The Law Quarterly Review

Volume 117(2001) 117 Law Quarterly Review 358.

Interpretation of Commercial Contracts

Bills of lading can be unclear as to who is contracting to perform the carriage. This may be surprising to those not accustomed to them. Shipping lines often put their names in block capitals and their logo on the front of the bills. But it does not necessarily follow that they are contracting as principals. If a line is only a time charterer, it may be that it has only issued the bill as agent on behalf of the shipowners or the demise ("bareboat") charterers whoever they may be. The bill is then an "owner's bill". But, on the other hand, it may be that although the line is only a charterer it has contracted as a principal: a bill of lading in such circumstances is called a "charterer's bill".

   Everything depends on the interpretation of the bill. Different indications may be given by different parts. English courts tend to place a special significance on the signature and whether it is expressed to be on behalf of the master, who normally be an employee of the owner or demise charterer: The Rewia [1991] 2 Lloyd's Rep. 325 at pp. 333 and 336. Perhaps this is why the cases tend to find that a bill is an owner's bill.

   In The Starsin [2001] 1 Lloyd's Rep. 437 the issue was whether the shipowners were principals liable on the contract of carriage. The Court of Appeal by a majority (Morritt V.-C. and Chadwick L.J., Rix L.J. dissenting) reversed the decision of the Commercial Court judge (Colman J.), [2001] 1 Lloyd's Rep. 85.

   The time charterers of the vessel were Continental Pacific Shipping Limited ("CPS"). They were the operators of a liner service. They had chartered in the vessel under a time charter on the New York Produce Exchange form. Cargo claims were made. Unfortunately CPS had become insolvent and the question arose as to whether the shipowners were liable for the damage to the cargoes.     

   Except for one claim the shipowners could not be sued in tort. This was because the damage had occurred before the cargo claimants had become owners of the goods or entitled to possession of them. The question then was whether the shipowners could be held liable for breach of contract - as principals on the bills which had been issued by the line and obtained by the cargo claimants. No point was taken by the shipowners in the Court of Appeal that the bills were issued without their authority. Lack of authority is a difficult point for shipowners to take because of the authority usually given under the charterparty for charterers to issue owner's bills and because owners will often be liable under the doctrine of apparent authority.

   The bills of lading contained printed wording to the effect that the "Master of the Vessel" had signed them. But in the signature boxes the typescript also recorded that each had been signed on behalf of CPS. Next to the signatures there were various forms of words which identified CPS as carrier. For example, one bill had typed words next to the signature which read "As agents for Continental Pacific Shipping As Carrier". The corresponding words on another bill were "As agents for the carrier Continental Pacific Shipping."

The printed clauses included:

"1. DEFINITIONS   In this Bill of Lading...
( c) 'Carrier' means the party on whose behalf this Bill of Lading has been signed.
33. IDENTITY OF CARRIER The contract evidenced by this Bill of Lading is between the merchant and the owner of the vessel named herein...".

The form of bill before the Court of Appeal also had a misprinted clause as follows:

"35. If the ocean vessel is not owned by or chartered by demise to the company or line by whom this Bill of Lading is issued (as may be the case notwithstanding anything that appeared to the contrary. This Bill of Lading shall take effect only as a contract of carriage with the owner or demise charterer as the case may be as principal made through the agency of the said company or line who act solely as agent and shall be under no personal liability whatsoever in respect thereof."

   Such clauses are called "demise clauses" and their original purpose is explained below. In the argument before the Court of Appeal it was not in issue that this misprinted clause could be cleaned up by closing the bracket after the word "contrary", deleting the full stop and changing the capital letter "T" in "This" into a small letter. The "cleaned up" version reads as follows:

35. If the ocean vessel is not owned by or chartered by demise to the company or line by whom this Bill of Lading is issued (as may be the case notwithstanding anything that appeared to the contrary) this Bill of Lading shall take effect only as a contract of carriage with the owner or demise charterer as the case may be as principal made through the agency of the said company or line who act solely as agent and shall be under no personal liability whatsoever in respect thereof."     

   In the Commercial Court Colman J., applying Universal Steam Navigation Co. Ltd v. James McKelvie & Co. [1923] A.C. 492 at p. 500 per Lord Summer, took into account the "preponderant importance" of the fact that the typed or stamped words were "used in conjunction with the signature". He said that the interpretation issue could not be affected by whether there was actual authority for the line to issue the bill on behalf of the shipowners. This was not "within the shippers' knowledge" and "cannot be part of the context or commercial setting".     

