Lecture 2

Common law

Contracts II

Language, structure and

interpretation

THE LANGUAGE OF CONTRACT

Wordiness resulting from the influence of the English case law system is particularly noticeable in the
law of contract: “If the parties omit something from the contract, they cannot rely on the courts to
insert it later … under common law the terms of a contract are always interpreted literally and
narrowly”

Perseverance of outdated ritualism, much contested by the Plain Language movement.

THE LANGUAGE OF CONTRACT

Heavy style resulting from the narrow interpretation of laws and contracts. This rule of interpretation
is called the parol evidence rule. A continental lawyer (Ramón Mullerat) points out that he once
received for signature a 130-page English loan contract (Heikki E. S. Mattila, Comparative Legal
Linguistics, 2006)

Tendency to preserve archaic words and expressions: e.g. antiquated legal adverbials
- “hereafter”, “herein”, “hereby”

THE LANGUAGE OF CONTRACT

High degree of redundancy resulting from repetition of words (“to exercise or perform”, “power and
authority”) and long lists containing items with similar or identical meaning e.g. “act, power, duty,
right, or obligation”

In the hypothetical world of legally binding contracts, we are more projected towards the future and
we tend to use modal verbs such as shall, may or must, to express obligation, authorization,
prohibition, etc.

STRUCTURE OF CONTRACTS

There is generally no legal requirement for a contract to follow a particular format or layout.

The exact structure used will vary according to the kind of document being drafted.

However, most modern commercial contracts prepared by lawyers follow a similar structure.

STRUCTURE OF CONTRACTS

As a rough rule, the structure of a typical commercial contract is as follows:

the names and addresses of the parties

recitals
definitions

conditions precedent

agreements

representations and warranties

boilerplate clauses

schedules

signatures

appendices

The names and addresses of the parties

The first section of the contract usually sets out the full names and postal addresses of all the
parties to the contract.

This section may also specify that a shortened name will be used in the remainder of the
contract to denote each of the parties.

E.g. Pan-Oceanic Shrimp Packers plc (hereinafter referred to as “the Company”)

The words ‘the Company’ will then be used in the remainder of the contract in place of Pan-
Oceanic ...

Recital

The recital is often referred to as a nonoperative part of the contract since it has no specific legal
effect.

The purpose of the recital is to explain to the reader the background to the transaction.

If necessary, the recital also sets out certain facts that may influence the way in which a court might
interpret provisions of the contract.

If it is vital to the contract that the content of the recital be treated as an integral part of the
substantive part of the contract, an express clause to this effect should be included in the contract.

Definitions

The definitions section contains a list of terms used later in the contract.

A definition is given for each term, which represents the way in which the drafters of the contract
wish the term to be interpreted as a matter of law.

E.g. “Execution date” shall mean 3 October 2017, the date of execution of this Agreement.

Often the definitions section needs to be read in conjunction with another section of the agreement.
E.g. a definition may simply state that ‘. . . shall have the meaning assigned to that term in Section 4.3
of this Agreement’.
Definitions

The definitions form part of the substance of the contract since they prescribe that certain words and
phrases shall mean certain things.

It is best to state directly what these words and phrases shall mean rather than resorting to phrases
such as ‘where the context so admits’, since this creates potential for ambiguity.

Conditions precedent

Conditions precedent are conditions which have to be satisfied before the agreement comes into
force.

They are generally viewed as being outside the main terms of the contract.

E.g. In Pym v Cambell (1856), oral evidence was admitted to show that a contract was not to come
into operation unless a patent was approved by a third party.

‘Parol Evidence’rule

One important consequence of this fact is that these conditions are therefore not subject to the parol
evidence rule.

This rule states that where all the terms of a contract are contained in a written document, no external
evidence may be added to it to vary the interpretation to be given to the contract.

Condition subsequent

Contracts may stipulate that if a specified future event occurs during the term of the contract then it
will be terminated.

This type of stipulation is sometimes known as a condition subsequent.

Agreements

The agreements section contains the rights and obligations of the parties. This part reflects the heart
of the deal struck between the parties.

The drafting of the clauses will therefore depend upon the particular facts of the case at hand.

E.g. In a sale of goods contract, the seller will promise to sell and deliver goods of a certain description
and quality. The buyer will promise to pay for them.

This part of the contract will contain clauses covering what happens if the seller fails to deliver or the
buyer fails to pay.

Representations and warranties

The representations and warranties section contains promises by one or other party that a given
statement or set of facts is true.

A representation is a statement of fact made by one contracting party to the other, which induces
the other to enter the contract.
A warranty is a contractual promise and if such a promise is broken, the innocent party will be able
to claim damages.

Boilerplate clauses

Boilerplate clauses are standard clauses that are inserted as a matter of course into certain types of
agreement.

