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