Contract Law 103

By Ross Dillon | Litigation

Contracts are the foundation of business transactions, legal agreements, and everyday interactions. They serve as the backbone of commercial relationships, providing a framework within which parties can operate, make commitments, and ensure the smooth flow of activities. However, which disputes arise, the interpretation of contracts is not always straightforward. It involves a balance between reasonableness and context, aiming to decipher what the parties intended when entering into the agreement. In this brief overview of contract interpretation, we focus on the two main elements that guide this process: reasonableness and context.

Reasonableness in Contract Interpretation

At the heart of contract interpretation is the principle of reasonableness. When dissecting a contract, one must begin with the assumption that the words used carry their natural and ordinary meaning. This fundamental principle ensures that contracts are understood in a manner that aligns with common language use. However, the concept of reasonableness goes beyond the strict adherence to dictionary definitions. It allows for a degree of flexibility, acknowledging that an overly literal interpretation may lead to results that defy business logic. The commercial purpose of the contract will always be borne in mind.  Which leads us to :

The Commercial Purpose of the Contract

One essential aspect of reasonableness is the consideration of the commercial purpose of the contract. Contracts are not drafted in a vacuum; they exist to serve specific business goals and objectives. Therefore, interpreting a contract cannot be solely reliant on linguistic analysis. Instead, the overarching aim of the contract must always be an element of interpretation. If a strict interpretation would lead to a result that runs counter to the commercial purpose of the contract, it may be deemed unreasonable.   The commercial purpose of the contract is a manifestation of its context.  Thus:

Context: The Matrix of Fact

While reasonableness sets the tone for contract interpretation, context provides the rich tapestry against which the contract is understood. This context is often referred to as the "matrix of fact" and is comprised of all the background knowledge that the parties could reasonably be expected to know, relevant to understanding the terms of the contract. In essence, every contract is “caught in the matrix”, and ignoring it can lead to incomplete and inaccurate interpretations.

Establishing the Context

However, establishing the context of a contract can be a daunting task. The matrix of fact encompasses anything that could impact how the words used in the contract would be understood by a reasonable person in the position of the parties. Consequently, the evidence required to establish this context in a court of law can be substantial and multifaceted. It includes not only the written words of the contract but also various extrinsic factors that can shed light on the parties' intentions.

The Relevance of Prior Negotiations

One aspect of context is the relevance of prior negotiations. When specific words or phrases used in the contract are contested, it may become important to examine the discussions and communications that took place before the contract was finalized. Were the words in disoute communicated and adopted, or were they part of a formulation that was objected to by one or both parties? The answers to these questions can provide valuable insights into the intended meaning of these or similar or replaced terms in the final agreement.

The Significance of Subsequent Conduct

Furthermore, the conduct of the parties after the contract is agreed upon may be relevant in contract interpretation. This subsequent conduct can offer clues as to what the parties truly meant by the words they used. However, a crucial caveat exists: this conduct is most relevant when examined within the context of the period after the contract was formed and while it was being performed but before any disputes arose. Once a dispute has emerged, the conduct afterward may be less pertinent to understanding the original intent.

Viewing the Contract as a Whole

To ensure a comprehensive interpretation, it is imperative to view the contract as a whole. This holistic approach helps identify the context and ensures that specific phrases or terms are not given isolated meanings. A contract should exhibit internal logic and consistency, with no word or phrase interpreted in isolation. It is reasonable to anticipate that each clause and provision would harmonize with the broader purpose and intent of the agreement.

Agreements as to Time

Contracts often contain provisions related to time, specifying deadlines for performance. However, these time-related terms are treated as a special category. Generally, they are not considered strictly enforceable unless the parties explicitly designate that performance by a specified date is "of the essence." When time is deemed essential, the contract can be cancelled if the agreed-upon performance is not met within the stipulated timeframe, as governed by the Contract and Commercial Law Act.

Conclusion

Interpreting contracts objectively is a complex undertaking that involves balancing reasonableness and context to determine what the parties intended. Reasonableness starts with an expectation that contracts would use words and phrases in accord with natural and ordinary meanings, tempered by commercial sensibility. Context, on the other hand, encompasses the matrix of fact, which includes all relevant background knowledge and information, which may include things such as prior negotiations, subsequent conduct and trade usages.

Ultimately, contract interpretation requires careful consideration of a large range of relevant factors. Contracts are the lifeblood of business relationships, and their interpretation should reflect the parties' intentions, respecting the commercial objectives they seek to achieve. As such, the balance between reasonableness and context remains essential in ensuring the effective interpretation of contracts.

Disclaimer:
We have taken care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.