Unreliable Precedents

A dispute can sometimes turn on what is meant by a specific phrase used in a contract.

Lawyers will search various databases to see if the courts have determined the meaning of that specific phrase in other cases. There is a danger in this - how a court has interpreted that phrase in the past may give a false sense of security in the strength of the case. You might think that, given the concept of “legal precedent”, a court will be bound to follow earlier court decisions. But with respect to the contractual interpretation, that is not correct - as illustrated in the arbitration award of certain policyholders v China Taiping Insurance.

The covid lockdowns brought a sharp focus on the insurance cover for business interruption. This is not an article on the nuances of various court decisions, some handed down very recently, but is a continuation of the theme developed in my earlier article “comma to your senses”; namely that contractual interpretation is an art and not a science.

The covid lockdowns were implemented as part of central Government actions. Amongst many other things, the FCA v Arch test case found that the phrase “competent local authority” was, in one context, sufficiently wide to include central Government.

As a result, the policyholders in the China Taiping arbitration must, understandably, have felt they were onto a winner. They had cover for business interruption resulting from the closure of premises on the “instructions of the Police or other competent local authority”. It was common ground that the premises were closed because of central Government decisions but that wouldn’t matter if the phrase was given the same meaning as in the FCA test case.

For the insurers, the same counsel team who had argued in the FCA test case that the phrase “competent local authority” wording included central Government now argued the opposite - arguing the China Taiping policy was not triggered because “the Police or other competent local authority” did not include central Government.

At the time that looked like an audacious “U-turn”, although of course given recent political events it might now go unnoticed given that “U-turns” are the “new normal”.

Lord Mance agreed with the insurers and found the meaning of “competent local authority” in the China Taiping policy was different from the meaning given by the High Court to the almost identical phrase in the Ecclesiastical Insurance policy.

In the FCA test case, the phrase “competent local authority” was used in both a disease extension and a denial of access exclusion. The High Court held the disease extension could only work if the phrase included central Government and so it ascribed that wider meaning so as to give effect to the parties’ intentions. The same considerations did not apply to the China Taiping wording - the different context in which the phrase was used allowed Lord Mance to apply a more natural interpretation to it; “local” meant local.

The award is a reminder that context is key when determining the meaning of contractual provisions. The phrase “competent local authority” had to be understood in its context, including the other terms of the policy and how it is used in the clause in question. As a result, the same words can bear radically different meanings when used in different ways and in different contexts.

Lord Sumption has written a brilliant speech called “A Question of Taste: The Supreme Court and the Interpretation of Contracts”. In it, he says “instinct and mood play an important role in judicial analysis”.

What that means in practice is the outcome of a contractual interpretation dispute cannot be certain, even if the phrase in dispute has been the subject of earlier court judgments. You cannot plug in a contractual wording into a computer to get a reliable “win”/ “lose” answer. It’s normally a bit more nuanced than that.

Simon Goldring

October 2022