Interpretation of Contracts

What do the words in a contract mean? Do they mean what they appear to say? Or what the parties think they mean? English law offers a number of solutions as to how you interpret the words of a contract.

What does your contract mean?
 
The basic position at law is that words should be given their “natural and ordinary” meaning. The courts are reluctant to accept that people make mistakes in formal documents and do not want to interfere in bargains made, however bad.

However, if the background shows that something has gone wrong with the language of the contract, a judge will not interpret the contract to mean something which the parties did not intend.

In such cases, the court may look at all the background facts and aim to give effect to the "business purpose" of the contract. It will often do this by asking a simple question: “What would a reasonable person, having all the background knowledge available to the parties, understand the parties to mean”.

Alternatively, the courts may interpret clauses and words by reference to the purpose of the particular clause or word.

However, if the parties are arguing over what a clause means the court cannot refer to the negotiations leading to the contract to evidence a particular interpretation. Oddly and by contrast, if one party is applying to rectify the contract - that is, if it is saying that there was a mistake in the drafting of the contract - the court can look at how the parties were dealing with the relevant issue in the negotiations.

Sometimes people argue that a contract implies a duty. A classic example is a loan document with no terms as to repayment. “Surely”, the lender says, “if I make a loan, it is implicit that the money must be repaid”? Fortunately, the courts agree.

This law particularly has developed recently. One of the greatest modern judges, Lord Hoffmann, retired last year to a great fanfare. His last judgment reinforced his reputation as the greatest arbiter of how contracts should be read. It confirmed that a term should only be implied if it is necessary to make the contract work.

Ultimately, one should therefore never leave an important contract open to interpretation. Solicitors should be used to ensure that once the contract is signed, the deal is sealed, never to be undone by the courts.

For advice as to how to document your contracts, please contact:

Woking Office:

Mark Lucas 01483 748512
marklucas@barlowrobbins.com

Denise Herrington 01483 464211
deniseherrington@barlowrobbins.com

Guildford Office:

Rebecca Glazebrook 01483 464283
rebecca.glazebrook@barlowrobbins.com

Alternatively, please speak to your usual Barlow Robbins LLP contact.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.