Contracts form the cornerstone of business relationships. Having clarity as to the terms parties are bound by in a contract is paramount to business efficacy. Such terms and their interpretation are also vital when it comes to disputes arising within contractual relationships.
Navigating the complexities of contractual interpretation and understanding when and how terms may be implied into a contract by the courts may seem daunting. This article looks at the established principles of English law that apply to interpreting contracts and how the approach taken by the courts is designed to provide clarity and certainty to contractual arrangements.
Interpretation of Contracts
The interpretation of contracts is an essential aspect of contract law: ensuring that parties understand the rights and obligations outlined within the agreement. When disputes arise, the court’s primary objective is to ascertain the intention of the parties based on the language used in the contract. In doing so, the court considers various factors, including:
Literal Meaning:
The starting point for interpreting a contract is the literal meaning of the words used. Each term is given its ordinary and natural meaning. In essence, if it is clear and obvious within the contract as to what the wording means, the court will not override these provisions even if, on its face, the contract may not make commercial sense.
‘… the question is 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’… so said Lord Hoffman in the case of Chartbrook Ltd v Persimmon Homes [2009] AC 1101
This approach has been reiterated in a recent case in the High Court: Dooba Developments Ltd v MacLagan Investments Ltd [2016] EWHC 2944 (Ch). In Dooba it was held that where the meaning of words in a contract is clear and unambiguous, it is not necessary to consider commercial common sense or the intent of the parties. The literal meaning of the words will take effect.
Whole contractual approach:
Another approach the courts adopt is to interpret individual clauses in a manner that is consistent with the overall purpose and intent of the contract. In this respect, the contract is to be viewed as a whole, rather than focusing on one particular term and/or phrase.
Context
Where the words used in a contract are less clear and/or have an air of ambiguity about them, the courts will examine the contract as a whole and consider the surrounding circumstances and context in which it was formed. It is considered that this holistic approach helps to uncover the true intention of the parties.
Although the court will not deviate from the text within the document, it can look at the wider context and background information available to the parties when the document was first made. This is an objective test.
For example, the parties’ past dealings or course of conduct may provide insight into their intentions, especially when interpreting ambiguous terms.
Implied Terms
In addition to the express terms explicitly stated within a contract, English law recognises the existence of implied terms. Implied terms are obligations that are not expressly stated in a contract but are nonetheless deemed to be part of the contractual agreement. These terms can be implied in three main ways:
- Statutory Implication: Certain terms may be implied into contracts by statute, such as the Sale of Goods Act 1979, which implies terms regarding the quality and fitness for purpose of goods sold in the course of business.
- Custom and Trade Usage: Implied terms may arise from established customs or trade usage within a particular industry. These customary practices become inherent to contracts within that industry.
- Common Law: Implied terms may also arise through common law, where the court determines that certain terms are necessary to give business efficacy to the contract or to reflect the presumed intentions of the parties.
Implied terms play a crucial role in filling gaps within contracts and ensuring fairness and reasonableness in contractual relationships. Generally, however, terms will not be implied by the courts if the contract terms are clear and unambiguous, and their literal meaning can be applied objectively.
Seeking Clarity and Certainty
For businesses navigating the intricacies of contract interpretation and implied terms, seeking professional legal advice is essential. A skilled solicitor can provide invaluable guidance in drafting, interpreting, and enforcing contractual agreements, minimising the risk of disputes and providing clarity and certainty to business transactions. It is vital that parties are clear on what they intend to contract for, which in turn will allow those drafting the contract to ensure that it accurately reflects that intention.
In conclusion, understanding the principles of contract interpretation and implied terms is vital for businesses seeking to enter into clear and enforceable agreements. By adhering to established legal principles and seeking expert advice when necessary, businesses can mitigate risks, foster successful commercial relationships and avoid costly and time consuming disputes.
Ultimately it should also be remembered that clarity in contracts leads to certainty in business.