Law of Contract II

Lesson Two
By Dr. Fancy Too
Introduction
 To aim of this lesson is to appreciate the legal rules and key principles
of interpretation,
 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. 
 Generally, courts takes a purposive and commercial approach to the
construction of contracts
Contract interpretation
 The starting point for the court is to identify the intention of
the contracting parties. This is an objective test;
 Thecourt is concerned to identify the intention of the parties
by reference to "what a reasonable person having all the
background knowledge which would have been available to
the parties would have understood them to be using the
language in the contract to mean".
Consideration courts uses to get objective
meaning
 The courts will look to both the language of the clause and the commercial context in which it was
drafted.
 Key considerations:
 The natural and ordinary meaning of the clause. The courts "do not easily accept that people have
made linguistic mistakes, particularly in formal documents". However, the worse the drafting of a
particular clause, the more readily a court will depart from its natural meaning.
 Any other relevant provisions of the contract.
 The overall purpose of the clause and the contract. The facts and circumstances known or assumed by
the parties at the time the contract was executed.
 Commercial common sense.
CONTRACT INTERPRETATION
 The Plain Meaning Rule- where its clear that the meaning of the words
is the meaning to be given.
 Ambiguity: A court will consider a contract to be ambiguous in the
following situations:
1. Intent of parties cannot be determined
2. When it lacks a provision on disputed issue
3. A term is susceptible to more than one interpretation
4. There is uncertainty about a provision
 Extrinsic Evidence: Evidence that is not contained in the document
itself
Rules of interpretation
 Other rules of interpretation
 Rules the Courts Use
1. Insofar as possible, a reasonable, lawful, and effective meaning will be given to all of a contract’s
terms.
2. A contract will be interpreted as a whole. Individual, specific clauses will be considered subordinate
to the contract’s general intent. All writings that are a part of the same transaction will be interpreted
together.
3. Terms that were the subject of separate negotiation will be given greater consideration than
standardized terms and terms that were not negotiated separately.
4. A word will be given its ordinary, commonly accepted meaning, and a technical word or term will be
given its technical meaning, unless the parties clearly intended something else.
5. Specific and exact wording will be given greater consideration than general language
 Other rules cont..
6. Written or type written terms prevail over preprinted terms
7. Because a contract should be drafted in clear and unambiguous language, a party that
uses ambiguous expressions is held to be responsible for the ambiguities. Thus, when the
language has more than one meaning, it will be interpreted against the party that drafted
the contract
8. Evidence of trade usage, prior dealing, and course of performance may be admitted to
clarify the meaning of an ambiguously worded contract.
 Express are usually given most weight followed by course of performance, course of
dealing, and custom and usage of trade.
Case Example Eberbach v. Eberbach (2017)
9. Obvious mistake in spelling and grammar will be corrected or ignored
Parol evidence rule -written contracts
 Inparol evidence rule, extrinsic evidence cannot be admitted to vary or
contradict on the written instrument.
 Exceptions: a) Where the contract is not written
b) Where the contract is not an accurate record of the agreement which
the parties had already agreed
c) Where contract is void or voidable-to show fraud duress
d)To show that the contract has been discharged or some some of its
obligations have been waived
e) To prove a collateral agreement
The Contra Proferentem Principle
 It is a legal doctrine which provides that an ambiguous term should be interpreted against the interests
of the party that created, introduced, or requested that term be included. The contra proferentem rule
acts as a guidance for legal interpretation of contracts and is usually applied when a contract is
challenged in court.
 The process of negotiating contracts typically involves parties discussing and ironing out details of the
contract before committing to the terms in writing. Such a process involves complex legal drafting and
attention to intricate details to ensure that important expressions incorporated are clear and concise.
 As each party is ostensibly looking out for its best interests and will want the contract language to be in
its favour, this can create scenarios in which the contract language is ambiguous or unclear, leading one
party to interpret the contract differently from the other.
 Accordingly, the contra proferentem rule is designed as a penalty or punishment for including an
‘intentionally’ vague clause into a contract.
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
Cont..
 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
 Lord Hoffman’s Five Principles for
Interpretation 
 the right meaning is what the document conveys to a reasonable person;
 thisincludes everything in the “matrix of fact”, or relevant background
circumstances;
 priornegotiations are excluded from this (a point which has been much criticised
since);
 themeaning of words is not a literal meaning, but the one reasonably understood
from the context, and
 themeaning should not contradict a common sense view of what a contract
required.
 (nvestorsCompensation 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.
  Ifit 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 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.
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.
Impact of technology on contract
 The emergence of new technologies, software and services on the internet takes them beyond the
generally accepted and generally applicable contractual structures, such as a licence contract, a
service contract, and others.
 There are questions related to the subject of the contract—a product, a service, or is it a special
new subject?
 The development of information technologies and, accordingly, the expansion of the digital
economy changes the perception of the contract, along with the legal nature of contracts for the use
of services on the internet, and new aspects related to the process of its approval appear.
 There may be difficulties with user authentication, and therefore with the validity of agreements
concluded on the internet, since in some cases the user’s authentication may be “forged”, and as a
result, the agreement will be concluded by another person.
Examples on Acceptance

 ("click here to accept offer")

 Type "I accept" in a box is better than stating,
 "hit any key to accept."
Examaples on signatures

a signature serves certain practical functions, including:

(1) an evidentiary function (proving what the contact was), and;
(2) a cautionary and symbolic function, which makes the participant aware
that his or her actions will be interpreted as having legally binding
consequences
What is the place of digital signatures?
 End

Any questions