Saturday, August 06, 2005

Legal Aspects for Construction of Contracts


The process by which the courts arrive at the meaning of words in a contract is term as construing a contract, and the process by which the meaning, as determined by the court, the construction of the contract.

“The object sought to be achieved in construing any commercial contract is to ascertain…what each party would have led the other reasonably to assume were the acts that he was promising to do or to refrain from doing by the words in which the promises on his part were expressed.” (Lord Diplock in Pioneer Shipping vs B.T.P. Tioxide (1982)A.C724 at 736(H.L.)


In construing a contract the court applies the rule of law that, “while it seeks to give effect to the intention of the parties,(it) must give effect to that intention as expressed, that is, it must ascertain the meaning of the words actually used.
(Inland Revenue Commissioners vs Raphael (1935) A.C. 96 at 142 (H.L.);

For the purpose of construction “intention” does not mean motive, purpose, desire or a state of mind but intention as expressed, and the common law adopts an objective standard of construction excluding general evidence of actual intention of the parties. It permits evidence of the circumstances in which the contractual document was made, of the special meaning of words, of custom and certain other matters to assist the court in arriving at the expressed intention of the parties, nevertheless the fundamental rule is that the words must speak for themselves. The parties cannot come to the court to give evidence of what they intended to say.


It follows that the principle just stated that, for a written contract, no evidence outside the document itself, i.e. extrinsic evidence, may normally be adduced to contradict, vary, add to or subtract from the written terms.


Where a complete blank is left in a material part of the contract evidence is not admissible to fill it. Thus where the date of completion was omitted, and to insert it would result in the imposition of an onerous obligation under a liquidated damages clause, the court refused to admit evidence that each party has been told of the date.


The court is entitled to look at the deleted words to see if any assistance can be derived from them in solving an ambiguity in words retained, and that a word or phrase in the deleted part of a clause may throw light on the meaning of the same word or phrase in what remains of the clause. But by deleting a provision parties are not to be deemed to have agreed the converse. It is further been held that there is no difference here between a deletion and an omission.
(Diplock Louis Dreyfus vs Parnaso Cia. Naviera (1959) 1 Q.B.498 at 513.;Lloyd J. Mineralimportexport vs Eastern Mediterranean Maritime (1980) 2 Lloyd’s Rep.572 at 575.


When parties have acted in a transaction upon an agreed assumption that a particular state of facts between them is to be accepted as true, each is to be regarded as estopped as against the other from questioning as regards that transaction the truth of the facts so assume. Evidence to establish the agreed assumption is admissible which, it is suggested, might conceivably include evidence of facts occurring after the making of the contract in so far as they go to establish the existence at the time the contract was made of the agreed assumption.


A contract is void or voidable because of misrepresentation, fraud, mistake, illegality, duress, minority or made by a mentally disordered person or that the contract has been varied, rescinded, or is subject to an estoppel.
( Norton on Deeds (2nd ed.),p.151;Chitty(27h ed.),vol.1,8-64.


Different considerations apply when the contract is in truth, not exclusively in writing, but partly in writing and partly oral and/or by conduct.
(Evans & Sons vs Andrea Merzario (1976) 1 W.L.R. 1078 at 1081 C.A.)

(NOTE: The majority of the court of appeal did not agree wholly with the approach of Lord Denning and dealt with the case as a contract partly in writing, partly oral and partly by conduct).

In such a case the court admits evidence of the oral part of the contract and/or the conduct and construes the contract according to all its terms gathered from the documents, words and conduct comprising the contract.


This is used to describe words or phrases which have acquired a precise legal meaning ordinarily applied by the courts, but:

“ where a word or phrase which is a ‘term of art ‘ is used by an author who is not a lawyer, particularly in a document which he does not anticipate may have to be construed by a lawyer, he may have meant by it something different from its meaning when used by a lawyer as a Term of Art."
( Sydall vs Casting Ltd. (1976)1Q.B.302 at 314 C.A.)


“ When the terms of a contract are ambiguous and one construction would lead to an unreasonable result, the court will be unwilling to adopt that construction.
(Lord Esher M.R. in Dodd vs Churton (1897)1 Q.B.562 at 566 (C.A.)