They relate to issues that are to do with the way in which the contract works rather than the heart of
the deal itself.

These include clauses dealing with service of notices (the means by which documents which relate to
the contract must be sent) and assignment (whether and on what basis the parties can transfer the
contract to other parties), etc.

Schedules

If the contract contains certain very detailed agreements or information, the parties often prefer to
put this in schedules that are contained at the back of the contract, instead of cluttering up the main
part of the contract with a mass of detail.

E.g. if a contract must contain a very detailed price list for various kinds of goods sold under the
contract, this is usually placed in a schedule rather than in the main part of the contract.

It should be noted that the stipulations contained in the schedules do form part of the substantive
agreement between the parties.

Signature section

The signature section comes after the schedules and before the appendices.

All parties to the contract are required to sign the document as evidence of their agreement to its
terms.

The parties’ names are usually printed together with the date of the contract, and the parties must
then add their signatures to the contract.

It is common practice for contracts to be produced in duplicate.

This means that two copies of the contract are made – one for each party – and the parties each sign
both copies of the contract.

Appendices

Appendices usually contain documents that are referred to in the contract. These may simply be put
there because they are useful reference material for the parties. They do not necessarily form part of
the substantive agreement between the parties.

E.g. in a contract for the sale of machine parts by one company to another, the appendices to the
contract might contain detailed drawings or specifications for the machine parts for illustrative
purposes.
PRINCIPLES OF INTERPRETATION
The textual approach

The basic method of interpretation traditionally used by common law lawyers is known as the textual
or literal approach.

This approach is based on the idea that the meaning and effect of a contract or piece of legislation
should be determined solely from the words of the text itself and not from any external evidence.

The purposive or teleological

approach

This method contrasts with the approach to interpretation traditionally taken in civil law jurisdictions.
In such jurisdictions, the purposive or teleological approach is used.

This is based on the idea that the meaning and effect of a contract should be determined by taking
account of the object and purpose of the contract and the intentions of the parties

Specific rules of interpretation

The document must be read as a whole

This rule provides that when a reader is seeking to interpret the meaning of a particular clause in a
contract, this should not be done without taking into consideration what the rest of the contract says.

The exact meaning of a part of the contract should become clear once the whole document has been
read.

Contra proferentem rule

This rule provides that if an ambiguity in a contract cannot be resolved in any other way then it must
be interpreted against the interests of the party that suggested it.

E.g. if a problem arises concerning the extent of cover provided in an insurance contract and one
interpretation favours the insurer and the other the insured, the court will use the interpretation that
favours the insured.

Noscitur a sociis rule

Noscitur a sociis is Latin meaning ‘it is known by its neighbours’.

The noscitur a sociis rule states that if the meaning of a phrase in a contract is unclear by itself, its
meaning should be gathered from the words and phrases associated with it.

E.g. If a term in a lease provides that ”no dogs, cats, or primates may be kept on the premises”, the
meaning of primates is qualified by the others. It would cover only primates in the sense of apes and
monkeys, and would not forbid the lessee from having his uncle, a bishop, move in with him.

Ejusdem generis rule

Ejusdem generis is Latin meaning ‘of the same kind’. The ejusdem generis rule applies when a list of
specific items belonging to the same class is followed by general words; the general words are treated
as confined to other items of the same class.
E.g. if a list reads ‘cats, dogs, and other animals’, the phrase ‘other animals’ will be interpreted as
meaning other domestic animals only.

The phrase inter alia (including but not limited to) is often used to avoid this presumption being made
– it indicates that the list is not exhaustive, but merely illustrative.

Expressio unius est exclusio alterius rule

Expressio unius est exclusio alterius is Latin meaning ‘the inclusion of one is the exclusion of another’.

The expressio unius est exclusio alterius rule states that when a list of specific items is not followed by
general words, it is taken as exhaustive.

For example, ‘weekends and public holidays’ excludes ordinary weekdays.

Golden rules of interpretation

Words should be given their ordinary meaning

Consistent terminology

Words should be given their ordinary meaning

This rule provides that when reading a contract one should stick to the ordinary and grammatical
sense of the words being used.

There are two exceptions to this:

Where the ordinary meaning of a word leads either to absurdity or inconsistency with the rest of the
document, the meaning should be modified in the light of the intentions of the parties to avoid such
absurdity or inconsistency.

Technical words should be given their technical meanings.

Consistent terminology

This rule is often stated as follows:

Never change your language unless you wish to change your meaning, and always change your
language if you wish to change your meaning.

The basic point here is that if you have used one word to refer to a particular concept, you should
stick to it consistently throughout the document. If you change to a different word, there is a risk
that this will be interpreted to mean a different concept. For this reason, defined terms are often
used in commercial contracts as a means of maximising consistency of terminology and fixing the
meaning of words.