Interpretation clauses
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This article is written by Shivani Varade, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

Uncertainty makes it difficult for anyone to take decisive action, in business, as well as in contracts. Thus, it is our duty as lawyers representing our clients to help them avoid ambiguity in contractual terms and wrong interpretation of contracts by the court in case of dispute. The procedure by which the courts determine the meaning of a contract based on the terms in which it is expressed, is known as interpretation. Contract interpretation aims to determine and ascertain the intention of the parties when they signed the contract. 

This article aims to provide a thorough overview of the various interpretation clauses incorporated in an agreement and the general principles based on which the courts interpret ambiguous terms in an agreement in case of dispute. 

General rule of interpretation by court

Generally, when interpreting a commercial contract, a court applies such standards of interpretation:

  • Putting itself in the shoes of a reasonable individual in possession of the background details reasonably available to the parties, the court will attempt to determine the parties’ objective purpose when entering into the contract; and
  • If the wording is ambiguous, the court would take the interpretation that makes the most commercial sense.

From this, it can be observed that the client will benefit from clear and concise language in his contract, and thus interpretation clauses should be introduced while drafting a contract. Interpretation clauses specify which legal rules would be used to interpret ambiguous or contradictory language in a contract. They are-

Merger clause

A merger clause, also commonly known as an “integration clause”, “entire/complete/whole agreement” or “full and final expression of parties” clause is a common provision in many contracts. It provides that the written contract is the complete agreement between the parties, and any prior or subsequent agreement between the parties is superseded by the written contract. Simply put, any previous provision found outside the written agreement is declared to be invalid to the agreement if it is not mentioned in the merger clause. Many forms of contracts, including sales of goods agreements, job agreements, lease agreements, escrow agreements, and asset purchase agreements, include a merger clause.

Sample clause

  • This agreement contains the complete understanding between the parties and supersedes any prior understandings and/or written or oral commitments between them relating to the specified transaction/subject matter. It is agreed that there are no arrangements, representations, agreements, or understandings, either written or oral or, between the parties hereto relating to the subject matter hereof that are not expressly mentioned herein.
  • This is the parties’ full and final expression of their agreement superseding all prior negotiations and/or understandings. 

Benefits of a merger clause

Some of the benefits of having a merger clause in place are- 

  • Supersedes all other agreements specific to the transaction 

Any previous agreements between the parties about the transaction covered by the agreement are effectively nullified by the merger clause. For example, if two parties make some promise outside of the agreement- in person, via email, or over the phone, it will not be part of the final contract. Hence, it helps incentivize all parties to the contract to put all of the important parts of the agreement in writing to avoid disputes in the future. 

  • Look only to the contract if disputes arise

It also provides that the contract terms and conditions are to be found only in the contract and nowhere else. For example, in a lease dispute over the landlord’s commitment to repair a wall damaged by a prior tenant, the tenant cannot introduce emails from the landlord promising to also pay to repair a damaged bathtub. Therefore, this clause also helps to prevent either of the parties from later bringing up new issues or re-casting issues that were settled during the contract negotiations.

Course of dealing clause

A ‘course of dealing’ clause refers to a series of prior interactions between the contracting parties which is to be regarded as forming a common understanding for interpreting their expressions and other conduct. Simply put, in the event of a dispute over an ambiguous word, the court may consider the parties’ previous dealings to decide what the ambiguity is. 

Sample clause

  • The Parties hereby acknowledge and agree that at no time shall any prior conduct by the Parties directly or indirectly limit, impair or otherwise adversely affect any of the Parties’ rights, interests or remedies in connection with the subject matter or obligate either Party to agree to, or to negotiate or consider an agreement to, any waiver of any obligation or default by either Party under this Agreement.
  • Acceptance of or acquiescence in a course of dealing rendered or taken under or concerning this Agreement will be relevant in any respect to determine the meaning of this Agreement, or the obligations or liabilities of the parties hereto under this Agreement, even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection.

Benefits of a course of dealing clause

  • Acts as a piece of admissible evidence in the court of law

In breach-of-contract situations, proof of the course of dealing is admissible to interpret ambiguities in the contract, but not to alter or contradict the contract’s provisions. A term that seemed unambiguous at the time the contract was signed, could later prove to be problematic.

  • Establishes reasonableness of a transaction

In Southern Cotton Oil Co. v. Merchants National Bank, the issue was whether a bank’s course of dealing with its customer could determine whether the bank gave notice of dishonour within a “reasonable” period. Despite delaying notice of dishonour for 52 days, the court found that Merchants operated in a “reasonable” period based on its previous course of dealings with Southern as delays ranging from 9 to 45 days had occurred in the previous transactions, and the same were accepted by Southern. 

Generic interpretation clause

A general interpretation clause is found in almost all kinds of commercial contracts to look for significant concepts in the contract. The object of this clause is to provide clarity of understanding when reviewing the contract, to prevent a court from interpreting the contract in a way that is inconsistent with the intention of the parties, and to avoid repeating information when drafting a contract, making it easier to read.

