Interpretation of Contract
Prof. S. P. Srivastava
Department of Law and Governance
CUSB, Gaya
Basics
Primacy of contract Language the Governing
principle and text used are considered as
intention of the parties concluding the
contract if it is an enforceable agreement.
Courts seek to enforce the intent of the
parties to the contract.
The provisions of a contract must be
construed as a whole.
English law takes a purposive and commercial
approach to the construction of contracts
Guiding Principles
The intent which will be enforced is what a reasonable
person would believe that the parties intended. (An
Objective Test)
In interpreting contracts, ordinary words are to be
interpreted according to their ordinary meaning.
Trade terms and technical terms are to be interpreted
according to their trade or technical meaning subject to
otherwise intention explicitly stated in the contract
The courts "do not easily accept that people have made
linguistic mistakes, particularly in formal documents"
Additional printed material maybe treated as part of
contract subject to is it expressly mentioned in the
written contract or nor
Continued:
The overall purpose of the clause and the
contract shall be determining factor for
determination of meaning.
The facts and circumstances known or
assumed by the parties at the time the
contract need to be executed and priority for
interpretation.
The court will not take into account any
subjective evidence of either party's
intentions.
Notions of Intention
Actual
Hypothetical/Constructive and
Reasonable
Approaches to Contractual
Interpretation
A Subjective approach to contractual
interpretation would answer the question of
whether a particular facts or situation falls within
the scope of particular clause exclusively on the
basis of what the parties actually or subjectively
intended.
An objective approach to contractual
interpretation would answer the question
exclusively with reference to external factors
which can be ascertained without taking into
account the actual or subjective intentions of the
parties.
Lord Hoffman’s Five Principles for
Interpretation
the right meaning is what the document conveys to a
reasonable person;
this includes everything in the “matrix of fact”, or
relevant background circumstances;
prior negotiations are excluded from this (a point
which has been much criticised since);
the meaning of words is not a literal meaning, but
the one reasonably understood from the context, and
the meaning should not contradict a common sense
view of what a contract required.
(Investors Compensation Scheme Ltd vs. West
Bromwich Building Society, [1998] 1 All ER 98)
Otherwise Consideration
words and phrases have come to acquire an accepted
legal sense through decided cases and subsequently
used by the traders shall be presumed as per the court
determination. Eg. "best endeavours" or "reasonable
endeavours“.
The courts may take into account commercial common
sense when interpreting a contract subject to terms and
conditions stipulated in the contract.
where there is ambiguity and more than one possible
construction, the court will select the interpretation that
makes the most commercial sense, the presumption
being that the parties would not have intended an
uncommercial result.
Canons of Construction
sometimes the courts employs certain "canons of
construction" or "rules of thumb" in an attempt to do
justice between the parties.
1. The court will be reluctant to adopt a meaning that
gives an unfair result in the absence of clear drafting.
The courts have held that unambiguous language is
required to exclude certain contractual remedies.
2. The court will resolve any uncertainty or doubt
surrounding a provision against the party who would
benefit from the suggested interpretation. This is the
so-called "contra proferentem" rule. it. It applies in
particular to the party seeking to take the benefit of
an exclusion or limitation of liability.
Continued:
Where the preceding words are each part of a
common genus or category, subsequent
words will be interpreted "ejusdem generis",
i.e. read as being part of that same class, in
the absence of a contrary indication.
Can the court look beyond the contract?
While the court must examine the full background to the
contract, it cannot look at prior negotiations or the parties'
"declarations of subjective intent".
The court cannot look at extrinsic evidence such as antecedent
agreements, oral negotiations, exchanges of letters, etc.,
preceding the contract.
However, meaning of an unusual combination of words not
defined in the agreement and with no obvious natural and
ordinary meaning, the court can "explore the factual hinterland
of the agreement" to ascertain how the parties understood the
phrase.
If, having regard to the express words of the agreement, it is
still not possible to ascertain the meaning, the court may imply
certain terms. (Implied Terms). However, Courts are not
permitted to depart from the express wording, particularly if
the contract is detailed and appears comprehensive.
Terms implied by law, custom and practice or a prior course of dealing
In appropriate cases the court will recognise
standard practice in particular trades or areas of
industry and may imply terms into an agreement
to reflect this practice, provided the wording of
the contract is not inconsistent with the
implication.
If it can be shown that the parties have
consistently and clearly dealt with each other on a
particular basis the court may be prepared to
imply terms to reflect this, again provided the
actual wording of the contract does not contradict
this.
Terms implied to reflect the parties' presumed intentions
The courts will accept the other implication if
it is possible to attribute this as presumed
intention of the parties.
The court will look at the particular context of
the contract and its language and the
relationship between the parties to ascertain
if the implication sought can be inferred.
B.P. Refinery (Westernport) Pty Ltd -
v- Shire of Hastings
Laid criteria for criteria for implying terms:
1. It must be reasonable;
2. It must be necessary to give "business efficacy"
to the contract, so that no term will be implied
if the contract is effective without it;
3. It must be so obvious that it goes without
saying;
4. It must be capable of clear expression;
5. It must not contradict any express terms of
contract.
Difference between Contractual Interpretation
and Statutory Interpretation
A contract operates inter se the parties and thus being
private law it only affects the rights and obligations of
the parties to it. On the other hand, a statute
operates in rem, i.e. not against a particular person
but public in general. Therefore, the basic premise of
a contract is different from the basic premise of a
statute.
Law of contract is governed by the principle of
autonomy of the parties. Therefore, conduct of the
parties has a greater say in interpreting the terms of
the contract, whereas Statutory laws are interpreted in
the light of legislative intent and parliamentary
discussions behind them.
‘Context’ in Interpretation of
Contracts
There is a presumption that the words to be construed
should be construed in their ordinary and popular sense.
It is an accepted canon of construction that a commercial
document should be construed in accordance with sound
commercial principles and good business sense, so that
its provisions receive a fair and sensible application.
The commercial object or function of the clause in
question and its relationship to the contract as a whole
will be relevant.
It is to be presumed that the parties, as reasonable men,
would have intended to include reasonable stipulation in
their contract.
(Novartis Vaccines and Diagnostics Inc. vs. Aventis Pharma
Limited, 2010(2) Bom CR 317)
M.O.H. Uduman and Ors. v. M.O.H.
Aslum, AIR 1991 SC 1020,
a contract of partnership must be read as a
whole and the intention of the parties must
be gathered from the language used in the
contract by adopting harmonious
construction of all the clauses contained
therein. The cardinal principle is to ascertain
the intention of the parties to the contract
through the words they have used, which are
key to open the mind of the makers.
Documents which serves as a tool
Antecedent Agreements and Pre-contractual
Documents
Documents which are supplemented to the
main contract. (Annexure, schedules, price
lists, job order, etc.)
Documents forming part of the same
transaction (e.g. long term
Deleted (Crossed out ) words.
