• In the case of Investors Compensation Scheme Ltd. v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffman constructed five principles that impact the construction and interpretation of contractual terms.
  • This case was about exclusion clauses, commercial agreements, contract construction and compensation.
  • This contract case symbolized the significance of intentions of contracting parties during contract formation.

Facts of the Case

  • D gave C financial advice causing them to lose money when stock prices dropped. C was persuaded by multiple financial institutions including D to mortgage their properties.
  • D contended in this appeal that the phrase “or otherwise” suggested damages and rescission did not apply. C claimed the clause mean damages applied.


  • Was rescission the appropriate contractual remedy?
  • Was the meaning of words interpreted correctly or misused during contract formation?

Held by House of Lords

  • Appeal allowed – the investors do have a right to rescission of their mortgages.

Lord Hoffman

Implying terms

  • “Almost all the old intellectual baggage of “legal” interpretation has been discarded”.
  • The meaning of a contract depends on whether the words are natural and ordinary. Future courts must question whether the contracting parties have available all the reasonable background information.
  • “The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification… 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.”
  • “It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.”