Investors Compensation Scheme Ltd v West Bromwich Building Society [1997]

Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28 is a landmark decision in English contract law, notably for its establishment of a contextual approach to the interpretation of contracts. Lord Hoffmann, delivering the majority judgment, outlined five key principles that have since become fundamental in contract interpretation.

Firstly, Lord Hoffmann emphasised the importance of applying a reasonable person standard in construing contracts. According to this principle, the interpretation should reflect what a reasonable person, possessing all the relevant background knowledge available to the parties, would have understood. This approach aims to align the interpretation of contracts with common sense and practical expectations.

Secondly, the judgment highlights the concept of the matrix of fact as part of the background knowledge. This includes any information that could influence the understanding of the language used in the contract. The broad scope of the matrix of fact allows the court to consider a wide range of contextual factors.

The third principle excludes prior negotiations and declarations of subjective intent from the admissible background, with exceptions limited to cases of rectification. This exclusion is a departure from traditional legal interpretation and aligns with the practical policy of reducing litigation by focusing on the objective meaning of the contract.

Fourthly, Lord Hoffmann emphasised the importance of interpreting the document contextually, moving beyond a strict reliance on the literal meaning of words. The goal is to understand how the language would have been reasonably understood by the parties in their specific situation.

Lastly, the judgment recognises a presumption against linguistic mistakes but allows for exceptions. If the background suggests an error in language, the court is not obliged to attribute an intention to the parties that they clearly could not have had.

In applying these principles to the facts of the case, the House of Lords held that the right to claim rescission was retained by the investors, while the right to claim damages had been effectively assigned to Investors Compensation Scheme Ltd. The decision exemplifies the contextual and pragmatic approach to contract interpretation advocated by Lord Hoffmann and has had a lasting impact on the jurisprudence of contract law in England.
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