Most contracts are in writing, whether a formal deed or agreement, or a less formal memorandum or heads of agreement, or correspondence. Whatever form the record of the contract may take, it is common for parties later to disagree on what words in the contract mean.
Language, or more particularly words as they are used in language, may not have precise meanings. Words can have many meanings, or shades of meanings (this is the linguistic concept of polysemy). The meaning of a single word or phrase in a contract can be very significant, and have substantial consequences, whether beneficial or detrimental, for a party.
An example was given by Steven Pinker at the commencement of his recent book The Stuff of Thought (Steven Pinker is now a Professor in the Department of Psychology at Harvard University, and previously taught in the Department of Brain & Cognitive Sciences at MIT).
He has written widely on the use, development and significance of language. The example that Steven Pinker uses to demonstrate the importance of language is an instance of construction of a legal contract. Following the destruction of the World Trade Centre properties in the 9/11 terrorist attack, the lessee claimed on the building insurance policy on the building. There was one policy of insurance, but two building towers, which were each destroyed by the impact of a separate aircraft. The cover under the policy was limited to $3.5 billion (US) for any one "occurrence". The issue was whether there was one "occurrence", so that the difference, potentially, between construing the events which occurred as one "occurrence" or two "occurrences" was potentially $3.5 billion (US). The result, with a number of insurers involved, seems to have fallen somewhere between the two extremes.
ARE THERE RULES FOR CONSTRUCTION OR INTERPRETATION OF CONTRACTS?
Just as language, and the meaning of words, may not be precise, there are no precise legal rules which can be used to determine the meaning of words in a contract.
A contract is an agreement between the parties to the contract. The first and best evidence of that agreement is, generally, the written agreement or document that is intended to contain the terms of the agreement. In some circumstances, evidence of other things may be used to vary, explain or add to the words of the agreement, as they are recorded in the document.
There are no Acts relating to the interpretation, or principles of interpretation to be applied, to contracts, as there are for statutes (the Acts Interpretation Acts of the Commonwealth and the States).
THE MAIN RULE: PLAIN ORDINARY MEANING
To the extent that there is a main, or perhaps an initial, rule or principle for the interpretation of words in contracts, it is that the words, if they have a plain, ordinary, appropriate meaning, will be assigned that meaning, unless there is some good reason to depart from this.
It is, however, obvious from the number of disputes which arise as to the meaning of words in contracts, that there are many occasions when there is not an obvious plain, ordinary and appropriate meaning.
SCOPE FOR INTERPRETATION
If the words of a contract are plain and unambiguous, there is no scope for "interpretation". Where, however, more than one meaning is possible for a word, interpretation may be necessary to determine the scope of the meaning of the word.
OTHER FORMS OF CONTRACT CONSTRUCTION
It is possible that a Court may be called on to add to or vary words appearing in a contract document, rather than interpreting words in the document.
If the words in a contract document do not record the agreement that was in fact reached by the parties (if this can be proven), the contract document may be "rectified" to include the correct form of words.
If the written record of a contract is silent on a matter, it is possible that a Court may determine that words should be included in the contract as an implied term, to give business efficacy to the contract.
The rectification of a contract document, or the implication of term into a contract, may not be a matter of "interpretation", but these issues often arise for determination together with questions of interpretation or meaning.
INTERPRETATION IN CONTEXT
The primary principle that words in a written document are to be given their plain and ordinary meaning would exclude use of evidence of other matters, if strictly applied. In the High Court of Australia, Mason J in the action Codelfa Construction Pty Ltd v State Rail Authority of NSW ( HCA 24; (1982) 1949 CLR 337) referred to the theory in English legal thinking that words in a contract are generally to be given their plain and ordinary meaning, and went on to say:
"On the other hand, it has frequently been acknowledged that there is more to the construction of the words of a written instrument than merely assigning to them their plain and ordinary meaning...This has led to a recognition that evidence of surrounding circumstances is admissible in aid of the construction of a contract." [paragraph 12]
Accordingly, evidence can be admitted to show the object or aim of a transaction. As an example (although not from any particular case), in a contract for supply of goods or services to a railway, use of the word "carriage" would probably be taken to mean a railway carriage, rather than the general meaning of that word which includes all forms of wheeled conveyances (and also has other meanings).
EVIDENCE TO EXPLAIN WORDS WITH MULTIPLE MEANINGS
Mason J in the Codelfa case noted that:
"...where words in a contract are susceptible of more than one meaning extrinsic evidence is admissible to show the facts which the negotiating parties had in their mind". [paragraph 16].
