Back to Basics - Contractual interpretation

22 September 2015

Construction disputes often involve questions concerning contractual interpretation. In the latest article in our Back to Basics series, we highlight some of the key principles in this area.

Construction disputes often involve questions concerning contractual interpretation: whether as part of understanding the contractor's scope of work or to establish the proper operation of the agreed provisions.

With the parties inevitably taking opposing views, focus will necessarily turn to how a tribunal would decide the question - if asked. What principles should it adopt and how would it approach the exercise from a practical perspective?

Key principles to keep in mind:

  1. The starting point must not be overlooked, as often the most obvious answer is the right one. Recognising the assumption that people generally mean what they have said, a tribunal will first read the words in the contract and will seek to give the words used their natural meaning. That is: what would the words used mean to a (hypothetical) reasonable person, in possession of the background knowledge that was available to both parties at the time the contract was entered into?
  2. How does the clause fit into the contract as a whole, i.e. what do the words really mean in the context that they were used?
  3. Which interpretation makes more commercial common sense? In a commercial contract a tribunal might incline towards an interpretation that makes more commercial sense, taking the view that this is more likely to be what the parties were aiming to achieve. This only goes so far, however, and the trend in recent case law is that this will not trump the language used in the contract, unless the language is ambiguous or lacks clarity. This principle will not save a party from entering into a 'bad bargain'.

What is not relevant:

  1. The subjective intentions of the parties. The law adopts an objective approach to interpretation: what one or other of the parties actually meant when they used the words is not relevant. The words that were actually used, in the context that they were used, will be construed in the way that they would be understood by a (hypothetical) reasonable person.
  2. Pre-contractual negotiations. The parties' negotiations, comprising the parties' changing (albeit slowly converging) aims, are of no relevance to the words that are ultimately used in the document that finally reflects consensus - the contract. Such evidence may however be admissible to show that a relevant background fact was known to both parties and may be relevant to a claim for rectification of the contract - i.e. a claim that the written contract should be corrected so as to reflect the terms that were actually agreed.
  3. Conduct of the parties. The way that the parties went on to perform the contract is not relevant when interpreting a written contract. If both parties operated a provision in a particular (but actually incorrect) way, that fact will not be relevant in determining how the provision was intended to work.

Clear drafting is essential

Predicting the outcome of a dispute concerning contractual interpretation will often be uncertain. Such disputes are very fact sensitive and, because of the importance of the relevant background, it is not safe to assume that a clause in one contract will have the same meaning in a different contract. This, together with the fact that tribunals are not in the business of saving parties from bad bargains, makes clear drafting essential.

With the natural emphasis leading up to contract award being to 'get the deal done', there may be an inclination not to properly bottom out tricky provisions. This is a risky business. Even where the terms seem clear during the drafting process, it is sensible to check your draft contracts and consider the following:

  1. Are any of the provisions open to misinterpretation or to a suggestion that they are ambiguous? Could the clause be read in different ways?
  2. What do the clauses mean in the context of the contract as a whole? Taking a wider view of the contract, could the clause be misunderstood?
  3. Apply possible scenarios to your clause: how would the clause react; is this what you intended?

This extra time spent pre-contract may well save you significant time and money further down the line.

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