## Facts

- The case concerned financial arrangements linked to home income plans, where investors sought compensation for alleged losses due to incorrect advice.
- A central contractual clause assigned rights to the Investors Compensation Scheme.
- Dispute arose over whether this clause permitted claims for losses caused by negligence.
- The commercial circumstances and specific language of the assignment formed the context for the House of Lords’ analysis.

## Issues

1. Whether the disputed contractual clause assigned to the Investors Compensation Scheme the right to claim compensation for losses arising from negligence.
2. How courts should interpret contractual terms—whether by strict literal wording or by considering the objective meaning in context.
3. The extent to which prior negotiations and subjective intentions should be considered in interpreting contracts.

## Decision

- The House of Lords determined that contract interpretation should focus on the objective meaning of terms as understood by a reasonable person with access to relevant background.
- It held that prior negotiations and subjective intentions are generally excluded when establishing meaning, except in rare instances such as rectifying errors.
- The court rejected a purely literal approach, instead adopting a context-driven method centered on commercial sense and practicality.
- The disputed clause was interpreted by applying this approach, considering both the contract's language and its commercial background.

## Legal Principles

- Established Lord Hoffmann’s five principles for contractual interpretation:
  - Objective meaning is deduced from how a reasonable person with background knowledge would understand the contract.
  - All relevant contextual circumstances influencing meaning are considered, but not prior negotiations or personal intentions.
  - Interpretation is not confined to literal wording; courts avoid inserting purposes not shared by the parties.
  - Assumes parties intend to avoid errors, especially in formal contracts.
  - Emphasizes practical reasoning over strict literalism where literal interpretation would yield commercially illogical results.
- Reaffirmed the exclusionary rule: prior negotiations and subjective intentions are generally inadmissible, supporting fairness and certainty.
- Contractual terms are interpreted to make the agreement workable and commercially sensible.

## Conclusion

Investors Compensation Scheme Ltd v West Bromwich Building Society fundamentally reformed contract interpretation in English law by prioritizing objective, context-based analysis and delineating clear exclusion of prior negotiations, setting out a practical framework that remains central in modern contract disputes.


Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL)