Is It Possible to Inject Commercial Common Sense into a Contract

Date Added 07.01.16

The Supreme Court has summarised the test for assessing the meaning of a contract. In essence assessment must be made by reference to “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”. There are 6 key factors to consider:

  1. The natural and ordinary meaning of the clause
  2. Other relevant provisions in the contract
  3. The overall purpose of the clause and the contract
  4. The facts and circumstances know or assumed to be known to the parties at the time the contract was entered into
  5. Commercial common sense; and
  6. A disregard for any subjective evidence of the parties’ intentions.

In considering those factors the following principles should be applied:

  1. Commercial common sense and surrounding circumstances should not undermine the importance of the language actually used in the contract
  2. The less clear the drafting the more likely it is that the court will depart from the natural meaning of the words used. A court cannot however look for problems with the drafting solely to justify a departure from the natural meaning of the words used.
  3. Commercial common sense cannot be invoked retrospectively – it must be assessed as at the date the contract was entered into. Just because a contract has not worked well for one of the parties is not a reason to depart from the natural meaning of the words used.
  4. The courts should be very slow to reject the natural meaning of the words used simply because it appears to be an imprudent clause for a party to have entered into. The purpose of interpretation is to identify what the parties did agree and not what the court thinks they should have agreed.
  5. Only the facts know to or reasonably available to both parties at the time the contract was entered into can be considered. It is not right to take into account facts or circumstances know to only one party.
  6. If an event occurs after the contract was entered into which was clearly not intended or contemplated by the parties, if it is clear what the parties would have intended then the court will give effect to that clear intention.
  7. Service charge clauses (which were the subject of the case in question) are not subject to any special rules of interpretation. A court “should not bring within the general words of a service charge clause anything which clearly does not belong there”.

The Court reiterated the previously held rule that when interpreting a contract one must consider what a reasonable person, with all the factual background knowledge which would reasonably have been available to the parties, would have understood the parties to have meant. The aim of the exercise is not to re-write the contract because it has proved to be a bad bargain for one of the parties. Commercial common sense will only be a relevant consideration if the result would be one which was available from an initial review of the term under review. Commercial common sense cannot override the plain and unambiguous words of a contract so, in a nutshell, the parties should ensure that they say what they mean.

All things Tollers

We partner with...