Supreme Court dismisses appeal upholding contract interpretation based on objective meaning at time of agreement.

THE SUPREME COURT

[Appeal No: 45/2016]

Denham C.J.

O’Donnell J.

McKechnie J.

Clarke J.

MacMenamin J.

Charleton J.

O’Malley J.

In the Matter of an application by the Accountant of the Courts of Justice pursuant to the Insurance Act, 1964 (as amended

by the Insurance (Amendment) Act, 2011

Between/

The Law Society of Ireland

Claimant (by Order of the Court)/Respondent

and

The Motor Insurers’ Bureau of Ireland

Respondent (by Order of the Court)/Appellant

Judgment of Mr. Justice John MacMenamin delivered the 25th May, 2017.

1. I agree with the judgment delivered by Clarke J. I would like to make certain additional comments in relation to the approach to

interpretation so elegantly set out in my colleague O’Donnell J.’s judgment. In essence one can safely say that the starting point for

the different approaches in these judgments is how this agreement should be interpreted. I confine my observations to only a few

points.

2. The parties to this case both approach it on the basis of accepting the law as set out in Investors’ Compensation Scheme v. West

Bromwich Building Society [1998] 1 WLR 896 (HL) (“ICS”) and as subsequently approved in Ireland. In ICS Lord Hoffman set out the

following general principles:

1. The Court must consider the meaning a document would convey to a reasonable person having all the background

knowledge that would reasonably have been available to the parties at the time the document was made.

2. This background knowledge includes all relevant factual information that is available to the parties, and which would

have affected the way in which the language used in the document would have been understood by a reasonable person.

3. Pre-contractual negotiations, however, are excluded from this background information.

4. The meaning of a document may not be the same as the meaning of the words used. The Court can and should

attempt to ascertain what the words were intended to convey as opposed to their literal meaning.

5. Whilst parties must be taken to have used the words they did for a reason, it may be possible to conclude that

something has gone wrong with that language and the Court must attempt to give effect to what the parties meant to

say.

3. There is, of course, much that is attractive in such an approach. It is predicated on the proposition that courts should enjoy a

significantly wider ambit in order to interpret contracts in a more contextual manner. It allows a court to impart business

commonsense to agreements. But in law, context is not in fact “everything”. Lord Steyn’s observation to that effect in R. v. Sec. of

State for the Home Dept. Ex P Daly [2001] All ER 433 at para 28 must even itself, be seen its own context, i.e. in a discussion as to

the basis for judicial review in English law. Context matters a very great deal. But it must not be elevated so high as to defeat textual

indications pointing to a different conclusion. For the purpose of this case context can be understood only in light of what the parties

to the agreement understood at the time the agreement was made. But one cannot exclude past events from their contemplation

these past events are discussed in Clarke J.’s judgment. This is discussed in Clarke J.’s judgment. There is a very real risk that in

applying the ‘business commonsense’ test, which is inherent to the I.C.S. approach, a court may be tempted to find what the parties

should have agreed, rather than what they actually agreed; or to give some retrospective meaning to what was left ambiguous in an

agreement.

4. What is noteworthy about the two, fully reasoned, judgments of my colleagues is the extent to which, by attributing different

weight to the five considerations set out in ICS one can arrive at diametrically opposed conclusions. This to my mind raises questions

about how helpful, what may characterised as the “ICS criteria” always are, unless those criteria are operated within some ‘rules’ as

to the manner in which they are to be weighed and utilised in any particular situation. Granted, the agreement is ambiguous in the

sense that all the clauses do not mesh together consistently. But I think the fundamental question is what is the gist of the most

important part of the agreement? Does it create liability? In my view it does. That most important part is clause 4.1.1 even in its

broad terms. Does it create liability against MIBI? In my view it does.

5. In analysing any agreement, the Court may want to ask itself the question “could these parties, negotiating a particular contract

have possibly meant what the contract now appears to say?” But this is not always the right, or the only, question. What must be

truly in issue is what the parties actually agreed. To my mind a court must look at the words and context. But the value of the words

used cannot be discounted to the point where context becomes a form of “trump card”, where there is always the risk that hindsight

dictates what the parties should have agreed rather than their actual common intention. There is a risk that a mis-located or

overemphasised ‘contextualisation’ process can defeat explicit words and material facts. An “imputed” context can be too narrow;

when, in fact, there is a necessity that, in a broader, historical and contextual analysis, more weight should be given to the actual

words used by the parties. I think this is so here.