   Colman J. declined to follow the earlier decision of Moore-Bick J. in The Flecha [1999] 1 Lloyd's Rep. 612. In that case it had been decided in an extempore judgment that a similar CPS bill was an owner's bill. Colman J., however, considered that the typed or stamped words next to CPS's signature identified who was the "Carrier" as defined by clause 1 ( c). They cancelled out the small print of clauses 33 and 35. In so deciding Colman J. followed and applied the reasoning of Rix J. in The Hector [1998] 2 Lloyd's Rep. 287.     

   In the Court of Appeal the three judgements are very different. Rix L.J. (dissenting) agreed with Colman J. about the importance of the words being next to the signature and followed his own approach in The Hector. Although that case had not involved a demise clause it had concerned an identity of carrier clause which Rix J. had regarded as superseded by the typed wording. Rix L.J. found The Flecha unpersuasive because Moore-Bick J. had not referred to clause 1 ( c) - the definition of "Carrier" in the printed form.     

   Chadwick L.J. distinguished The Hector on the ground that it had not concerned a demise clause. He regarded as critical the purpose of the words in brackets in the demise clause. At para. 162 he said their purpose was "to emphasise" that if the line was not in fact the shipowner the contract was with the shipowners even if "on the face of the bill, it does appear that [the line] is the ship owner".

   Chadwick L.J. then said (para. 163) that this was "such a case." He said (para. 164) that he did not "invoke some principle of paramountcy" - a reference to a suggestion made in argument by the Vice-Chancellor that the demise clause was paramount over other provisions in the bill. But in the next few words he decided that the words in brackets gobbled up the typed words next to the signature, leaving the small print of clause 33 to walk into the gap. There is a contradiction here. If the demise clause was not paramount it did not override the words next to the signature. If it was not a crocodile it was a chameleon and took its colour from the rest of the bill. Either it is paramount or it is not: Chadwick L.J.'s judgment at para.164 appears, with respect, to contradict itself.     

   The cleaned up version of clause 35 was substantially identical to the standard form demise clause. The history of that clause is set out in a note in (1990) 106 L.Q.R. 403 written by Lord Roskill, who had been involved in its preparation and described it as "immortalised" in Scrutton on Charterparties and Bills of Lading . It was drafted during the Second World War by Mr. William McNair who was the senior editor of Scrutton, the leading junior at the commercial bar and legal adviser to the Ministry of War Transport.     

   Its original purpose was explained in the 16 th edition of Scrutton , edited by Sir William McNair (by then a commercial court judge) and Mr Alan Mocatta, at p.62:

" Note . - In order to avoid the possibility that time charterers other than by demise, may be held liable as parties to a bill of lading without being able, as owners of ship, to claim the protection from and limitation of liability afforded by sections 502 and 503 of Merchant Shipping Act 1894, most modern bills of lading in use by liner companies contain the following so-called 'demise clause'...".     

   The demise clause was intended to place the contract of carriage with the owners or demise charterers as principal so that cargo claims on liner services would be subject to these sections of the Merchant Shipping Act. The original purpose fell away after amendments to that legislation in 1958. But the demise clause has survived and continues to be used internationally in liner bills as a standard printed clause. It is regarded in English law as an ordinary standard printed clause commonly to be found in bills of lading. Tetley in Marine Cargo Claims (3 rd ed., 1998, pp. 248-251) attacks the validity of demise on a number of grounds including that they conflict with the minimum obligations required under Article III rule of the Hague or Hague-Visbly Rules. But that view has been rejected in Australia and in England. Where the clause is effective it identifies who the carrier is; it does not cut down on the liabilities assumed by the carrier.     

The edition of Scrutton current at the time of Lord Roskill's note was the 19 th , published in 1984. It carried a hesitating footnote to the demise clause-footnote 87 at p. 71:

" Quaere , whether the clause would be sufficient to negative the person liability of the time charterer in a case where the bill of lading holder has no notice that the ship is chartered."

Lord Roskill disposed of this in (1990) 106 L.Q.R. at p. 406:

"...the very purpose of the words in brackets was to put the bill of lading holder on express notice of the possibility that the ship concerned was chartered."     