His Honour refers to a number of English decisions, including MacDonald v Longbottom (1859) 1 E&E 977, 120 ER 117. In that case, the defendant contracted to buy "your wool" from the plaintiffs. The dispute was whether this included not only wool which the plaintiffs had on their own farms, but wool which they had bought from other farms. Evidence was admitted to show that one of the plaintiffs had stated in a conversation before the contract was concluded with the defendant's agent that he also had wool from the other farms, so that this wool was included. As Lord Campbell said in the MacDonald case, the evidence which was admitted:
"...neither alters nor adds to the written contract, but merely enables us to ascertain what was the subject matter referred to therein".
LIMITS ON ADMISSION OF EVIDENCE
It is not, however, possible to admit evidence unless it is necessary to explain or interpret the words of a contract (although it may be possible to adduce evidence to show that there is an ambiguity or requirement for clarification). In Codelfa, Mason J said that:
"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed." [paragraph 22]
His Honour notes that a difficulty often arises with respect to prior negotiations between the parties, and as to whether or not evidence may be given of the negotiations. He indicates that, to the extent that evidence of prior negotiations will tend to establish an objective background of facts known to both parties, the evidence may be admitted, but not to simply show intention of the parties. His Honour says:
"Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except insofar as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties...". [paragraph 24]
Isaacs J, in another decision of the High Court of Australia, in Cohen and Co v Ockerby and Co Ltd  HCA 58; (1917) 24 CLR 288, explained the concept that a contract which is unclear or ambiguous is to be construed so as to give effect to the object of the parties as follows:
"That does not, of course, mean you are to stretch its terms in favour of one party against the other; but, reading the two cases cited together, it means that the expressions, and particularly any elliptical expressions, in a mercantile contract are to be read in no narrow spirit of construction, but as the Court would suppose two honest businessmen would understand the words they have actually used with reference to their subject matter and the surrounding circumstances".
There are a number of syntactical or grammatical principles or presumptions, which are often expressed as Latin maxims, which have been used for construction of statutes. These are sometimes endeavoured to be applied to disputes as to the meaning of words in contract documents. If the Latin expression is known, it can sound impressive, but there are no binding rules that are applicable, and the rules can all be reduced to an application of the general principle that, where there is an ambiguity, and the words are not plain, the parties' intentions must be ascertained from the words they have used, having regard to the surrounding circumstances.
Some of the maxims are really just commonsense, and sometimes they are contradictory. Very briefly, some of the main maxims are:
noscitur a sociis: the meaning of a word or phrase is derived from its context. This is simply an affirmation of the general principles noted above.
ejusdem generis: general words are limited by specific words. An example of this given in Pearce & Geddes Statutory Interpretation in Australia is:
So in specifying the animals that may be carried on a ferry, the drafter may refer to "horses, cows, sheep and other animals". It would be regarded as an improper reading of the Act if it were suggested that a tiger fell within the words "other animals".
The point is made by Pearce & Geddes that "it is another way of saying that the words derive meaning from the context in which they appear".
expressio unius est exclusio alterius: an express reference to one matter indicates that other matters are excluded.
expressum facit cessare tacitum: this is usually taken to be to a similar effect to expressio unius est exclusio alterius.
generalia specialibus non derogant: specific words will prevail where there is a conflict with general words. This is sometimes stated in the reverse as generalibus specialia derogant.
reddendo singula singulis: if two or more subjects are qualified by two or more words or matters, the qualifi cations attach to the subjects in order in which they appear. An example of this appearing in Pearce and Geddes Statutory Interpretation in Australia is:
If the statement is made 'paint or varnish may be dissolved by turpentine or kerosene', does this mean that both solvents work on both subjects? Or is it that paint may be dissolved by turpentine and varnish by kerosene? The reddendo approach indicates the latter interpretation.
OTHER PRESUMPTIONS: CONTRA PROFERENTUM
A complex body of cases, and principles, applies in relation to some particular kinds of contracts or clauses in contracts, particularly:
- Standard form contracts;
- Exclusion or limitation clauses in contracts.
Another Latin tag "contra proferentum" may apply in these cases: In the Australian Encyclopaedia of Forms and Precedents, the editors describe this as:
"If all else fails, interpret the provision to the detriment of the party who proposed it."
PREPARATION OF CONTRACT DOCUMENTS
Because of the scope and vagaries of words and language, it is likely that many contract documents will be far from perfect in expressing the intentions and precise meanings of parties.
It is a counsel of perfection to suggest that all contracts should be carefully prepared and considered in commercial dealings. Often contracts will be brought into existence quickly, and without the time for detailed consideration. However, particularly for matters of substance, the wording of contracts should be given careful and timely consideration and, where appropriate, should, ideally, be drawn by, or with advice from, lawyers with expertise in the area. However, as will be seen from the brief comments above, it may be impossible to guarantee that even a carefully prepared contract document does not contain some ambiguity which may require interpretation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.