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

Similarities

The interpretation of any written instrument is ultimately a question of judgement, but that judgement must be exercised in accordance with principle. Interpretation cannot be understood at the level of detailed rules: that would be incompatible with what is essentially a judgemental exercise. But the interpreter of a legal document cannot simply reach a decision untrammelled by legal considerations. In chapter 6 of Through the Looking-Glass, Humpty Dumpty declared that a word means “just what I choose it to mean – neither more nor less”. That approach is not open to the interpreter of a legal document: it would amount to palm tree justice. The rule of law requires that judgements about the meaning of words are exercised in accordance with principle. And the basic principles of interpretation are applicable to all legal documents.

It will suffice to mention four:

• First, the guiding principle of the interpretation of all legal documents is that the interpreter is required to establish the intention of those who are responsible for producing the document concerned. In the case of contracts, this means the parties. In the case of statutes, it is the legislature. But, in all cases, it is not what the parties or the legislature actually intended which is relevant, but only what they objectively intended. What would a reasonable person understand their intention to be from what they have written, said and done? This objective approach is as important to the interpretation of statutes (Black- Clawson International v Papierwerke Waldhof-Aschaffenburg [1975] AC 591 at 613 – Lord Reid) as it is to contracts (Deutsche Genossenschaftsbank v Burnhope [1995] 1 WLR 1580 at [1587] – Lord Steyn).
• Second, the objective intention of the promulgator of the instrument concerned must be established from the words of the text of the instrument. It may be necessary to refer to other matters outside the text when interpreting the words of the text – for instance the background against which the text was produced. But those external matters cannot establish what the promulgator of the instrument intended. All they can do is to influence the interpretation of the words actually contained in the text of the instrument. This is the case with both statutes (Williams v Central Bank of Nigeria [2014] AC 1189 at [72] – Lord Neuberger) and contracts (National Commercial Bank Jamaica v Guyana Refrigerators [1998] 4 LRC 36 at [40] – Lord Steyn).
• Third, it is a cardinal principle of the interpretation of all documents that they must be read as a whole. A particular phrase or sentence cannot be read in isolation from the document as a whole. The context gives colour to the words being interpreted. Words which appear to be perfectly clear in isolation can mean something quite different when read in the context of the instrument as a whole. This is as true of statutes (Attorney- General v Prince Ernest Augustus of Hanover [1957] AC 436 at [461] – Viscount Simonds) as it is of contracts (Charter Reinsurance Co v Fagan [1997] AC 313 at [384] – Lord Mustill).
• Fourth, when interpreting the words of any legal text, the starting point is always the natural and ordinary meaning of the words in their relevant context, taking account of the purpose of the instrument concerned. Where the words are ambiguous or they seem to produce an odd result, further analysis is required; but the starting point – and often the finishing point, too – is the natural and ordinary meaning of the words. This is the case with both statutes (Black-Clawson International v Papierwerke Waldhof-Aschaffenburg [1975] AC 591 at [650] – Lord Simon) and contracts (Charter Reinsurance Co v Fagan [1997] AC 313 at [384] – Lord Mustill).

Differences

The general approach to the interpretation of any legal document is therefore broadly the same. The key principles by which the courts interpret statutes are no different from those for the interpretation of contracts. But the application of those principles does differ; and the reason for this difference of approach is that statutes and contracts are materially different types of legal instrument.

• First, a statute is a unilateral act. It is imposed by the legislature on citizens. It is consensual only in the limited sense that, in a constitutional democracy, we may be taken to have consented to the legislature’s power to do this. By contrast, a contract is a voluntary act.
• Second, statutes generally apply much more widely than contracts. They tend to be addressed to all citizens, whilst contracts only bind their parties. And statutes are always promulgated by the same body – the legislature of the state concerned. The identity of those who make up the legislature changes over time, but the nature of the body which promulgates the statute is always the same. This is quite different from contracts, which are entered into by all sorts of different persons.
• Third, the purpose of a statute is always broadly the same. They create laws to bind citizens. The nature of the laws varies from statute to statute, but the basic purpose is the same. Contracts, on the other hand, are infinitely varied. They are entered into for all sorts of reasons in a multitude of different circumstances.
• Fourth, a statute is a formal instrument. It must be in writing, it is written in a particular form and style and it must be enacted in a particular way. Something is only a statute if it complies with these formal requirements. This is in marked contrast with contracts. They can generally be made informally – orally, or even by conduct. Even if a contract is encapsulated into a document, it does not necessarily follow that all of the terms of the contract are contained in that document. And the drafting style can vary considerably.

For all these reasons, the approach to the interpretation of statutes can differ from contracts. This manifests itself in two ways. One is practical. The other is constitutional.

Taking the practical difference first, contracts are made in all sorts of different circumstances between all sorts of different types of people in order to achieve all sorts of different purposes. Even in a formal written contract, it follows that the meaning of the words used must to some extent be coloured by the context. The identity of the parties, the market in which the parties are operating, the purpose of the contract – these can all influence the way in which the words in the contract will be interpreted. This is less true of a statute. It is a unilateral instrument. It is always issued by the same body. It is normally issued to all citizens. There is much less reason for the background to influence the outcome. It follows that words can be given a more conventional meaning, without as much need to delve into the background.

