Overview

Disputes between parties to a written agreement almost always involve disagreements about the meaning and effect of particular contractual terms.

When asked to decide such disputes, the courts seek to give effect to the presumed intention of the parties at the time of entering into the agreement, mainly by reference to:

1. The natural and ordinary meaning of the words used: what would a reasonable person, having appropriate regard to the commercial context of the agreement, understand by the disputed term?
2. The course of dealings between the parties: in performing the contract did they consistently behave in accordance with a particular interpretation?; and
3. Custom and practice in the relevant commercial sector or industry.

Unless certain exceptions apply the court will not, however, consider evidence of pre-contractual negotiations when interpreting a particular term. Persimmon Homes Ltd almost fell victim to this rule in a dispute with Chartbrook Ltd. It had to go all the way to the House of Lords (as it then was) to have a contractual payment calculated as had been intended, because the contract, as worded, did not accurately reflect that. The difference was worth more than £3.5 million. The addition of five words to the provision in question would have avoided the problem.

To read this article click ‘View Briefing’