If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to the business common sense.(Antaios Compania vs Salen A.B. (1985)A.C.191 at 201(H.L.);


The contract must be construed as a whole, effect being given, so far as practical, to each of its provisions.
Lord Atkinson in Brodie vs Cardiff Corp.(1919)A.C.337 at 355(H.L.)

Construing a contract may involve two stages; first, the court may have to determine which documents are contractual, secondly, having decided which document forms part of the contract, it must give effect to all the terms and endeavour to reconcile inconsistencies by the rules of construction.


This rule is that there are words of a particular class followed by general words, the general words are treated as referring to matters of the same class. In a clause permitting an Extension of Time to be granted to the contractor, if the words were “delayed by reason of any alteration or addition…or in case of combination of workmen, or strikes, or by default of the sub-contractors… or other causes beyond the contractor’s control, the “other causes” were limited to those ejusdem generies with the causes particularized, and did not therefore include the employer’s own default in failing to give possession of site. (Wells vsArmy & Navy Co-op, Soceity (1902) H.B.C. (4th ed., 1914) vol.2, p.353 at 357(C.A.) Where the words “et cetera” were inserted between words describing a particular class and general words it was held that their meaning was too vague to prevent the operation of the rule.
(Herman vs Morris (1919) 35 T.L.R.574 C.A.)


This expression means “ against the profferer “ i.e. against the person who drafted or tendered the document. Where there is a clause enabling the architect to extend the Time for Completion and the employer sought to rely on the clause to enable him to claim liquidated damages, it was held for various reasons that the employer could not rely on it. It was said that in case those reasons were wrong, then in any event the employer could not rely on the clause for it was ambiguous and would therefore be given the construction favorable to the contractor.
Miller vs L.C.C. (1934) 50 T.L.R. 479 at 482.)

Of a form of contract devised by the employer, it was said “the liquidated damages and the extension of Time clause in printed forms of contract must be construed strictly Contra Proferentem.”
(Salmon L.J. in Peak Construction (Liverpool) Ltd vs McKinney Foundations Ltd (1970) 1B.L.R.111 at 121;)


A recital is an introductory part of a document, usually beginning with the word “Whereas…” which indicates what the parties want to effect by their contract. Recitals often intentionally or in effect contain definitions or description of the subject matter of the succeeding contract.


There is a distinction between construction, which is determining the meaning of words, which are in the contract, and implication, which is (in effect) supplying words, which are not in the contract. There are three different senses in which the expression “implied terms” is used. The first is a term, which does not depend on the actual intention of the parties but on a rule of law such as the implied terms in a contract for the sales of goods. This is discussed under “ Statutory Implication”. The second is where the law in some circumstances holds that a contract is dissolved if there is a vital change on conditions. The third is where a term is sought to be implied based on an intention imputed to the parties from their actual circumstances. This sense is under “ Necessary Implication”.


Within the spectrum, two broad areas or categories may be discerned. The first appears where the parties have drawn up a detailed contract but it is necessary to insert a term to make it work. This is sometimes term “ The Moorcock approach”. The second is where in all contracts of certain type, such as building contracts, the law implies certain usual terms unless the parties have shown an intention to exclude or modify them.

i) Implication to make contract work

The court does not make or improve contracts. Its:
“Function is to interpret and apply the contract which the parties have made for themselves. The clear terms must be applied even if the court thinks some other terms would have been more suitable.

“It must have been a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves.”
(Lord Pearson in Trollope & Colls Ltd vs North West metropolitan Regional Hospital Board (1973) 1 W.L.R. 601 at 609 (H.L.)

The test of implication, therefore is necessary- “ such obligation should be read into the contract as the nature of the contract itself implicitly require, no more, no less.” The term sought to implied must be one without which the whole transaction would become “ inefficacious, futile and absurd”.

ii) Implication of “usual “ terms – employer

Where there is a comprehensive written contract such as the standard form of Building contract there may be very little room for the implication of any terms, for if the parties have dealt expressly with a matter in the contract, no term dealing with the same can be implied. (Lynch vs Thorne (1956) 1 W.L.R. 303 (C.A.); Jones vs St.John’s College, Oxford (1870) L.R.6Q.B. 115 at 126;


Where an architect is to supervise the work the employer must appoint an architect.
Where a certifier fails to apply the terms of a contract properly to the detriment of the contractor and where the contract does not contain a relevant arbitration clause, it is ordinarily an implied term on the part of the employer that he will require the certifier to perform his duties properly.

