The facts: It is not essential to work out the slightly complex commercial arrangement in Sirius in order to understand the case's importance. Briefly, Angew is an insurer, FAI was its re-insurer. Agnew needed a re-insurer with an 'A' credit rating. FAI did not have an 'A' credit rating. Sirius, which did have an 'A' credit rating, was brought in to front for FAI. Therefore, when Agnew made a claim against its re-insurer, Sirius was technically liable, but would be instantly re-imbursed by FAI, and was paid a fee for acting as a 'front' in this way, while FAI got the main re-insurance business. To protect itself, Sirius obtained a letter of credit ('LOC') in its favour from FAI's bank. Just in case FAI did not pay up when Agnew sent it a claim via Sirius, Sirius, as 'front', would still have to pay the claim, but was guaranteed its money back from the letter of credit. Unless, of course, FAI turned round to Sirius and said, 'wait a minute, you should not have accepted Agnew's claim, we are not going to reimburse you for claims which we have not accepted as valid.' Skipping forward, eventually FAI went into liquidation. Its liquidators settled a dispute with Sirius in a Tomlin order which said, in its schedule, '"1. FAI … is indebted to [Sirius] in the sum of US$22,500,000 and [Sirius] shall be entitled to prove in the liquidation … in the said sum … 4. For the avoidance of doubt, the position and all arguments of the Applicant and the Respondents in respect of the LOC are preserved in respect of the proceeds notwithstanding the terms of this Schedule.' This gave the courts a headache. How can FAI (in liquidation) acknowledge it owes Sirius money, and in the same breath say that all the arguments between the parties are still open? Had FAI (in liquidation) meant by the these words to accept that Sirius should pay claims, and was therefore entitled to reimbursement? Or had it meant to leave that question open?

Commercial common sense in contractual construction: the modern approach: At first sight this might seem a case of little interest, except to the protagonists and their advisors. It was not a leading case. It did not make new law. Lord Steyn said that, as it turned out, it was not an appropriate case for the House to deal with. However, it strikes me as a very instructive case, because it shows just what the leading modern cases on contractual interpretation mean in practice, now that they have bedded down. By 'leading modern cases' I mean, of course, the House of Lords decisions in 1997 in Investors Compensation Scheme v. West Bromwich Building Society ('ICS') and Mannai Investment Co. Ltd v. Eagle Star Assurance ('Mannai'). Commerical practitioners will need no explanation of these cases. For the benefit of others, I will take the considerable risk of attempting to summarise the point they decide. The point is that if you have a dispute about the meaning of a contractual document, you should ask what a reasonable person would think it means. That reasonable person might say, 'I can see what the words should mean, but I am pretty sure that the drafters have made slip, because it doesn't make sense. There is a careless slip, they must have put in the wrong word or date.' Or, 'It is totally incredible that any businessmen would have agreed to that. I think I can see what they must have wanted the document to say, if only the drafters had not got in a tangle by not thinking out the wording clearly.' In these cases, so the theory goes, ICS and Mannai, and the line of cases which precedes them, lay down with the highest authority that the law goes with common sense and does not try to enforce the wording which if applied literally would 'flout business common sense.' In ICS Lord Hoffman, in the leading speech, lists five principles to be applied when interpreting a contract, which are supposed to lead to this result.

What's the problem? The general thrust of these cases appears to be admirable, aside from the fact that Lord Hoffmann has been criticised for somewhat loose use of language in ICS when he said that the 'factual matrix' in which interpretation has to take place can 'includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.' However, Sirius perfectly illustrates that the attempts of the House to clarify the principles of contractual interpretation, which look so clear on paper, have in practice been a disappointing and near total failure. ICS was a case on preliminary issues, the key issue being one of construction. In it Evans-Lombe J (the first instance decisions is reported only at [1998] 1 BCLC 493) gave what the House ultimately regarded as the common-sense interpretation of a difficult sentence in a document. He was reversed by a unanimous Court of Appeal (Alford & Ors v. West Bromwich Building Society). In the only full judgement, Leggat LJ said, 'It seems to me that there is no proper basis for departing from the natural and ordinary meaning of the words used... There is nothing ridiculous about the commercial result.' A 4-1 House of Lords reinstated the judge's interpretation of the disputed words.

In Sirius, seven years later, in spite of the benefit of ICS and Mannai as touchstones for common-sense interpretation, almost the same thing happened again. Sirius was a case on preliminary issues, the key issue being one of construction. At first instance (Sirius v. FAI [2002] EWHC 1611 (Ch); not on www.bailii.org, but reported at [2002] 2 All ER (Comm) 745, [2003] 1 WLR 87), Jacob J gave the disputed words a construction which the House of Lords eventually found to be the common sense one (i.e. that when FAI agreed in the Tomlin order that it owed Sirius the money, that meant that it had in effect acknowledged that the relevant claims were valid, and it was too late to dispute whether Sirius should keep the money). On the construction point, as in ICS, the Court of Appeal was unanimous in reversing the court below. In a near echo of the CA in ICS, May LJ said, ' The words of paragraph 1 cannot, in my view, be stretched to say what they do not say. It would be rather surprising if they did.' Wall J, in rejecting FAI's argument that the wording of the Tomlin order left the rights to the money undecided, said, 'I find this as an attractive argument, and one which may well reflect the overall merits of the case. The difficulty about it, however, in my judgment, is that it has to be prised out of the documents, and does not reflect what they actually say. I need, I think, to remind myself that these are highly sophisticated arrangements involving large sums of money and made by acute and hard-headed men of business: equally, the terms of the Tomlin order were negotiated by highly competent counsel.' In ICS the House reinstated the first instance decision by a majority. In Sirius the House reinstated the first instance decision unanimously, but with two of their Lordships indicating that while they chose not to dissent, they preferred the Court of Appeal's construction of the Tomlin order.

