What does it all mean?

It is an often-heard criticism of lawyers drafting documents for a commercial deal that they spend hours poring over the documents, making minor amendments to what appear to be insignificant clauses. For many, this process of amending, re-amending and then re-amending again, a document that the parties might consider is unlikely to be read again, is a waste of time and a process from which no-one benefits but the lawyers.

This might be so if it weren't the case that what lawyers call "the proper construction" of the terms of a contract (and the clients understand to be what the document means) could well be the most frequent cause of contract litigation. What one party to a contract believes is meant by a particular clause can be quite different from the clause's interpretation by the other party.

The aim of interpretation

The object of the legal rules of interpretation of a contract is to ascertain the true intention of the parties. However, this is an objective rather than a subjective test. Prior negotiations of the parties and their declarations of subjective intent are generally inadmissible in evidence as to what the document means. The reason for this is one party or the other might try and structure the negotiations so as to give the contract a particular meaning favourable to that party.

Interpretation is about ascertaining the meaning that the document would convey to a reasonable person having all the background knowledge that would reasonably be available to the parties in the situation in which they were at the time of the contract, the so-called "factual matrix".

The canons of construction

With this in mind, the courts have developed over the years a number of rules or "canons of construction" to guide judges undertaking their role of ascertaining the intentions of the parties. The main ones are:

The court looks at the document as a whole when construing a particular clause. So, for a contract by correspondence, each and every relevant letter must be considered. If you simply rely on one clause in isolation, without considering the rest of the agreement, you run the risk of ascribing an unreliable interpretation to the clause
Unless to do so would produce an absurd or inconsistent result, ordinary words are taken to have their ordinary meaning; that which society accepts the word means. The courts also assume that the parties have used technical words in their technical sense. However, if an absurd result would be produced, the law does not require judges to attribute to the parties an intention that they plainly could not have had
Where the parties have used a standard form agreement and amended this either in writing or orally to personalise it to their particular circumstances, the specific clauses will override the general terms to resolve an inconsistency
Also where a document is contradictory, later provisions in the document will prevail over earlier ones and the wording of a clause will prevail over that of a heading
Finally if the meaning of the contract term is ambiguous, if possible, the doubt will be resolved by construing the term against the person making the promise. This is known as the "contra proferentem" rule

Using the above rules as guidance, it should be possible to ascertain how a court might interpret a contractual term. However, the list above is by no means exhaustive, and in the event of uncertainty, advice should be sought as to how a particular contract term is likely to be construed.

The above rules of construction might seem to ignore the situation that the parties may not actually be able to point to a document embodying the terms agreed between the parties, the agreement never having been documented. In this case, the same rules above will be applied to the words used by the parties in concluding the contract, but proving who said what when is likely to be a very different matter, if disputed.

For further information on this matter, please contact Sarah Freeston.

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The content of this update is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide a comprehensive statement of the law. It does not constitute legal advice and does not provide a substitute for it.