Open To Interpretation

In this article we will examine how the court approaches disputes where the parties to a contract are unable to agree what the contract means and look at some recent examples showing how the court's approach applies in practice.

In theory, when the terms of a transaction are agreed the document drawn up to reflect the agreement should always be perfect. In reality, as we at Clyde & Co often see in the course of our work in the professional indemnity sector (where we regularly find ourselves defending solicitors against claims relating to allegedly negligent drafting), this is not always the case.

Disputes over the meaning of contracts are commonplace, and the property sector is no exception. Particularly in difficult economic times parties may sometimes look for ways to extract themselves from deals which have not turned out as well as they hoped at the time of negotiating the agreement. For example, if a contract for the sale of a property provides for a delay between exchange and completion, and if the property market takes a turn for the worse after exchange, the purchaser may look for any possible argument that the wording of the contract allows it to walk away from the transaction.

In a dispute over the meaning of a contract the court will consider:

how the contract should properly be interpreted; and/or whether the contract should be rectified in order to reflect the parties' true agreement or by reason of the unilateral mistake of one of the parties. The two tests are separate and independent, and can often be mutually exclusive (if a contract can be interpreted as one party claims then it probably does not need to be rectified). We therefore take each in turn below.

Contractual interpretation

In the words of Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society, "interpretation [of a contract] is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract". When called upon to interpret a contract, the courts will therefore seek to determine the objective meaning of the wording of the contract. The emphasis is primarily on analysing what the contract as a whole says, rather than what the parties may subjectively have intended it to say.

"All that is required is that it should be clear that something has gone wrong with the language [of the contract] and that it should be clear what a...