If to the employer’s knowledge the architect persists in applying the contract wrongly in regard to those matters where the architect must act fairly between the parties, he must dismiss him and appoint another.

If it is established that an employer knew perfectly well that his architect was failing to certify in accordance with the contract, it is thought that he would not be allowed to shelter behind the arbitration clause.

The implied term of co-operation extends to those which the architect must do enable the contractor to carry out the works and the employer is liable for any breach of this duty by the architect.
(London borough of Merton vs Leach (1985) 32B.L.R. 51 at 81; Neodox vs Swinton and Pendlebury B.C. (1958) 5 B.L.R. 38 at 41).

In Neodox vs. Swinton and Pendlebury B.C., it was said that what was reasonable did not depend solely upon the convenience and financial interest of the contractor. It depended also on the point of view of the engineer and his staff and the employer. It is thought that it may not be appropriate to consider reasonableness from the point of view of the architect or engineer or the employer where the order of the works is a matter solely for the contractor. The prime consideration is, it is suggested, and that instruction should be given at such time and in such manner as not to hinder or prevent the contractor from performing his duties under the contract.
(Glenlion Construction vs The Guinness Trust (1987) 39 B.L.R. 89 at 103.Jardine Engineering vs Shimizu (1992) 63 B.L.R. 96 (Hong Kong High court).

Since the principal relevant contractor’s duty is to complete within the stipulated time, the obligation of the architect or engineer to furnish drawings and instructions could validly be performed within a reasonable time of the conclusion of the contract.

The contractor cannot unilaterally determine what is a reasonable time, and a contractor does not prove a claim based on late instructions merely by establishing non-compliance with requests for instructions or a schedule of dates for instructions, which he has sent to the architect. Agreement by the architect with such a schedule, or even acquiescence, may, it is submitted, be relevant evidence on the question what is reasonable. The critical question will be to determine on all facts when the contractor really needs the instructions.


In general… a term is necessarily implied in any contract, the other terms of which do not repel the implication, that neither party shall prevent the other from performing it. The particular implied term relied on should be expressly pleaded, and “ except possible in the rare cases where the wrongful act alleged is independent of the contract, it is circumlocution to add a general allegation of prevention.
(Devlin J. in Mona, etc, Ltd. Vs Rhodesia Rys.Ltd (1949) 2 All E.R. 1014 at 1016;Thompson vs ASDA-MFI Plc. (1988) Ch. 241 considering Cheal vs A.P.E.X. (1983) 1 A.C. 180 at 189).

Unjustified interference by the employer in the supply of goods necessary for the contract is a breach of the implied term, notwithstanding that the suppliers has no contract direct with the contractor.
(Arrow (Automation) Ltd. Vs Red Chainbelt Inc. (1971) 1 W.L.R. 1676 at 1680 C.A.)


Deeds are construed in the same way as other documents save that where one party wishes to deny the truth of a statement in the deed he may be estopped (i.e. prevented) from doing so by the application of a further rule known as estoppel by deed. This is a rule of evidence founded on the principle that a solemn and unambiguous statement or engagement in a deed must be taken as binding between parties and privies and therefore as not admitting any contradictory proof.
(LordMaugham in greer vs Kettle (1938) A.C. 156 at 171 H.L.)

Statement of facts in the recital is subject to the rule. Statement in the deed may bind all or only one or some of the parties according to the construction of the deed. The estoppel does not operate where the deed was fraudulent or, in general, where it is illegal, nor where there the party seeking to set up the estoppel caused the misstatement of fact to appear in the deed.


Negligence means the breach of a contractual obligation to take responsible care or to exercise reasonable skill or breach of an equivalent common law duty. The requirement of reasonableness in relation to a contract term is:

“ …That the term shall have been fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”

In relation to a non-contractual notice, the requirement of reasonableness is:

“…That it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.” It is for this that a contract term or notice satisfies the requirement of reasonableness to show that it does.

No comments: