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Interpretation of Contract

The document discusses the principles of contract interpretation. It explains that the objective is to determine the intention of the parties based on what a reasonable person would understand from the contract. If provisions conflict, greater emphasis is placed on specifically negotiated terms. Implied terms can be included if they are reasonable, necessary, and do not contradict express terms. The rules of interpretation include considering the whole contract, commercial objectives, definitions, schedules, and pre-contract documents.

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Pallab Biswas
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66 views

Interpretation of Contract

The document discusses the principles of contract interpretation. It explains that the objective is to determine the intention of the parties based on what a reasonable person would understand from the contract. If provisions conflict, greater emphasis is placed on specifically negotiated terms. Implied terms can be included if they are reasonable, necessary, and do not contradict express terms. The rules of interpretation include considering the whole contract, commercial objectives, definitions, schedules, and pre-contract documents.

Uploaded by

Pallab Biswas
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Interpretation of

contract
Content
• General principles
• What if inconsistent provisions exist?
• Can terms be implied into a contract?
• Rules of Interpretation of Contractual Interpretation

1. Rule of Reasonable Construction


2. Whole Contract is to be considered
3. Commercial Object
4. Ejusdem Generis
5. Aids of Interpretation
6. Title
7. Recital
8. Definitions
9. Schedules
10. Pre-contractual Documents
11. Court Orders
A contract is a document executed between two or
more parties and is legally binding on all the parties. It
governs the relation between the parties to an
agreement and defines their rights and responsibilities.

Therefore, it is very important and prime responsibility


of the parties to correctly incorporate the terms between
them and not leave any scope for ambiguity. 
General principles

The following are the main principles of contract interpretation:

•An objective test is applied in terms of determining the intention of the parties to the contract. This
means the analysis is based on an understanding of the contract by a reasonable hypothetical person.
The actual subjective intentions of the parties and any previous negotiations are generally deemed
irrelevant.
•Words will be given their natural and ordinary meaning – i.e. what does the clause actually say?
•The overall purpose of the clause and the contract will be considered. The facts and circumstances
known or assumed by the parties at the time the contract was entered into should also be assessed.
•The factual, legal and regulatory background within which the contract is set may be examined
where required to provide further context.
•Where the wording is ambiguous, courts are likely to apply a commercial common sense
interpretation.
What if inconsistent provisions exist?

Commercial contracts are often complex documents and can comprise multiple parts.
Sometimes a provision in one part of the agreement may appear to conflict with a
similar term elsewhere. Where this arises, the courts will try to find a consistent
interpretation. However, if this is not possible, the following applies:

•Greater emphasis will be placed on terms which have been specifically negotiated
rather than standard terms;
•Greater weight is likely to be given to a more precise/detailed provision in comparison
to a wider clause; and
•The contract may include an order of precedence clause. This outlines an agreed
hierarchy of the various documents that form the contract (e.g. the main part of the
agreement supersedes the schedules), in order to determine which clause will prevail in
the event of inconsistency.
Can terms be implied into a contract?

If it is not possible to determine the meaning of a clause after considering the


express wording of the contract, the court may imply certain terms into a contract.
The test for implying terms in contracts has been developed in a long history of case
law.
This has established that any proposed implied term must meet the following
conditions (which may overlap):

•It must be reasonable and equitable


•It must be necessary to give business efficacy to the contract – no term will be
implied if the contract is effective without it
•It must be so obvious that ‘it goes without saying’ (the so-called ‘officious
bystander’ test)
•It must be capable of clear expression
•It must not contradict any express term of the contract.
Rules of Interpretation of Contractual Interpretation

1. Rule of Reasonable Construction


2. Whole Contract is to be considered
3. Commercial Object
4. Ejusdem Generis
5. Aids of Interpretation
6. Title
7. Recital
8. Definitions
9. Schedules
10. Pre-contractual Documents
11. Court Orders
Rule of Reasonable Construction

It is advisable to understand the words in their natural, ordinary


or popular sense. The words are to be understood and construed
in their grammatical meaning unless it leads to more ambiguity
or absurdity. In interpreting the terms of the contract, the
ordinary sense of the words is to be construed unless it  leads to
absurdity with the rest of the contract and the purpose of
entering of the contract or agreement. 
Lord Hoffman laid five principles for Interpretation of Contracts:

1. The document is to be interpreted in a manner which is understood by a


reasonable person.
2. Anything discussed or decided between the parties prior to entering into an
agreement or contract is to be excluded.
3. The word or expression should not be contrary to the general common sense.
4. The words should be construed in general sense and not literal. The words
should be assigned meaning which is generally assigned to them.
5. The words should depend on and be interpreted according to the intent of the
parties. While interpreting the words or contract it is advisable to consider the
background and the knowledge available on the basis of which the contract is
entered into by the parties. 
Whole Contract is to be considered

Lord Halsbury, in Glynn v Margetson [1893] A.C. 351, said:


“Looking at the whole of the instrument and seeing what
one must regard…as its main purpose, one must reject
words, indeed whole provisions, if they are inconsistent with
what one assumes to be the main purpose of the contract.”

The contract should be read as a whole, and the interpretation


should be based on all the clauses read together. It is important to
understand the intent of the parties. The clauses should be read
together to get a clear picture of the purpose of the contract and to
arrive at a decision as to its interpretation.
Commercial Object

The commercial object or function of the clause in question and


its relationship to the contract as a whole will be relevant in
resolving any ambiguity in the wording.

Ejusdem Generis

Ejusdem Generis means of the same kind or species. When


particular words pertaining to a class, category or genus are
followed by general words, general words are construed as
limited to things of the same kind as those specified. In other
words, general expression is to be read as comprehending only
things of the same kind as that designated by the preceding
particular expressions, unless there is something to show that a
wider sense was intended
Aids of Interpretation

A contract may apart from the rules, be interpreted based on the parts of the
contract like title, recital, definitions.

Title

Every contract entered into has a title which gives out the purpose of the
contract just by going through it. The title of a contract is used to interpret the
nature of the contract at first glance.

Recital

Recital defines the object and purpose of the contract. It is an introduction to an


agreement/contract and gives the basis of coming together of the parties. If
there is conflict in the clauses of the contract, the recital gives an idea as to
coming together of the parties and can be decided on that basis.
Definitions

Definitions in a contract assign meaning to the words being used in


the contract and help in eliminating the ambiguity in the contract.
Definitions are preamble to the clause. The definition can be used in
construing the clauses but only where there is ambiguity in the
clause. However, they can not be used to assign a different meaning
to the clauses which have clear intent and words.

Schedules

Documents which form annexures or schedules of the contract may


be read to understand and interpret the words and the contract.
Pre-contractual Documents

Any documents executed before the entering or execution of the agreement


or the contract will form the basis of intent of the parties in case of
ambiguity.

It may happen before the execution of the final contract that draft
agreements or contract were entered into between the parties and signed.
Such documents may be used to explain some terms which were defined in
detail in them and were not made part of the final draft in such detail.

However, draft agreements which do not represent the final consensus of the
parties, should not be taken into consideration for the purpose of interpreting
a contract.
Court Orders

In case of disputes while defining the rights and obligations of the parties, courts
rely on the decisions earlier decided on the similar basis. 

It gives emphasis as to the judgements already decided and interpretation given in


the judgment.
Factors which have been decided earlier basis of court judgements etc as well help
in the interpretation of the clauses in the contract.

The courts as well while interpreting the contract sometimes rely on the particular
kind of contracts. There are many contracts which have standard terms and are
used universally in such contracts like rent agreement etc. In appropriate scenarios,
the court will recognize the standard practice being followed in that field.

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