Commerciality the Key in Contract Interpretation

July 26, 2013

Commerciality the Key in Contract Interpretation

When a dispute arises concerning the meaning of a contract term that is capable of being interpreted in more than one way, the resolution is normally to be found in the interpretation which is most consistent with common business practice and sense.

Unclear wording of a contract involving bonds bought to guarantee contract performance or prevent losses arising from non-performance meant that a dispute wended its way to the Supreme Court, which took the view that the purpose of the arrangement for the purchaser of the bond must have included the circumstances which gave rise to the claim against the seller of the bond. There would be little commercial point in the transaction if it did not.

Accordingly, the application of common sense overrode the technical deficiencies in the wording.

Although it is clearly better to have contracts that are clearly worded, it is a relief to have the assurance that the courts will take a common-sense approach when to do otherwise would produce an uncommercial result.