Sample clause

Unless otherwise stated, the following rules of interpretation refer to this agreement:

  • Headings are for reference only and have no bearing on the meaning of this agreement;
  • Singular forms of words include plural forms, and vice versa; 
  • Gender-neutral or gender-specific terminology used include each gender;
  • A person includes a natural person, a joint venture, a government agency, a partnership, a company, an organization, a trust, or any other legal entity;
  • The terms “such as,” “including,” “particularly,” and similar terms are not to be construed as words of limitation;
  • A reference to:
  1. All schedules and attachments to this agreement are included in this agreement.
  2. A clause, term, party, schedule, or attachment refers to a clause, term, party, schedule, or attachment of this agreement.
  3. A party includes its agents, successors, and permitted assignees.
  • When deciding the relevant time of day for this agreement, the relevant time of day is:
  1. The time of day at which a party receiving a notice is situated while giving or receiving notices.
  2. For any other reason under this agreement, the time of day in the place the party who is expected to fulfil an obligation.
  • When something must be done on a day that is not a Business Day, it must be done on the [following/preceding] Business Day. 
  • A day shall mean the period beginning at midnight and ending immediately before the next midnight.
  • Since a party was responsible for the preparation of this agreement or any aspect of it, no rule of construction applies to that party’s disadvantage.

Benefits of an interpretation clause

An Interpretation clause expressly states how the parties intend particular grammatical conventions adopted in the contract should be interpreted. Further, it also sets out the breadth with which particular concepts are intended to be treated by the contracting parties. It clarifies certain common law construction principles, which may apply to the interpretation of the contract and seeks to achieve a level of certainty between the parties about the rules which a court should apply when interpreting the contract.

General principles for interpretation

In addition to the Interpretation clauses that are incorporated by the parties in an agreement, courts also consider certain general principles while interpreting the contract, if necessary. These principles are generally applied when the parties have not specifically included the Interpretation clauses in the agreement. Some of the principles are as follows- 

Usage of trade

Any practice or method of dealing that is practiced with such regularity in a place, vocation, or trade, as to justify an assumption that it will be observed with respect to the transaction in question is referred to as ‘usage of trade’. The burden of proving the existence of a trade usage lies on the party propounding it, and the party has to demonstrate a dominant pattern of use within the industry to establish “regularity of observance” of the trade usage. Further, ‘usage’ must be certain, definite and uniformly recognized in the ordinary course of business (Canara Industrial and Banking Syndicate v. Ramachandra Ganapathy Prabhu). 

Functions of usage of trade

  • Trade linguistics

This clause helps courts to understand that certain terms have a specialized meaning when used by people involved in such activities or professions, even though these terms convey a completely different meaning when used in a traditional sense. In Hurst vs Lake  & Co, B agreed to buy horse-meat scraps from A, who was in the same market, at a $5.00 per ton for meat with less than 50% protein but at least 49.5%. Since it was a known trade usage to consider a protein content of not less than 49.5% as equal to 50% protein, the Oregon Supreme Court held that if the parties meant not less than 50% protein, they should have expressly negated the usage (49.5%) in the agreement.

  • Providing for the unprovided

The function of trade usage is to provide proof of usage to fill in the details omitted in the written contract. In La Nasa v. Russell Packing Co., the United States Court of Appeals held that once a court decides to look beyond the terms of writing to determine the intent of the parties, usage will ordinarily be admitted. However, if it appears from the contract that the parties intended to exclude the usage, the usage will be rejected. Also, where the usage or general trade customs are expressly excluded in the contract, the usage will be denied. 

Course of performance

“Course of performance” refers to the systematic and consistent behavior that parties engage in after signing the agreement. The intent of the parties vis-à-vis the agreement is ascertainable through course of performance the agreement involves a repetitive series of performances. There must be more than one performance, but there is no specific number. However, the less the performances, the more likely it is that they cannot be considered a course of performance.

Functions of course of performance

  • Written contract may be modified

Course of performance may revoke rights granted under the original agreement and can either extend existing responsibilities or add new responsibilities on the parties. For example- If a gardener and her client agree that the gardener will mow the client’s lawn every Sunday during the summer, but the gardener mows the lawn every Saturday without the client’s objection during the month of July, course of performance may have changed the contract, requiring Saturday mowing. 

  • Protects reasonable reliance of a relying party

More specifically, if one contractual party regularly allows a practice to continue without objection, the other party will assume that the practice has become a part of their contractual relationship. To protect the reliance interest of the relying party, the doctrine allows the party’s course of conduct to alter the written contract. 

Conclusion

In summary, miscellaneous clauses which are frequently found at the end of the contract, are usually overlooked by parties who are focused on negotiating the key terms. To say, the above-mentioned interpretation clauses are few such clauses that are used by the courts to determine the ambiguity over any term or clause in the agreement. One should note that, when using general draft clauses from precedent documents, care must be taken to ensure that the interpretation clauses accurately represent the requirement of the client. While drafting any commercial contract, it is critical to remember how important it is to write interpretation clauses clearly for avoiding disputes in future.

References


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