] – Lord Hobhouse). But, either way, we generally need to read statutes by reference to our current understanding of the meaning of the words used.

The starting assumption for statutes is therefore the opposite of that for contracts. But it is just an assumption, based on what the legislature is likely to have intended. The ultimate question in every case is what the legislature would reasonably have been expected to mean from the words it has used (R (Quintavalle) v Secretary of State for Health [2003] 2 AC 687).

Unnatural meanings

The main problem faced by any practitioner who is trying to second guess how a court will interpret a provision of a document is whether the court will decide that it cannot give that provision its natural meaning because the promulgator of the document cannot objectively have intended it. In the context of statutory interpretation, the problem is exemplified by Yemshaw v Hounslow LBC [2011] 1 WLR 433, where the housing officers, a review panel, the first instance judge and the Court of Appeal all gave the word “violence” its natural meaning, but the Supreme Court gave it a more extended meaning. In the context of contractual interpretation, it is illustrated by Investors Compensation Scheme v West Bromwich Building Society [1997] 1 WLR 896, in which the House of Lords simply re-wrote the relevant provision.

In the early years of this millennium, this was a particular problem in relation to contractual interpretation; but, since the Supreme Court gave judgment in Arnold v Britton [2015] AC 1619, it now takes a lot to persuade a court that the words of a commercial contract should not be given their natural and ordinary meaning in context.

It is more of a problem with statutes. The courts are more willing to decide that a statute cannot mean what it appears to say. The reason for this is again both practical and constitutional.

We do not necessarily expect contracting parties to act reasonably. It is recognised that parties do not always have equality of bargaining power; and, even if they do, they can make the wrong commercial decision. It is no part of the court’s role to rectify a bad bargain. There therefore needs to be a very high level of unreasonableness to persuade a court that the words of a commercial contract do not mean what they say. Adjectives used to describe the nature of the outcome which is to be avoided include that it is “absurd”, “bizarre”, “irrational”, “utterly fantastic”, “arbitrary”, “aberrant” or “inconceivable”. Particularly since Arnold v Britton [2015] AC 1619, that is a high threshold.

In theory, the same is true of statutory interpretation. In R (Noone) v Governor of Drake Hall Prison [2010] 1 WLR 1743, the adjectives used by the Supreme Court in a case of statutory interpretation were remarkably similar. The outcome to be avoided was one which was “absurd”, “irrational”, “indefensible”, “astonishing”, “incapable of contemplation”, “intolerable” or “anomalous”. But nevertheless the similarity of the way in which the legal principle is expressed does perhaps hide the practical reality – which is that courts are more inclined to give words an unnatural meaning in a statute than in a contract.

There is a good reason for this difference of approach. We may not expect contracting parties to act reasonably, but we certainly do expect Parliament to do so. However much our expectations may be confounded in practice, hope triumphs over experience. The courts expect that what Parliament does will be done in a reasonable and fair way (Inland Revenue Commissioners v Hinchy [1960] AC 748 at [676] – Lord Reid). Of course, Parliament is sovereign. It can pass whatever laws it wants. But the words they have used should be read – if they can – on the assumption that the outcome was intended to be fair and reasonable.

This principle has been applied in a large number of cases in a wide variety of situations. It is as applicable to commercial and financial transactions as it is in other types of case. It is, nevertheless, more compelling in cases involving statutory provisions which appear to impinge on fundamental liberties. It is here that the courts tend to be particularly interventionist. They presume that legislation is not intended to override the fundamental liberties of the citizen unless it does so clearly: general words are insufficient (Raymond v Honey [1983] 1 AC 1). This principle is sometimes known as the “principle of legality”, although that is an unfortunate choice of words. The sovereignty of Parliament means that anything which it enacts is legal. The principle of legality is not a limit on Parliament’s powers. It is a principle of interpretation. If a statute appears to override a fundamental liberty, it will only be taken to do so if it does so clearly (R v Secretary of State for the Home Department, ex parte Sims [2000] 2 AC 115).

Courts are now able to go even further in protecting fundamental liberties as a result of s.3 of the Human Rights Act 1998. It provides that “so far as it is possible to do so, … legislation … must be read and given effect in a way which is compatible with [the European Convention on Human Rights]”. This gives the courts a broader power to intervene than they have at common-law (Ghaidan v Godin-Mendoza [2004] 2 AC 557).

The courts are also prepared to go further when interpreting legislation which is derived from directives of the European Union. They recognise that legislation of this kind is often drafted in a more opentextured way than traditional English legislation, and they are prepared to give more leeway to an unconventional interpretation (Vodafone 2 v Revenue and Customs Commissioners [2010] Ch 77 at [37] and [38] – Sir Andrew Morritt). Much commercial and financial regulation is based on European Union law. This is likely to change over time but, in the meantime, it will be interesting to see how the courts approach this issue. Will they continue to adopt a more freewheeling approach to interpretation of legislation of this kind, or will they gradually move closer to the traditional English approach to interpretation?

Conclusion

The basic principles of the interpretation of contracts and of statutes are the same. But the application of those principles can differ. The text of a statute is easier to establish than the text of a contract. It should also be more difficult to use external evidence to influence the meaning of the text when interpreting a statute than a contract; although, in practice, there may be little to choose between them. And, unlike a contract; a statute is generally regarded as being “always speaking”.

But perhaps the most important difference in practice between statutory and contractual interpretation is that the courts are more willing to give effect to an unnatural meaning of words where they are interpreting a statute. That is mainly because they presume that Parliament intends to act fairly and therefore that it is unlikely to have intended an unreasonable result. But it is also the result of statutory intervention in relation to human rights and the adoption of a civil law approach to the interpretation of legislation based on European Union law.

Further Reading:

• Interpreting statutes and contracts: What are the differences? Part I (2022) 3 JIBFL 192.
• How regulation impacts the interpretation of contracts (2017) 6 JIBFL 335.
• LexisPSL: Banking & Finance: Overviews: Contractual interpretation for banking & finance lawyers – overview.