Keynote Address by the Right Honorable Lord Patrick Hodge
On November 19, 2016, the Right Honorable Lord Patrick Hodge delivered the Keynote Address at The George Washington Law Review’s Symposium, Divergence and Reform in the Common Law of Contracts. Lord Hodge, Justice of the Supreme Court of the United Kingdom, framed his remarks around the common law pendulum that swings as judges review and update law to meet modern needs. He examined trends in two key areas of contract law: ascertaining terms and regulating by common law.
Noting that both the United Kingdom and United States use an objective approach to contract law, Lord Hodge divided ascertaining terms into interpretation, implication in fact, and rectification.
First, Lord Hodge argued that the pendulum of interpretation has not swung very far in recent years, despite much commentary interpreting Lord Hoffmann’s approach to construction in Investors Compensation Scheme Ltd. v West Bromwich Building Society, a 1998 House of Lords case, as revolutionary and Lord Clarke’s approach in Rainy Sky SA v Kookmin Bank, a 2011 U.K. Supreme Court case, as creating an opening for courts to use commercial common sense in interpretation.
Lord Hodge pointed to Lord Bingham’s argument that Investors Compensation Scheme was a new articulation of an old test, as well as Lord Neuberger’s opinion in the 2015 U.K. Supreme Court case Arnold v Britton, which held parties to clear, agreed upon language instead of allowing for a better commercial interpretation. Arnold was not a realignment toward literalism, rather the standard approach taken by courts when language has a clear meaning. Rainy Sky simply allows courts to prefer plausible constructions that favor commercial common sense where there is ambiguous language. Lord Hodge harkened back to Lord Wilberforce’s guidance that, “the court must . . . place itself . . . in the same factual matrix as that in which the parties were,” arguing that those words ring just as true for interpretation today as they did forty years ago in The Diana Prosperity, a 1976 House of Lords case.
Second, the Lord turned to implied terms, where, he argued, the pendulum was stopped in its tracks by Marks & Spencer plc v BNP Paribas Securities Services Trust Co., a 2015 U.K. Supreme Court decision. In Marks & Spencer, Lord Neuberger reasserted the traditional approach to implying terms: the term must be necessary for the business efficacy of the contract for a court to imply it. This assertion, Lord Hodge argued, stopped the potential sea change presented in the 2009 Judicial Committee of the Privy Council case, Attorney General of Belize v Belize Telecom Ltd. The Judicial Committee had treated implication as part of construction and appeared to liberalize the implication of terms. Marks & Spencer halted this shift, valuing the parties’ chosen language over commercial common sense.
Third, Lord Hodge discussed rectification, arguing that the swing toward interpretation has halted or reversed, such that rectification will be used only when there is a mistaken date or omission from a standard clause. He gave the example of Marley v Rawlings, where a husband and wife had both mistakenly signed the other’s will. Both lower courts felt as though their hands were tied: the husband’s will was unenforceable due to the error. The U.K. Supreme Court reversed, noting that there is no limit to the red ink available to correct mistakes. Lord Hodge argued that rectification gives weight to the effects on third parties, and this clarification in Marley has stopped interpretation issues from creeping into rectification matters for the time being, thus concluding his examination of ascertaining terms.
Addressing regulation through common law, Lord Hodge divided his discussion into penalty clauses and the doctrine of illegality. Until Cavendish Square Holding BV v Talal El Makdessi was decided in 2015, the highest court in the United Kingdom had not revisited the rule against penalties for breach of contract since Dunlop Pneumatic Tyre Co. v New Garage & Motor Co., decided in 1914. Lord Hodge noted that the holding in Dunlop had too often been viewed as though it were a statute, preventing the necessary swing in common law. Cavendish restored that swing, recalibrating the rule to allow courts to evaluate the substance of the clause rather than the form. Thus, the Lord argued, the demise of the Dunlop rule has been overstated and the swing of the pendulum continues.
Finally, Lord Hodge turned to the illegality doctrine. His argument that Patel v Mirza, a 2016 U.K. Supreme Court case, rationalized a mess of caselaw to create a consistent rule, exemplifies how the pendulum can swing drastically in just a few years. Patel was a large move toward transparent judicial policy, articulating a rule derived from a variety of judicial positions issued in quick succession. In less than three years, the U.K. Supreme Court decided four illegality doctrine cases. The first two cases were decided a few months apart, each by a panel of five Justices, but used different lines of precedent. Then, in early 2015, a panel of seven Justices decided Jetivia SA v Bilta Ltd., applying yet a third formulation of the doctrine. Finally, in 2016, a nine Justice panel decided Patel, rationalizing the prior cases to create a principled balancing test intended to prevent the defense from giving rise to substantial injustice.
Lord Hodge concluded his remarks by noting that the pendulum may always swing back through appellate decisions.
This summary was authored by Law Review member Lisa Ann Johnson.
