Unfortunately interpreting a written contract is usually not as simple as reading the words literally off the page.
When a dispute arises it is often because the meaning of a contractual term is ambiguous, with each party having a preferred interpretation.
So how do the Courts interpret a contract? Here are 7 tips:
1. Actual intentions and expectations are not relevant
What each party actually intended or expected is irrelevant in the interpretation of the contract.
The main reason is that evidence about what each party had in their mind when entering into the contract is an unreliable way to resolve a dispute about what the parties actually agreed to.
This can be illustrated with a simple example: say a dispute arises 5 years after a contract is entered into. Bill says that he intended to achieve result X and Sarah says that she intended to achieve result Y, but they never communicated their actual intentions to each other. How can the Court resolve the dispute, particularly when memories fade over time, and each party can be expected to give evidence that favours their interpretation?
Instead the Court will look primarily at the words the parties have used in their contract, to ascertain what the parties must have intended from an objective standpoint, when they entered into the contract.
Evidence of the parties’ statements and actions reflecting their actual intentions and expectations is not admissible in Court. For example, evidence of pre-contractual negotiations (such as the parties’ statements and actions) is not admissible, because it reveals the terms the parties intended or hoped to make, which are superseded by, and merged in the contract itself.
2. A commercial contract will be given a businesslike interpretation
The terms of a commercial contract will be interpreted according to what a reasonable businessperson would have understood them to mean.
The Court will place a notional “reasonable businessperson” in the position of the parties, and interpret the contract from that perspective, having regard to the commercial purpose and objects to be achieved by the contract.
To identify the commercial purpose and objects of the contract it may be necessary to understand the genesis of the transaction, the background, the context and market in which the parties are operating.
Unless there is a contrary intention in the contract, the Court will interpret a commercial contract on the assumption that the parties intended to produce a commercial result.
In other words, a commercial contract will be interpreted so as to avoid it making commercial nonsense or creating commercial inconvenience.
3. The role of surrounding circumstances
If the disputed terms are ambiguous the Court will take into consideration the surrounding circumstances when the contract was entered into, including facts which both parties were aware of at the time.
4. The contract must be read as a whole
The particular terms in dispute must be considered in light of the whole contract, and any related contracts. In other words it is incorrect to consider the disputed terms in isolation.
5. Post-contractual conduct is not relevant
A contract will be interpreted as at the date it was entered into. The parties’ post-contractual conduct is not relevant in interpreting the terms of a written contract.
6. An absurd literal meaning will be avoided
The Court will normally apply the literal, plain, natural or ordinary meaning of the disputed terms, unless that would lead to an absurd or irrational result, which was not intended by the parties.
Similarly if a disputed term is open to 2 interpretations, the Court will avoid an interpretation which is capricious, unreasonable, inconvenient or unjust.
7. The implied duty to co-operate
As a general rule, a contract will be interpreted as containing an implied duty on each party, obliging them to do all things which are necessary to enable the other party to have the benefit of the contract.
In other words, the parties must co-operate with each other, by taking whatever additional steps are necessary to enable the contract to be fulfilled, even if those steps are not set out in the contract.
Properly interpreting a contract requires legal skill and experience. Please contact me if you require assistance.
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Judy Siddins, former Legal Counsel, Australian Wildlife Conservancy