Tales from the Public-Private Divide: The Labour Party and Standard-Form Contracts

Earlier this summer, the British Labour Party ended up in court over an attempt to restrict the electorate for a leadership contest (won, last weekend, by Jeremy Corbyn). At issue in Evangelou and others v. McNichol, [2016] EWCA Civ 816 was whether the Party’s National Executive Committee could provide that only those who had been members of the Party for six continuous months would be eligible to vote in the contest. This depended “on the interpretation of the Labour Party’s 2016 Rule Book which constitutes a contract between the individual members” (at para. 1). The Court of Appeal held (in reasons bearing Beatson L.J.’s name but to which Macur L.J. and Sales L.J. contributed) that the Committee could lawfully do so by exercising its power to define ‘eligibility criteria’ and set a ‘freeze date’.

Much of the judgment focuses, as one would expect, on the details of the Rule Book, but there is an interesting general point about the interpretation of discretionary powers found in the contract between an unincorporated association and its members. Here, Beatson L.J. wrote, “a discretion conferred on a party under a contract is subject to control which limits the discretion as a matter of necessary implication by concepts of honesty, good faith and genuineness, and need for absence of arbitrariness, capriciousness, perversity and irrationality” (at para. 24). At this point, Beatson L.J. cited to Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, at [66], where a distinction was drawn between unreasonableness in the contractual setting and Wednesbury unreasonableness.

Subsequently, he cited to Braganza v BP Shipping [2015] UKSC 17, [2015] 1 WLR 1661, “in which Baroness Hale stated that the principles to be applied were the same as those applied in public law cases, i.e. not only that the decision is made rationally and in good faith, but also that it is made consistently with its contractual purpose and, we add, that all relevant matters have been taken into account and irrelevant matters not taken into account” (at para. 47, emphasis added). I am not especially familiar with these contractual interpretation cases, but it seems to me that the effect of this passage is to harmonize interpretation of contractual discretion with the grounds of review for abuse of discretion in administrative law.

This is underscored by two further passages. First, “[t]he area in which the consideration of contractual discretionary powers is most developed in the sense that the public law approach to such powers has been adopted, concerns mutual undertakings such as mutual insurance undertakings and bodies exercising self-regulatory powers over a business, a profession or a sport” (at para. 48, emphasis added). Second, the effect of recent cases has been the “bringing together the principles of limiting ostensibly broad powers in contracts by the deployment of principles of propriety of purpose, relevance, fairness and rationality…” (at para. 49).

Meanwhile, on the other side of the Atlantic, the Supreme Court of Canada recently revised its approach to judicial review of arbitrators’ interpretations of contracts. Readers will recall that in Sattva Capital (blogged here), Rothstein J. justified a deferential approach by drawing an analogy with administrative law. The effect was that contractual interpretation was no longer the exclusive preserve of the courts. There was a strong backlash from Courts of Appeal and commentators around the country, which culminated in the recent decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37. Per Wagner J., a majority of the Court held that standard-form contracts are not subject to the Sattva principles:

In my view, where an appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review…[F]or standard form contracts, the surrounding circumstances generally play less of a role in the interpretation process, and where they are relevant, they tend not to be specific to the particular parties. Accordingly, the first reason given in Sattva for concluding that contractual interpretation is a question of mixed fact and law — the importance of the factual matrix — carries less weight in cases involving standard form contracts…[T]he interpretation of a standard form contract could very well be of “interest to judges and lawyers in the future”. In other words, the interpretation itself has precedential value. The interpretation of a standard form contract can therefore fit under the definition of a “pure question of law”, i.e., “questions about what the correct legal test is”: Sattva, at para. 49; Southam, at para. 35. Establishing the proper interpretation of a standard form contract amounts to establishing the “correct legal test”, as the interpretation may be applied in future cases involving identical or similarly worded provisions (at paras. 24, 32 and 43).

Cromwell J. disagreed:

As I see it, the three elements of the proposed exception do not assist in deciding whether the question is sufficiently general in nature so as to attract correctness review. Whether or not a contract is a standard form does not, as I see it, tell us anything about the degree of generality of the particular interpretative principle in issue in a particular case.   The absence of a “factual matrix” is not of much assistance either.  All contracts have a context which is important for their interpretation…The absence of facts about negotiations does not mean that there are no contextual matters that inform the interpretative process and therefore tend to make it a mixed question of law and fact. The third element of the proposed exception — whether the interpretation has precedential value — seems to me to simply ask the critical question, which is concerned with the level of generality of a legal principle, in a different and unhelpful way. Questions of law are reviewed on appeal for correctness because the decisions on such questions have precedential value: these sorts of decisions ensure uniformity among similar cases and serve the law-making function of appellate courts…The more general the principle, the more the precedential value. To ask the question in terms of precedential value rather than the generality of the legal principle in issue seems to me to simply pose the key question in a different way and in one that simply sends the analysis back to the question of degree of generality (at paras. 116-117).

Sattva, right or wrong, was a significant break with existing practice. No doubt there will now be pressure to expand Ledcor’s domain at the expense of Sattva’s.

These are quite different areas of law, of course, but it is nonetheless interesting to see the English and Canadian courts shifting in different directions.

This content has been updated on September 28, 2016 at 11:12.