Courts are regularly called upon to interpret contracts ie work out what they and their terms mean.

You can avoid these sort of complex, circular or meaningless arguments by writing down clearly and simply what you have agreed.

The court tends to apply a mix of the actual words (a literal interpretation) as well as business commonsense when deciding what a contract might mean:

courts are more willing to recognise that words take their meaning from their particular context and that the same word or phrase may mean different things in different documents Transocean

Reasonable people

The court tries to work out what the parties meant – but didn’t quite manage to clearly state – in their contract. As it cannot see into the parties’ minds, it bases its interpretation on:

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

It isn’t actually interested in what the parties think the contract term means. It can even come up with a third interpretation!

Common sense isn’t commonly applied

The court can only apply business common sense to decide between two alternative interpretations of a contract term. Where the term is not ambiguous then it merely has to explain its single meaning:

The starting point is the wording used in the agreement when read in its context.  If the words used can be given a sensible meaning, which is free from ambiguity, and reflects the commercial sense which the parties are expected to possess, then, absent some compelling countervailing factor, that meaning should be employed to resolve the dispute Kennedy & Others v Dickie & Moore

The court will not apply business commonsense to save a client from a bad bargain (Wood v Sureterm Direct Ltd) even if the consequences are alarming:

purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed… it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Arnold v Britton & ors

What Should You Do?

The simple way to avoid all this case law, kerfuffle and uncertainty is to accurately, briefly and clearly write down the agreement you reached. If your agreement is complex then ask someone to check it makes sense to them (and does not rely on information in your head).

Keeping it simple means there is less scope for the lawyers to argue that your contract has a meaning you never intended!

 

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