Former Employment Judge and Trinity CEDR Accredited Mediator, Michael Malone has prepared the following analysis of two authorities from the House of Lords and Supreme Court referred to in the recent publication of Lord Sumption’s book Law in a Time of Crisis (Profile Books, £16.99).
Since his retirement from the Supreme court, Jonathan Sumption has acquired something of a reputation for challenging conventional beliefs and established doctrines. His recently published book is based on 12 lectures which he has given in the past decade, updated where necessary to 2020. It ranges widely over law, history and public affairs. In one chapter, wearing his historian’s hat, the author tells us that the framers of Magna Carta ‘would be surprised to learn of their posthumous fame’; and that the Charter as we know it was reinvented in the early seventeenth century, largely by one man, Sir Edward Coke. The author refers in an endnote to the 800th anniversary of the Charter as ‘an occasion for a great outpouring of platitudinous humbug and national self-congratulation’.
I hold no brief for the framers of the Charter or indeed for Sir Edward Coke. I do, however, have serious concerns about a later chapter. That chapter, titled ‘A Question of Taste: The Supreme Court and the Interpretation of Contracts’, is based on a lecture given at Keble College, Oxford in May 2017, when Lord Sumption was still a member of the Court.
Lord Sumption criticises what he describes as ‘an ambitious attempt to free the interpretation of contracts from the shackles of language and replace them with some broader notion of intention’. He states that this attempt has ‘for the most part been associated with the towering figure of Lord Hoffmann’. Lord Sumption believes that ‘it is time to reassert the primacy of language in the interpretation of contracts’. He claims that ‘the Supreme Court has begun to withdraw from the more advanced positions seized during the Hoffmann offensive, to what I see as a more defensible position’.
Lord Hoffmann responded forcefully to the criticisms of his position, in an article titled ‘Language and Lawyers’ [2018] 134 Law Quarterly Review, 553-573. Lord Sumption does not mention this response. He may have thought that no reply was required - or that this was not the time or place - but I find the chapter to be disappointing in three other respects.
Specifically, Lord Sumption criticises a House of Lords decision (Chartbrook) on the basis of an inaccurate summary of the facts and issues, even though he should have been alerted to the inaccuracies by Lord Hoffmann’s LQR article. Secondly, he states in an endnote that he believes that a leading case (Rainy Sky) was wrongly decided by the Supreme Court, but fails to give an accurate summary of the case or convincing reasons for his view. Thirdly, he contends that the Supreme Court ‘has sounded the retreat from earlier decisions’, particularly Rainy Sky, albeit ‘in rather muffled tones’, and has given an indication of a ‘new direction of travel’. This contention is remarkably similar to a proposition which had been dealt an authoritative and summary rejection only a couple of months before his lecture. He fails to deal with this issue and, more importantly, his thesis may tend to undermine what had appeared to be settled authorities.
Chartbrook
Lord Hoffmann and Lord Walker gave the leading judgments in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, with concurring judgments being given by Lord Hope, Lord Rodger and Lady Hale. Lord Hoffmann states in his LQR article that Lord Sumption gave a ‘somewhat misleading summary of the reasons for the decision’. That is indeed the case. Lord Sumption states that the case of the developer, Persimmon, was based on the express terms of the agreement with the landowner, Chartbrook, and that the landowner succeeded. In fact, it was the landowner who relied on the express terms and the developer who succeeded in the House of Lords. Under the express terms, the landowner was to receive on the sale of each flat a basic land value sum based on the area of the flat, amounting to £53,438 on a 700 square foot flat. This sum represented 23.4% of an estimated sale price of £228,000. There was also to be a balancing payment and a percentage of 23.4% was referred to. It was clear to the court that the balancing payment was meant to be the amount (if any) by which 23.4% of the actual net sale price exceeded the basic land value sum of £53,438, but under the formula in the agreement it was to be 23.4% of the amount by which the net sale price exceeded the basic land price of £53,438 - a vastly greater figure.
Lord Sumption claims that ‘Lord Hoffmann reconstructed the commercial logic of the transaction on the assumption that it was highly unlikely that land values would fall’. That was not the assumption. This was a rare case where the express terms of an agreement were overridden by the context because those terms were viewed by the Court as irrational (not just unreasonable or one-sided) and self contradictory and because it was clear to the Court what the intended terms were. The terms were found to be irrational because apples (the basic land price) were being compared with pears (the actual selling price of the flat). They were found to be self contradictory because there was a term expressly contemplating the possibility that no balancing price would be payable; no one could have seriously contemplated that a flat expected to sell for £228,000 would fetch only £53,438.
Rainy Sky
The only judgment in Rainy Sky S.A. v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2100 was given by Lord Clarke. Lords Phillips, Kerr, Mance and Wilson agreed with it. Lord Sumption refers in his text to ‘the loose approach to the construction of commercial documents which reached its highest point in Rainy Sky’. He adds in an endnote that he believes that the case was wrongly decided. I respectfully but strongly disagree with him on both points. The approach to construction was less radical than that in Chartbrook and remains good law; the case was rightly decided.