   In the liner trade the appearance may be given to outsiders that the line owns the ships. Shipowners and the line know this. The words in brackets in the standard clause contemplate that appearances may not be what they seem. Their purpose is to warn cargo interest not to rely on appearances - the line may only be charterers. This is the purpose identified by Lord Roskill in his note and Rix L.J. at para. 61 of his judgment.

   The words in brackets warn of a possible inconsistency between the writing in the box and the printed clauses. But they do not resolve that inconsistency if it occurs. The printed clauses do not prevent the parties from using the printed form as the starting point for creating charterers' bills. Whether the bills as adapted are charterers' bills depends upon interpreting the contract as a whole.     

   When commercial men adapt printed forms they usually do not go through the small print deleting what is inapplicable. This has been recognised by commercial judges for two hundred years: see Robertson v. French (1803) 4 East at p. 135 per Lord Ellenborough C.J., adopted by Lord Halsbury L.C. in Glynn v. Margetson [1893] A.C.351 at pp. 357-358, and followed by McNair J. (as he had become) in The Brabant [1967] 1 Q.B. 588 at p. 600. In Chandris v. Isbrandtsen-Moller Co. Inc [1951] 1 K.B. 240 at p. 245, Devlin J. said: "The presumption against surplusage is of little value in ascertaining the intention of the parties to commercial documents as many great commercial judges have recognised." Lord Penzance said in Dudgeon v. Pembroke (1877) 2 App. Cas. 284 at p. 293: "The practice of mercantile men of writing into their printed forms the particular terms ... without striking out the printed words which may be applicable to a larger or different contract, is too well known, and has been too constantly recognised in courts of law." There are many more such cases.     

   Commercial people are in business. They are not lawyers. When it comes to the interpretation of their words, what matters is what they are to be taken to have meant. Professor Corbin in his treatise on Contracts ((1961 ed.), vol. 3, § 543) put the point thus:

"In the process of interpretation, it is the court and not the parties who should be reasonably, or even remarkably intelligent."    

He quoted the words of Lowrie C.J. in Miller v. Fichthorn 31 Pa 252 (1858):

"[Judges] have to deal with and manage the ever changing matters of a whole community, consisting of ... all classes of occupations, doing their business in all sorts of ways. It is the right of a free people so to deal; and those who participate in judging their acts are to find out and apply the pattern by which they act and not to furnish it."     

   It is this that provides the key to why the typed words have priority even though the printed clauses have not been deleted. It is how commercial men make their contracts. It is the way they have chosen to express their intent. It is their right to choose how this is done and the court's function to give effect to it. Corbin's principle lies at the heart of Lord Hoffmann's speech in I.C.S. v. West Bromwich B.S. [1998] 1 W.L.R. 896 at pp. 912-913.     

   The position is similar to what it would have been if CPS had made the contract partly orally and partly in writing and had told the merchant that CPS was contracting as carrier. In that situation the oral words would prevail over anything in the printed form for the reasons given by Lord Denning M.R. in Mendelssohn v. Normand [1970] 1 Q.B. 177 at pp. 183-184. The oral promise has had a decisive influence on the transaction. The printed term is rejected because it is repugnant to the oral promise. As Lord Denning M.R. said: "It is illusory to say we promise to do a thing but we are not liable if we do not do it. To avoid this illusion, the law gives the oral promise priority over the printed clause." This reasoning was applied to a bill of lading contract by the Court of Appeal (Lord Denning M.R., Roskill and Geoffrey Lane L.JJ.) in J. Evans & Sons v. Andrea Merzario [1976] 1 W.L.R. 1078. It makes good commercial sense and is consistent with the standards of honesty to be expected in commercial transactions. If the line had said orally we are signing as the carrier - those words would prevail. So it is with the typed or stamped words next to the signature.

   The Vice-Chancellor had the casting vote. He said that there was a "general principle, to which [Colman J.] was not referred" which was summarised in Chitty on Contracts (28 th ed., 1999, vol. 1, s.12-068):

"It is open to the parties to stipulate in their printed conditions of contract that written provisions appended to the printed form are not to override, modify or affect in any way the application or interpretation of that which is contained in the printed conditions, and effect must then be given to such a stipulation even though this is contrary to the ordinary rule."   

