Page 216 - M97TB9_2018-19_[low-res]_F2F_Neat2

8/8 M97/February 2018 Reinsurance

As commercial contracts, reinsurance contracts are subject to the ordinary principles of construction and
Subject to the
ordinary principles of these are set out, in brief, below:
construction
• The primary rule of construction of the contract is that the court must give effect to the intention of the
parties. ‘Intention is determined by reference to expressed rather than actual intention’ (Deutsche
Genossenschaftsbank v. Burnhope (1996)).
• The starting point is that words should be given their ordinary and natural meaning. However, if the
meaning of the word(s) has been settled by the court, or if a word has a technical meaning, it is
presumed that such meanings were intended.
• ‘The ordinary meaning of words is the meaning when read, not in isolation, but in context.’ (The Law of
Insurance Contracts by Malcolm Clarke et al). Context may come from either within, or exceptionally,
outside the terms and conditions of the reinsurance contract.
• Extrinsic (or outside) evidence may be sought to elucidate technical meaning, to resolve ambiguity or
absurdity or, as envisaged by Lord Hoffmann in Investors Compensation Scheme v. West Bromwich BS
(1998). In that case, Lord Hoffmann summarised the modern principles for the construction of
contractual documents.

His principles included:
1. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable
person having all the background knowledge which would reasonably have been available to the
parties in the situation in which they were in at the time of the contract.

2. The background … referred to by Lord Wilberforce as the ‘matrix of fact’ … includes absolutely
anything which would have affected the way in which the language of the document would have been
understood by a reasonable man…
4. The meaning which a document (or any other utterance) would convey to a reasonable man is not the
same thing as the meaning of its words. The meaning of words is a matter of dictionaries and
grammars; the meaning of the document is what the parties using those words against the relevant
background would reasonably have been understood to mean. The background may not merely
enable the reasonable man to choose between the possible meaning of words which are ambiguous Reference copy for CII Face to Face Training
but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever
reason, have used the wrong words or syntax.
5. The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense
proposition that we do not easily accept that people have made linguistic mistakes, particularly in
formal documents. On the other hand, if one would nevertheless conclude from the background that
something must have gone wrong with the language, the law does not require judges to attribute to
the parties and an intention which plainly could not have had.

He, therefore, signalled a move away from a literal non-contextual approach, from ascertaining intention
from the natural and ordinary meaning of the language, towards a more commercial and common sense
(purposive) approach to interpretation. Indeed, his summary has been read as enabling the courts to
8 look at the surrounding circumstances more often than was previously the case.
Chapter In Dornoch v. Royal and Sun Alliance Insurance (2005), the Court of Appeal recognised the ‘dangers in

judges deciding what the parties must have meant when they have not said what they meant for
themselves’, especially in a situation where the parties selected for themselves an unsuitable standard
clause. In other words, the difference appears to be that the courts will now respond more readily to
evidence that the parties intended something different to what they had expressed. Further, if a
reasonable person in the position of the relevant party to a contract would be expected to understand a
term in a particular way, they will be bound by that understanding even if it does not quite correspond to
the normal or literal meaning.

In Rainy Sky v. Kookmin Bank (2011), the Supreme Court held that where a term of a contract is open to
more than one interpretation, it is generally appropriate to adopt the interpretation which is most
consistent with business common sense.