Once again Lord Sumption’s summary of the facts is somewhat misleading. As he says, the case was about the scope of a bank guarantee given in connection with shipbuilding contracts. There were six separate contracts, each with a different buyer, and each contract required advance payment of instalments of the price at specified points. Each contract required the builder to provide a bond to guarantee repayment of the advance payments in certain circumstances and that bond was provided in each case by Kookmin Bank. Lord Sumption states that the issue in the case was whether the bond covered all the advances. In fact, the issue was whether the bond gave any cover at all in the event of the builder’s insolvency.
More importantly, Lord Sumption claims that the language of the bond ‘on the face of it supported’ the bank’s view. In fact there were two possible constructions of the bond and it had been conceded on the bank’s behalf in the Court of Appeal that both were arguable. The trial judge and one member of the Court of Appeal had preferred the construction which favoured the buyers; the majority in the Court of Appeal had preferred the one which favoured the bank. Lord Clarke, whilst conceding that the bank’s construction of the document was arguable, said that ‘if focusing only on the language of the clause’ he ‘would be inclined to prefer the Buyers’ construction’.The case was therefore more nuanced than Lord Sumption suggests.
Lord Clarke stated two legal principles of construction. ‘Where the parties have used unambiguous language, the court must apply it’ (paragraph 23). ‘If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other’ (paragraph 21). He cited a substantial body of authority.
The Court decided that this was a paragraph 21 case, agreeing with the trial judge and the minority judge in the Court of Appeal that the bank’s construction ‘made no commercial sense’. On that construction, the bonds covered every situation in which the buyers were entitled to a refund except the insolvency of the builder, yet that was ‘the situation for which the security of an advance payment bond was most likely to be needed’.
A question of authority
In March 2017, a couple of months or so before Lord Sumption’s lecture at Keble College, the Supreme Court decided the case of Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173. The case concerned the interpretation of an indemnity clause in an agreement for the sale and purchase of the entire issued share capital of a company. One of the questions which had arisen in argument was whether, in the case of Arnold v Britton [2015] UKSC 36, [2015] AC 1619, the Court had ‘rowed back’ from the guidance on contractual interpretation which the Court had given in Rainy Sky. The Court had refused to entertain that submission.
Giving the judgment of the Court, Lord Hodge said that he would explain briefly why he did ‘not accept the proposition that Arnold involved a recalibration of the approach summarised in Rainy Sky’(paragraph 9). He gave that explanation in paragraphs 10-13, drawing on both Rainy Sky and Arnold as well as other authorities. For example: ‘Textualism and contextualism are not competing paradigms in a battle for exclusive occupation of the field of contractual interpretation’(paragraph 13). In summary: ‘On the approach to contractual interpretation, Rainy Sky and Arnold were saying the same thing’ (paragraph 14). The other four Justices agreed with Lord Hodge’s judgment. They were Lord Neuberger, Lord Mance, Lord Clarke - and Lord Sumption.
I wouldn’t wish to make too much of the apparent conflict between a judgment which Lord Sumption agreed with in March and a lecture which he gave in May. For example, Lord Sumption might well have thought that it would be inappropriate to give a separate judgment in order to deal with an issue which counsel had not been permitted to develop fully in argument; or he may simply have changed his mind. Also it is in his recent book, not the lecture, that he goes so far as to say that he believes Rainy Sky to have been wrongly decided. I suggest that it would have been better to explain in his book whether he had in fact changed his mind, but my main concern is a more substantial one.
Rainy Sky and Arnold are both regarded as leading cases on the construction of contracts. For example, they are so referred to in Butterworths Challenges in Arbitration, LexisNexis 2019, page 275, and in Merkin and Flannery on the Arbitration Act 1996, Sixth Edition, Routledge 2020, page 66. Furthermore, as recently as April 2021, Lord Hamblen gave the judgment of the Supreme Court in Burnett or Grant v International Insurance Company of Hanover Ltd [2021] UKSC 12. He said that the parties were agreed ‘that the policy, like any other contract, is to be interpreted in accordance with the principles discussed and set out by Lord Hodge in [Wood] paras 10-13’. Those are the paragraphs which, as mentioned above, explain why Rainy Sky and Arnold were saying the same thing. It is, frankly, unhelpful for Lord Sumption to risk undermining settled authorities without giving more convincing reasons. On the other hand, his chapter will serve a useful purpose if it encourages his readers, like this reader, to go back and read the cases for themselves.
Michael Malone is a CEDR accredited mediator at Trinity Chambers and a Fellow of the Chartered Institute of Arbitrators. Michael is also a regular writer for Bloomsbury Law and contributes quarterly to the Equal Pay and Pensions chapters of their Discrimination Law Looseleaf.