The other reason for the distinction between statutes and contracts is even more important. We allow the legislature to pass laws which will govern our behaviour. The quid pro quo is that we must know what those laws are so that we can comply with them. Any reasonable person should be able to understand what statutes mean from the words which the legislature has used.

This point cannot be carried too far. A lawyer may well be required in order to establish what the statute really means in practice. But this does not diminish the constitutional importance of our being able to understand what we have signed up to in our social contract.

How do those differences between statutes and contracts affect the way in which they are interpreted? In this article, four areas of difference will be discussed:

• the identification of the text of the instrument being interpreted;
• the relevance of materials outside the text to the interpretation of that text;
• how to deal with cases where the instrument remains in force for a considerable period of time; and
• when it is permissible to give the words of the instrument an unnatural meaning.

Text

It is axiomatic that the text of any document is the source of its meaning. It is only from its words that one can gauge the intentions of the promulgator. Those words need to be read in the light of the relevant context, but the words which require interpretation can only be found in the text.

There are very few formalities in the creation of a contract. It rarely has to be made in writing. Even if the terms of a contract are written down in a formal document and signed by the parties, the document may not contain all of its terms. The terms of the contract are derived from the common intention of the parties, and it may be their objective common intention that other terms are to form part of the contract. That is not very likely if the parties have gone to the trouble of writing down the terms of the contract and signing it, but it is possible. And it is to guard against the concern that a court may have to look at a vast array of documentation in order to decide whether that was the parties’ intention that it is common for commercial contracts to contain an entire agreement clause.

None of that is relevant to statutes. A statute must be in writing, made in the appropriate form and approved in the proper way by the legislature concerned. It follows that the terms of the statute are found – and can only be found – in the formal document. Statutes have a built-in entire agreement clause.

In addition, there are two doctrines of the law of contract which have no part to play in relation to statutory interpretation – implied terms and rectification.

Terms can be implied into a contract if they are so obvious that there is no need to express them or if they are necessary to make the contract work in a business context. There is no equivalent doctrine for statutes. But even a brief review of the cases on statutory interpretation illustrates the fact that the courts do add words to statutes when interpreting them. How is this done?

There is little discussion of this problem in the cases, but it is suggested that there is a principled way of distinguishing between the approach to contracts and statutes. A provision of a document can be varied by interpretation, but a new provision can only be added to a document by the implication of a term. Interpretation is relevant to both contracts and statutes, but terms can only be implied into contracts.

When interpreting an instrument, it is commonplace for courts to interpolate words in order to vary the meaning of an obligation contained in the instrument. Normally, the effect of interpolating the words is to limit the apparent scope of a broad provision – as the Supreme Court did in Re Sigma Finance [2010] 1 All ER 571. Occasionally, the effect of doing so is to increase the scope of a provision – as the House of Lords did in Charter Reinsurance Co v Fagan [1997] AC 313. But, in each case, what the court is doing is to vary an existing obligation, not to create a new one. This is part of the process of interpretation, and it is as relevant to the interpretation of statutes as it is to the interpretation of contracts.

But it is not part of the process of interpretation to add a new provision to the document being interpreted. That is not interpretation, it is the creation of something for which the instrument does not provide. This cannot be done with a statute; and it can only be done with a contract if the court is able to imply a term in accordance with the strict requirements of the doctrine of implied terms. In Marks and Spencer v BNP Paribas [2016] AC 742, the Supreme Court was only able to require the apportionment of rent in a lease if a term to that effect could be implied; and it could not. The addition of a new obligation could not be effected as a matter of interpretation, but only by the implication
of terms.

It follows that the role of the court is more limited in relation to statutes than contracts. By interpretation, it can vary an existing provision of the statute; but it cannot add a new provision. That can only be done by the legislature.

There is a further way in which statutes differ from contracts. If a party to a contract is unhappy with the ordinary meaning of the words used in the contract, it has a choice. It can claim that, as a matter of interpretation, those words do not mean what they appear to say. Or it can argue that the contract should be rectified in order to give effect to the parties’ common intention at the time the contract was entered into. Where there is a dispute of this kind, it is common for both interpretation and rectification to be pleaded, and the court can deal with both in the same hearing – as it did, for instance, in Chartbrook v Persimmon Homes [2009] 1 AC 1101.

This duality of approach is not available in relation to statutory interpretation. There is no doctrine of rectification of statutes. If a statute has to be altered, it must be done by Parliament, not by the courts. So the only way to challenge the apparent meaning of the words is by interpretation.

In summary, the text of a statute can only be found in the written instrument itself. Unlike a contract, it cannot be argued that additional terms can be found outside the writing, or that a term should be implied, or that the terms of the contract should be rectified. There is therefore more certainty about the text of a statute.

Conclusion

Statutes and contracts are both legal texts. The principles of interpretation are broadly the same, whatever the nature of the text concerned. But statutes are very different from contracts, and this does affect the way they are interpreted. One way in which the distinction is manifested is that there is more certainty about the text of a statute than the text of a contract.

In the second part of this article, three other differences will be discussed – the relevance of background materials to the interpretation of the text; the “always speaking” principle; and the extent to which it is permissible to give the words of the text an unnatural meaning.