6. I am concerned as to what are the limits which can be placed on the criteria of contextualisation and business commonsense.

There may be many potential ‘moving parts’, but what are the fixed parts or rules regarding weighting each of the criteria? I admit this

is not always an easy question. To my mind, the case for adopting the “chronological approach” from 1955 onwards, for assessing the

2009 agreement as advocated by counsel for the Law Society has real persuasive force. It allows for a fuller, and more telling, range

of materials to be taken into account. The analysis retains its force despite the amendments and alterations which took place to the

agreement. Bearing in mind those successive amendments one might rhetorically ask why, if the parties were prepared to change

other parts of the agreement, did they not amend clause 4.1.1 as quoted in Clarke J.’s judgment? They had ample opportunity to do

so. The question becomes more pertinent when one looks to the MIBI’s financial statements which, up to 2013 made allowance for

insurers’ insolvencies. It goes very far to simply say this was an error. Even if it was an error did it not represent the MIBI’s own

contemporaneous understanding of its potential liability in the event of an insurer’s insolvency?

7. The agreement, and its predecessors, were negotiated by people who work, both now, and in the past in the world of insurance,

and by those officials who seek to regulate that world. People who work in this area are well familiar with the contractual principles of

contra proferentem and material non-disclosure. The fact that the negotiating personnel may have changed is immaterial. Institutions

and corporations do not “forget” things.

8. There are real contrasts therefore with the facts of I.C.S. The identity and the state of knowledge of the parties here is very

different from those in that case. The Court is here dealing with persons very familiar with the concept of words having ‘meaning’ in

Lord Atkins’ celebrated phrase in Liversidge v. Anderson, [1941] UKHLI and with people for whom the omission of words have a real

consequence. All the negotiating parties had and have a common characteristic that is a desire to avoid ambiguity when it could be

avoided. Yet clause 4.1.1 remained unaltered. It is to be recollected that pace Lord Hoffman’s homely metaphor, the Court is not here

dealing with a private inter partes agreement; but rather one with a strong “public” law aspect. This is part of the broader context

also.

9. These concerns become more acute when there are other pieces of material in the broader context which might indicate quite

clearly that insolvency of an insurer was consistently in the minds of the respondent. Many of these are outlined in Clarke J.’s

judgment.

10. I would add to these, what is to be found in what is termed the ‘Domestic Agreement’ made on the 1st January, 1993 between

the Motor Insurers’ Bureau of Ireland (“MIBI”) and the various insurers and underwriters who were its members. This was part of the

material made available to the Court.

11. This agreement was to be seen in light of the fact that the MIBI was at the time about to enter into what is called the “Uniform

Agreement” with the bureaux of other European countries who were members of the Council of Bureaux. It implemented what are

called the Geneva Recommendations, making uniform arrangements for owners and drivers of motor vehicles to be adequately insured

against third party risk when entering foreign countries where insurance against such risks was compulsory. For that purpose, the

MIBI wished to bind its members in relation to a definition of what would be the “insurer concerned” and also to define exceptions to

that term. The agreement identifies relevant countries and deals with how judgments are to be satisfied.

12. Clause 7 provides that “where it appears expedient to the MIBI to settle or compromise at its discretion any claim arising out of a

Road Traffic Act liability without allowing such claim to proceed to judgment, the MIBI should be entitled to recover its outlay from

any member found to be insurer, or insurer concerned in relation thereto. Clause 8 allowed the MIBI to make calls or levies on the

insurers who are members of the MIBI for such sums as the bureau might from time to time require in order to enable it to discharge

its obligations or further its objects. The agreement sets out various provisos. It deals with both insurers and underwriters.

13. Clause 10 deals with the issue of “Insolvency of Member”. It provides

“(1) In the event of the insolvency of any insurance company any payments which MIB of I may as a result be

called upon to make on its behalf to judgment creditors shall be contributed solely by the other Insurers’ Companies

and in the event of the insolvency of an Insurance Underwriter all payments which MIB of I may as a result be

called upon to make on his behalf to judgment creditors shall be contributed solely by the other Insurance

Underwriters in each case the individual contributions being in the pro rata proportion mentioned in clause 8 hereof.

(2) It is agreed in the event of such payments referred to in clause 10(1) having to be made MIB of I will have the

right to make a claim for a refund of such payments on behalf of its members against such liquidator, receiver,

examiner or otherwise of such Insolvent Insurance Company or Insurance Underwriter”. (emphasis added)

14. Of course one can say these clauses should be seen within the particular context of the domestic agreement made in 1993. But I

do not believe it can be tenably suggested that the MIBI did not at least have the insolvency issue on its mind then and

subsequently. In my view this too must be part of the context.

