How the Court would Read Your Contract

A valid contract is all about the meeting of minds. Parties enter into a contract because they have each come to an agreement to do (or not to do) certain things. However, disputes are commonly unavoidable in the course of a contract.

If parties cannot resolve these differences on their own, the task of interpreting the agreement often falls into the hands of the court. 

Now in interpreting an agreement, should the court follow the views of Contractual Party A or Contractual Party B?

Bear in mind that the court would have no prior knowledge of the agreement laid before it – should it then simply decide what seems fair and equitable to all parties in the circumstances? 

This article explores the broad guidelines that the court would follow in deconstructing an agreement before it. The focus here is on written agreements. 

Are all parts of the agreement before the court? 

In practice, not all contracts are helpfully reduced to a single, clear-cut document. Often, multiple drafts would have been exchanged between parties before a final version is agreed upon. It is important for the court to first be able to identify the latest copy of a contract (usually by reference to the latest date) that is intended to be legally binding upon parties. 

There may also sometimes be several agreements supplemental to the “main” agreement containing the primary contractual terms.  It is necessary to pinpoint these supplemental agreements because the terms of supplemental agreements are meant to be read together with the “main” agreement to paint a full picture of what has been agreed upon. Here, the court would take note of any clause in the supplemental agreement(s) which expressly provides that in the event of inconsistency between the terms in the “main” agreement and that in the supplemental agreements, the latter would prevail. 

Keeping it plain and ordinary 

The cardinal rule of interpretation means that the court will give effect to the plain and unambiguous meaning of the contractual term as expressed by parties.  In other words, it does not matter what parties thought the contractual term meant – what matters is what has been clearly and expressly stated in the contract. The test is what a reasonable person would have understood the contractual term to mean. If there is no ambiguity as to the meaning of the term, the court has no choice but to apply the dictionary definition of the term. See the Federal Court decision of SPM Membrane Switch Sdn Bhd v Kerajaan Negeri [2016] 1 MLJ 464. 

But what if there are two possible meanings? 

If a contractual term(s) has two possible interpretations, the court would choose the meaning that makes more commercial sense in the circumstances. See for example the case of SPM Membrane (supra) where the contention centered principally around clause 8.1 (b) and clause 9.2. 

8.1 Termination by the State Government

The State Government shall be entitled to terminate this agreement by giving thirty (30) days notice to the Company if:

(b) the Company is unable to perform its Services as provided under the agreement;

9.1 The parties hereby agree that the State Government may at any time during the Contract Period review the Company’s performance of its Services under this Agreement [upon such terms and conditions as the State Government and the Company may hereafter agree in writing].

9.2 In the event that the State Government shall determine the Company’s performance of its obligations under this Agreement as unsatisfactory; the Company shall be given thirty (30) days to remedy the unsatisfactory situation.

The issue in this case was whether clause 8.1 could be exercised independently of clause 9. In other words, the court had to make a choice between two interpretations i.e. either: 

1. Accept that clause 8.1 is independent from clause 9 and that the Respondent could unilaterally deprive the appellant of the opportunity to remedy any of its performance that the respondent has “determined as unsatisfactory” or 

2. Reject the contention that clause 8.1 is independent from clause 9 and that termination is only possible where the appellant has not remedied its unsatisfactory performance after 30 days. 

Ultimately the court determined that interpretation (b) made more commercial sense. The court found that Clause 9.1 for instance, obliged the parties to agree upon the terms and conditions of the review prior to any review occurring. This was clearly meant to protect the interests of both parties, ie the interest of the respondent in ensuring that the unsatisfactory situation was remedied, and the interest of the appellant in avoiding breach and termination of the contract. The court decided that interpretation (b) above should be given to ensure that “the meaning and purposes of the two clauses were not lost or rendered nugatory by operation of the other”. 

Holistic Approach and Main Purpose 

Bear in mind that the role of the court is not to redefine the contract, but rather to preserve the sanctity of the bargain that parties have held themselves to. As much as possible therefore, the court would want to interpret a contract holistically. For instance, it was mentioned above that a main agreement may be accompanied by several supplemental agreements. The court would first find a way to reconcile all parts of the agreement to achieve a harmonious interpretation. 

Of course, if a holistic approach is not possible to resolve any ambiguity, the court would look at the main purpose of the contract and reject words, or even whole provisions which are inconsistent with what the main purpose of the contract is. 

In the Court of Appeal decision of Sia Siew Hong & Ors v Lim Gim Chian & Anor [1995] 3 MLJ 141, the question was whether the general rule that applies to bar actions for the breach of a contract was to be applied, or whether that rule had been displaced by a contrary intention evinced by the parties. The appellants relied on the words “in the event of the borrower’s default in its repayment” appearing in the document under consideration as fixing the date on which the cause of action vested in the respondents, namely, the date on which the company broke its contract with the lender.

Nonetheless the court grounded its decision on the fact that the main object of the document was that the appellants should indemnify the respondents against the loss of the latter’s land. Therefore, time only began to run only from the date the respondents suffered the loss of the land, and not before that.

Recourse to the contra proferentum rule 

If the court is faced with an ambiguity in a contractual term, it also has recourse to what is known as the contra proferentum rule i.e. an ambiguity which cannot otherwise be satisfactorily resolved is to be construed adversely to the party who proffered it for execution. See the Privy Council decision of Kandasami v Mohamed Mustafa [1983] 2 MLJ 85. 

A practical example might be where a contractual term in a contract spells out that Party A would be provided with 100 kg of goods by Company B. Company B however denies Party A’s entitlement as such on the basis that in the necessary column in the schedule attached to the contract, it is not spelled out which branch of Company B the goods would be sourced from. Given that Company B seeks to rely on the ambiguity in the schedule to deny Party A’s entitlement, this could be a scenario where the court applies the contra proferentum rule against Company B. 

Looking beyond the four corners of the contract 

Where there is ambiguity in a contract, it is also open to the court to look beyond the four corners of the contract and consider the factual matrix surrounding the agreement. SPM Membrane (supra) allows the court to look into “the meaning which the contract would convey to a reasonable person having all the background knowledge … available to the parties”. 

Consider the backdrop that a contract was entered into. Perhaps the contract was executed pursuant to a court order. What was the purpose of the court order? If a court order exists, it stands to reason that the contract must necessarily reflect the remedies awarded under the court order. 

Subjective views of parties do not matter

An often overlooked point, and perhaps somewhat counterintuitively, the subjective intentions of parties are irrelevant in determining the meaning of a contract. In Investors Compensation Scheme Ltd Supra) [1998] 1 All ER 98, Lord Hoffmann expressed that the “law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent”.

How is this principle reconcilable with the fact that court can look beyond the four corners of a contract to address any ambiguity? Well, subjective evidence from parties would be relevant insofar as such evidence inter alia illustrates existing facts surrounding an agreement. What is not permissible is ascribing meaning of a contract based purely on the subjective intention of parties. Ultimately, the rule of interpretation is still an objective one. 

Summing It Up 

In practice, the court would often entertain several considerations of the aforementioned principles simultaneously in interpreting a contract. If one were to summarize contractual interpretation in one sentence, it could perhaps be: 

“What is the objective meaning that a reasonable person having the necessary background knowledge of all surrounding circumstances would ascribe to the contract, bearing in mind the main purpose of the contract and the need to achieve commercial viability?”