   The above passage in fact contains some of the words of clause 12(1) of the notorious RIBA 1963 standard form contract, described by Edmund Davies L.J. in English Industrial Estates Corp. V. George Wimpey & Co. Ltd [1973] 1 Lloyd's Rep. 118 as a "farrago of obscurities". It is best understood after reading the cases in its footnote.     

   That case law is exclusively on the RIBA standard form. It concerns the purpose for which the bills of quantities come into the RIBA building contract as eventually concluded. Those bills of quantities have been used to obtain tenders. They have been used to negotiate the contract. Some of the proposed terms in them will have become superseded in negotiations. So if the bills of quantities are to be referred to in the contract they cannot come in for all purposes. Under the RIBA standard form the bills of quantities come into the contract - they are incorporated in it - but only for the limited purposes specified in the first part of clause 12(1) and no others. They float in or out of the contract. They are "appended" to the contract for those limited purposes and those purposes alone. The bills of lading in The Starsin did not have any equivalent to clause 12(1) of the RIBA 1963 standard form. Nor did they have any bills of quantities "appended" to them. It is difficult to see that the case law on the RIBA contract and the passage in Chitty were relevant.     

   In para. 184 the Vice-Chancellor also moved the position of the opening bracket in the demise clause from before the words "as the case may be" to after them. He described the position of the opening bracket as "misplaced" and as one of a number of "obvious mistakes". With respect, this was where the bracket was placed by Sir William McNair when he drafted the clause, where it appears in many reported cases in England, Australia, Canada and the United States, where it is in all the editions of Scrutton since 1955, where it is in Tetley (3 rd ed. at p. 248), where it is in Lord Roskill's note and, most importantly of all, where it is in the contract itself.     

   Having rewritten the bill the Vice-Chancellor then proceeded to interpret it. He interpreted his rewritten wording of the printed clause as overriding the words in the signature box (para. 185)     

   This judgment is not on the standard form clause drafted by Sir William McNair, or the cleaned up version interpreted by all the other judges, or the misprinted version of the bill. It is a judgement based on materially different wording from that in the contract.

   Extrinsic evidence may show that words used by contracting partied cannot be interpreted in their ordinary sense. It may be that the parties really meant the exact opposite of the literal meaning of what they said: I.C.S. v. West Bromwich Building Society [1998] 1 W.L.R. 896; Mannai Investment Co. Ltd v. Eagle Star Life Assurance Co. Ltd [1997] A.C. 749. Common sense, the other terms of the contract and the surrounding circumstances may all lead a court to the confident conclusion that the parties made a drafting error - e.g. incorporating a printed form in so far as "inconsistent" with the other terms of the contract was treated by the High Court of Australia as an obvious error for "consistent". Snell's Equity (13 th ed., 2000, para. 43-05) cites Lord St Leonards in Wilson v. Wilson (1854) 5 H.L.C. 40 at p. 66:" ... [Courts] ...may correct an obvious mistake on the face of an instrument without the slightest difficulty." These cases respect and carry into effect the right of parties to make their own contracts - "the right of a free people" to decide how they will deal with each other. It is not the words used by them which are sacrosanct but their right to have their true intent and meaning put into effect by the court. This must not be done on "guesses or mere speculation as to the probabilities of an intention" ( per Bowen L.J. in Re Jodrell (1890) 44 Ch.D. 590 at p. 614) it must be such that the court can be confident of its conclusion.     

   This was the test applied by the House of Lords in Trollope & Colls v.North Western Hospital Board [1973] 1 W.L.R. 601 in deciding whether a term was to be implied into a contract based on what the parties must have intended. This type of implied term depends on the interpretation of the parties' written bargain. As Lord Pearson said (at p.609): "The court's function is to interpret and apply the contract which the parties have made for themselves." To rewrite and then to interpret a contract is not to search for the will of the commercial men but to override their intent, and to hold them bound by something they never agreed. Instead of searching for what the parties meant by their agreement it dictates the terms to the parties. It would seem, with respect, from Lord Roskill's note this is what the Vice-Chancellor may have done.     

   As for the judgments that do interpret the words of the contract, however, judicial opinion is evenly divided on the effect of the words next to the signature. Legal principle and Lord Roskill favour the interpretation adopted by Colman J. and Rix L.J. over those of Chadwick L.J. and Moore-Bick J.

Steven Gee QC*