Wednesday, March 10, 2021

Interpretation of Contracts

Since a contract is a law, it may be interpreted. A law may be interpreted when it is vague, silent, illogical, ambiguous, and contradictory. So interpretation gives meaning to the provisions of the contract. If the provision of the contract is clear, there is no need to interpret (Art 1733). Here in law of contracts, interpretation is the way and process of determining the true meaning of a written document.

It is a judicial process and ultimately vested with the power of the court in determining the meaning of a contract entered into by partiers in accordance with a number of rules and presumptions.

Many times the parties to a given contract may disagree about the meaning of one or more terms of their agreement. When this occurs, the courts must interpret or construe the contract to determine the rights and duties of the parties.

The interpretation of uncertain, unclear and ambiguous terms is a question for the court which has to give the right meaning for such terms. The basic standard of interpretation is objective: the courts attempt to give the agreement, the meaning that a reasonable person would be expected to give it in light of the surrounding facts and circumstances.

The courts have devised certain basic rules to guide them in interpreting contracts. Most of these rules are simply matters of commonsense. The first thing a court may do, especially common law courts, is to attempt to determine the principal objective of the parties.

Every terms and conditions of the contract is then will be interpreted in light of this principal objective. Ordinary words are being given their ordinary meaning and technical words too their technical meaning unless a different meaning was clearly intended.

If the parties are both members of the same trade, profession or community where certain words are commonly given a particular meaning which is called usage, the courts presume that the parties intended the words meaning to be in accordance and in line with that trade usage.

 Exercise 3.1

Kerim signed a contract with XYZ bakery so that the bakery shall deliver 10 dozens of breads every morning for consecutive six months. Later on Kerim claimed that the bakery should deliver 150 loaves of bread. On the other hand, the bakery asserted that it is bound to deliver 120 loaves of bread on a daily basis. How do you resolve this dispute?

Usage can also add provisions to the parties’ agreement. If the contract finds that a certain practice is the matter of common usage in the trade, profession or community of parties, the court assumes that the parties intend to include that practice in their agreement. Parties who are members of common business, profession or community and who intend not be bound by usage should specifically say so in their agreement.

There are fairly considerable differences among Western legal systems as regarding interpretation of contracts. For example the English and French law approaches the problem from theoretically conflicting points of views.

As it is stated by the former, the English approach, contracts are to be interpreted strictly by looking only at what the contracting parties have said.

This is to say that interpreting their words as objectively as possible and giving them the meaning they would have for a “reasonable man”. The justification for this approach is stated as it is not fair to search the intention of the parties rather than looking at the words expressed in the text of the contract; this may lead to search what the parties never meant while concluding the contract.

The French approach, on the other hand, states that it is better to search for the real intention for the parties, correcting imprecise terms or incorrect figures where necessary. The justification for this approach is based on the idea that if one, while interpreting, exclusively looks only at the words expressed in the text and what the parties said , he will fail to get their real intention, which is the most important element.

Here, although the contract between the two approaches have practical consequences, the difference is clear in theory than in practice. For example, in the rule of English law which dictates that the words of the contracting parties should be interpreted strictly and objectively, rules of equity in that law allows some correction of contracts to give effect to the true intention of the parties: whereas, the French law which says searching the real intention of the parties may face a difficulty of ascertaining the true or real intent of the parties, may give primary attention to the declaration of the parties.

The English approach primarily is concerned with the economic utility or importance of contracts to security of commercial transactions while the French gives more emphasis and stress to the moral basis of contracts as a man’s word should be his bond. In England, as in France, however, one would recommend that the contracting parties conduct themselves properly and should act according to what they really intended rather than the letter of the contract.

But if one considers the courts problems in interpreting contracts, one will inevitably pay more attention to what was actually said by the party in the contract  and much less to what may have been intended during the conclusion of the contract.

We have said that where the contract is not drafted precisely enough, it may become a source of dispute between the parties. This is specifically true where a different interpretation of an article or even a word leads to important financial consequences. Legal vocabulary is rarely mastered by lay contracting parties and it is further rarer that they have provided solutions for every possible problem that might arise in the future. Not only this is probably impossible but also will force one to seek the assistance and intervention of legal professionals in every contract  which in turn and as a result raise the costs of economic activity, especially in developing economy where access to competent  lawyer is difficult, either because of lack of a lawyer or of its expensiveness.

A doubt may also arise as to the legal qualification of the contract as a whole. A lay man may be in doubt or hesitate between donation and sale, between lease and loan etc... In such cases, the judge, through interpretation, has to give the exact qualification of such contract and determine the effects of such contracts.

The principal rule in respect of interpretation of contracts is derived from such considerations.

The Ethiopian civil code attempts to strike a middle ground between the two approaches we have discussed previously. Articles 1732 through 1739 of the civil code deal with these mechanisms of ascertaining the true meaning of the contents of the contract.


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