Who is the reasonable man? The message for practical litigators is that issues of construction as much up for grabs as every they were. ICS and Mannai, although giving apparently clear guidance, have made very little difference to that. Quite why this should be so is not easy to answer. It is difficult to answer because it leads into questions which more the province of the philosopher than of the lawyer. First, the question of what is common sense? Who is the reasonable man? If I can say so with the greatest respect, presumably all the nine judges in ICS and all the nine judges in Sirius would be treated by the law as reasonable men, albeit some, of course, more experienced in commercial matters than others, yet they failed to agree. More specifically, is it ever common sense for the courts to interfere with what they read as the 'literal' sense of documents which have been drafted by clever, skilled, and experienced lawyers and other professional advisors who know the background of the case, and who have presumably discussed the issues with the commercial people involved?

The line between 'literal' and 'common sense commercial' meaning: The second reason why the ICS line of cases has failed to clear up the problem of construction of unclear documents is even more philosophical, and it is something Lord Steyn does mention in Sirius. It is the idea, which I think is more tricky than it looks at first, that a document can have two meanings, one a literal meaning of words (which Lord Hoffman in ICS said was a matter of dictionaries and grammars), and a different, common sense, meaning, in the sense that a reasonable man would know what the writer was getting at even though the words are not 'technically' precise. I am not going to delve into that philosophical minefield, but I do think it is minefield, and that is a reason lurking in the background which helps explain why the approach laid down by Lord Hoffman in ICS has not worked in practice. Lord Steyn seems to be aware that the boundaries between 'literal' and 'intentionalist' interpretations can be shifting sands, because in Sirius he does give an illustration to explain the difference. In paragraph 19, which is worth quoting in its entirety, he says,

'There has been a shift from literal methods of interpretation towards a more commercial approach. In Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, Lord Diplock, in an opinion concurred in by his fellow Law Lords, observed (at 201):

"if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense."

In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, I explained the rationale of this approach as follows (771A-B):

"In determining the meaning of the language of a commercial contract . . . the law . . . generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language."

The tendency should therefore generally speaking be against literalism. What is literalism? It will depend on the context. But an example is given in The Works of William Paley (1838 ed), Vol III, 60. The moral philosophy of Paley influenced thinking on contract in the 19th century. The example is as follows: The tyrant Temures promised the garrison of Sebastia that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried them all alive. This is literalism. If possible it should be resisted in the interpretative process. This approach was affirmed by the decisions of the House in Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited [1997] AC 749, at 775 E-G, per Lord Hoffmann and in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896, at 913D-E, per Lord Hoffmann.'

More confused than ever? With respect, the problem of predicting how the courts will interpret a contract is no closer to resolution that it was 100 years ago. The the replacement of the complex cannons of construction with plain common sense has made advising on construction problems simpler but no more predictable than ever it was. In any event, where is this 'literalist' interpretation which we are supposed to have abandoned? It never existed. Of course practitioners, and texts on evidence, can line up ludicrously literalist cases, but on closer examination they all turn out to be about wills, or other unilateral documents (in particular, notices given pursuant to contract). This type of document was treated more literally. To that extent Mannai, which is on a notice to determine a lease, moved the law forward by extending the 'common sense' method of interpretation to a technical, unilateral document (although even Mannai might have had the same conclusion in the nineteenth century, by the application of the doctrine that the court can correct an obvious slip of the pen, a simple rule of evidence which is not to be confused with the equitable remedy of rectification). Where the nineteenth century courts had to decide what two commercial parties had agreed, they were always receptive to business common sense.

The matrix an excuse for admitting extrinsic evidence? So the ICS line of cases not only did not resolve the problem, but the idea that it has changed the likely outcome of any construction point is a bit of a chimera. Some people have thought that these cases on the 'matrix of fact' mean that parol evidence or other extraneous of the commercial background can now be admitted where it could not in the past. That is also a misconception. The factual matrix in Sirius evidently must have appeared on the face of the pleadings, and of the disputed contractual documents themselves. Similarly in ICS, there was no question of admitting evidence to resolve the disputed construction point. The factual background of course must have been in the pleadings, and was given in an agreed statement of facts (appended to the first instance decision).

Be warned: common sense is not always what it seems: To paraphrase A. E. Housman's amusing introduction to his edition of Lucan, scholarship on the construction of contracts makes no steady progress. The old cannons of constructions were pretty unpredictable, but the guidance they gave had some value, and their loss is a retrograde step, since the 'commercial intention' method of interpretation has proved still more capricious in practice. The lesson which practitioners should take from Sirius, is that, yes, you can advise your clients that the courts will apply common sense to interpreting your contract, and will seek to give it 'business efficacy.' That is correct. The problem is that what is obvious common sense to one party might appear to the other party to be quite the reverse, and even with judges of the highest quality it is all but impossible to predict what the court will think is common sense. That message is deafeningly clear if one reads the first, second and third instance decisions in Sirius, or in ICS. Sirius made no new law, but illustrates the failure of ICS and Mannai to bring claritity to construction points with the utmost vividness.

Dr John Birchall - Professional English, Legal English, and Common Law Training