Interpretation of contracts – a minefield?

Barry Riley

In its simplest form, the interpretation of a contract (often called the “construction”) is the task of ascertaining the meaning that a contractual document would convey to a reasonable person.

Modern case law stresses that contract interpretation involves broad principles, rather than strict rules, for ascertaining the parties’ intention.

These principles are as follows . . . 

1. Parties’ intention assessed objectively

An objective test is used for ascertaining the intention of the parties to the contract. Their actual or subjective intentions are irrelevant. The standpoint of a reasonable businessperson is adopted. Where the contract is in writing, what the parties have written, rather than what they intended to write, constitutes the agreement.

2. Business common sense

An interpretation consistent with business common sense is generally preferred to more literal or strict readings.

3. The commercial purpose

The court will consider the commercial purpose of the contract, or more narrowly, the commercial purpose of a particular provision:

4. Reasonableness

Reasonableness alone may not indicate a correct interpretation. The parties may have agreed something unreasonable, or even commercially foolish. The courts will nevertheless be reluctant to embrace an interpretation that leads to very unreasonable or absurd results or practical consequences.

5. The whole contract approach

The document must be construed as a whole, in its context.

6. Literal meaning is less important

The approach to language is informed by business common sense. The court does not adopt an overly strict or literal approach to language where that would offend business common sense.

For assistance with contract interpretation, please do not hesitate to get in touch.

Barry Riley
DDI – 0117 9453 042


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