15. I remain unconvinced that any of the subsequent amendments made after 1955 are such that they require a different

interpretation to be put on the whole agreement from that which is readily discernible from clause 4.1.1. It is unnecessary to rehearse

Clarke J.’s detailed analysis of that clause, or the other provisions or which the MIBI, now, seek to rely.

16. I should also express my concern that, in the ultimate, the application of “business commonsense” can, in certain circumstances

be difficult to distinguish from subsequent rectification of a contract. At what point does business commonsense end and rectification

begin, albeit with the benefit of hindsight? Part of the attraction of a “contextual approach” is that it can obviate injustice. But it can

also create contractual uncertainty, or it can lead to an interpretation with the wisdom of hindsight.

17. In the neighbouring jurisdiction the contextual approach was applied in a number of cases after ICS (see Attorney General for

Belize v. Belize Telecom [2009] UK PC 10; Transfield Shipping Inc. v Mercator Shipping Inc. [2008] UK HL48). But there is evidence

that Lord Hoffman’s views have been the subject of some reassessment in the United Kingdom (see Arnold v. Britton [2015] UK SC;

Marks and Spencer plc v. BNP Paribas Securities Services Trust Co. (Jersey) Ltd. [2015] UK SC 72.

18. In Arnold Lord Neuberger identified criteria which were relevant to the decision of the UK Supreme Court in that case. These

were:

(1) Reliance placed on commercial commonsense and surrounding circumstances should not undermine the importance of

the language and wording of the provision to be construed.

(2) The less clear centrally relevant words to be interpreted, the more ready the Court can properly be to depart from

their natural meaning.

(3) Commercial commonsense is not to be invoked retrospectively.

(4) Whilst commercial commonsense is an important factor to be considered a court should be slow to reject the natural

meaning of a provision simply because the consequences seem imprudent for a party. The purpose of interpretation is to

identify what the parties have agreed, not what the Court considers they should have agreed.

(5) When interpreting a contractual provision one can only take into account facts or circumstances that existed at the

time the contract was made and were known or reasonably available to both parties.

(6) In cases where an event subsequently occurs that was not intended or contemplated by the parties on the basis of

the wording but it is clear what the parties would have intended, the Court will give effect to that intention.

19. At the minimum, this revisiting of the criteria raises a question as to the extent to which the courts in the neighbouring jurisdiction

now see the I.C.S. judgment as the last word in this evolving area of law. It raises the question whether the same approach should

unquestioningly be adopted in our courts with possibly far reaching consequences in the future. I fully accept that the agreement

under consideration contains clauses which are apparently not consistent with clause 4.1.1. But to my mind, the critical question is

not whether they are inconsistent, but whether they are sufficiently inconsistent in order to raise a real question as to how the

agreement should now be interpreted?

20. The weight of the words in clause 4.1.1 although broad, and capable of more than one interpretation, ultimately to my mind only

point in one direction. They favour the Law Society’s case. Counsel for the MIBI has, with considerable ingenuity, been able to

construct a most capable argument whereby greater weight should be put upon those other clauses which are most helpful to his

case. But the key question is, surely, whether any one or all of those clauses are sufficiently clear and decisive in order to displace

the “working assumption” that should inform the Court’s interpretation induced by clause 4.1.1. In my view they are not.

21. In his dissenting judgment in Arnold v. Britton Lord Carnwath made the apposite observation that “As Tolstoy said of unhappy

families, every ill-drafted contract is ill-drafted ‘in its own way’”. I do not deny this observation can be made in relation to the

agreement under discussion. But there is nothing, even at this stage to prevent a further revision of the agreement. I would dismiss

the appeal and uphold the three judgments of the Court of Appeal and that of the High Court judge.

22. I can see the force in the proposition that the outcome of this case may be detrimental to the insurance market, in Ireland and

that there is an urgent need to address this question. I acknowledge, too, that the judgments of the courts below have serious

implications for the MIBI levy on insurers. It is within the power of the parties to the agreement to further revise this agreement – if

they wish. But that is not the point. To my mind the essential, determinative, issue is what the 2009 agreement conveys to the

objective observer, rather than what the parties now wish they had agreed in light of the collapse of Setanta. I would affirm the

judgments and order of the Court of Appeal.