L2301 Week 10 Lesson 1 19 December 2022

INTERPRETATION OF CONTRACT TERMS

Under the topic of contents of a contract and incorporation of terms, we looked

at which terms form part of a contract, and rules that determine how certain
terms become part of a contract. The next step is to establish what the terms of a
contract mean.

On interpretation of contract, we are concerned with how the courts find the
meaning of express terms of the contract.

This arises because one party favours a particular interpretation of the term
while the other party favours a different interpretation.

The aim of interpretation is to establish the parties’ common intention.

- Courts will not allow evidence of the parties as to what their intentions
were.
- But the courts deduce intentions of parties objectively.

Where there is a dispute as to the meaning of one or more terms of a contract,

the court will try to establish what the parties intended by employing the
following processes:
1. Linguistic treatment/ construction, failing which, it will employ,
2. Canons of construction.

The courts therefore engage in a three staged approach (Also known as the
Delmas Milling Approach) in their interpretation of contract terms.

See Delmas Milling Company ltd v Du Plessis 1955 3 SA 447

[Christie expands the first two stages into a four step technique (p. 233 – 249
4th ed.; pp 192-225 5th ed.) namely, the grammatical and ordinary meaning; the
context within the contract; the wider context, background evidence and
extrinsic evidence of surrounding circumstances; before looking at the canons
of interpretation].

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Linguistic treatment.

First stage: The courts look at the verbal or written terms of the contract,
(which is the more reliable evidence).

Words are generally interpreted according to their ordinary and grammatical

dictionary meaning.
- If the ordinary meaning of the language in the contract is clear, the court
will give effect to the meaning.

Courts use this method on the assumption that the meaning of the words
accurately reflects the intention of the parties.

But courts will deviate from the ordinary meaning of the words if this
interpretation will lead to:
- absurdity, or
- a result which the parties could have never intended.

This is called the Golden Rule of interpretation.

In determining the ordinary meaning of the words, the court does not consider
the words in isolation. It takes into account their contextual setting.

It therefore considers the words in light of:

- other provisions in the contract;
- the nature of the transaction; and
- purpose of the transaction.

See Cinema City (Pty) Morgenstern Family estates 1980 (1) SA 796 at 803
The contract must, however, be read and considered as a whole and in so doing it may
be found necessary to modify certain of the prima facie meanings so as to harmonise
the parts with each other and with that whole. Moreover, it may be necessary to
modify further the meanings thus arrived at so as to conform to the apparent
intentions of the parties.

Where the parties have deleted a word from the contract, the court will consider
the deleted word to be pro non scripto [the word is ignored and treated as if it
had never been written]. It will not draw any inferences from the fact that it was
once in the draft agreement.

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If the contract is clear once this rule has been applied no more needs to be done.
But if the term or contract is still unclear or ambiguous, the law goes to the
second stage of interpretation.

Second stage: The court looks at the surrounding circumstances of the case.

Linguistic treatment is not limited to examination of the documents of the

contract. The court will look at the circumstances in which the parties entered
into the contract. These help the courts understand the wider context in which
the parties were operating within.

The courts can therefore consider:

- the nature of the contract;
- matters present in the parties’ minds while they were contracting;
- what passed between the parties’ on the subject of the contract before its
conclusion, eg. Oral negotiations and correspondence;
- consequent actions of the parties that indicated their understanding of the
document.

See Swart en ‘n Ander v Cape Fabrix (Pty) Ltd 1979 (1) SA 195.

In this case one part signed a surety agreement, where he undertook to be a

surety for payment of amounts due. The surety said he was liable only for debts
due on the date of signature, not debts that arose after that.

The court found that he signed to be surety of a person who had just bought
shares in company and it was anticipated that he would continue buying
property for the company. Hence the surety could not be limited to debts on
date of signature.

Interpretation of contracts is closely linked to the parole evidence rule. The

difference is that if the meaning of the contract is unclear after the court has
examined the document, the courts may hear oral evidence as to the meaning of
the contract.

Third stage: Canons/Rules of Interpretation

If after considering all the evidence above, it is still unclear what the parties
intended, the court will resort to canons of construction.

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Some of the most important rules here are as follows.

1. Non Avoidance Rule/Construction favoring validity

Where words in a contract have a doubtful meaning or two meanings, in

interpreting the contract, courts must adopt an interpretation that gives validity
of a contract rather than one which results in its avoidance (or renders the
contract inoperative).

In other words, if a term is capable of two meanings, one of which would lead
to the contract being invalid; the court will adopt the meaning which makes the
contract valid.

Rationale is that when parties entered into the contract they, intended it to work.

2. Eiusdem generis (ejusdem genus - according to the Ovcon case)

Literally translated it means: ‘of the same kind’.

It is also known as noscitur a sociis (you will be known by the company you
keep).

The rule is used to find the meaning of general terms that are used together with
words of a more specific nature.

- General words here are taken to be limited to the same category into
which the particular words themselves fall.

In other words, a court will limit a wide ambit of a general word to matters
similar to the things covered by the more specific phrases.

See Ovcon (Pty) Ltd v Administrator Natal 1991 (4) SA 71

Thames and Mersy Marines Insurance v Hamilton Fraser (1887) 12 App Cases
484

3. Generalia specialibus non derogant

Means: ‘The provisions of a general statute must yield to provisions of a special

one’ Google

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The rule requires that greater weight should be given to special provisions than
general provisions in the contract.

The rule is regularly used in interpreting

- statutes and
- articles of association of a company.

See Consolidated Employers Medical Aid Society v Leveton 1999 (2)SA 32

E.g. Power of attorney

4. Construction Contra Proferentum/contra stipulatorum Rule

This rule is not concerned with the common intention of the parties.

It is used as last resort when all methods of ascertaining the common intention
of the parties have failed.

So they are rules of law rather than rules of construction.

The main rule of law is that any ambiguity or uncertainty in the wording of the
exemption clause is interpreted against the party who drew the clause.

Galloon v Modern Buglar Alarms 1973 (3) SA 647.

NB If the court’s application of the canons of construction does not help clarify
the meaning of a contract, the courts will declare a contract void for vagueness.

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 RECTIFICATION

There are times where parties fail to record terms of their agreement accurately
in a document. Where this happens, it would be unfair to hold parties to terms
which do not correctly reflect either party’s original intention. Thus the law
holds that a party may apply for an order of rectification of the document so as
to bring it in line with their original intentions.

- The most important exception to the parole evidence rule arises where the
parties fail to record the terms of their agreement accurately in the
document. Strict application of the parole evidence rule where parties
have not recorded their intention correctly would lead to unfair results.

It follows that rectification occurs when a written contract, which incorrectly

reflects the parties’ common intention, is corrected (rectified) to reflect the
parties’ consensus.

E.g. Parties agree that a car will be sold voetstoots. By mistake they leave out
this term in the written contract. The court can rectify the document by inserting
the voetstoots clause.

Rectification is based on the idea that the courts will enforce the parties’
subjective agreement (the document).

NOTE: Rectification does not vary/change the contract. What is changed is the
document. The contract retains what the parties intended their agreement.

In order to get an order rectifying the contract a party has to prove:

1. The common intention of the parties

- rectification can only occur if the parties had reached consensus on a
term.
- If only one party intended the term to form part of the contract,
rectification cannot occur.

2. The document incorrectly reflects this intention.

- The terms of the contract are incorrectly reflected in the contract.

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 - This can happen by incorrectly leaving out, misstating or including a
term.

3. Show what the written terms of the contract should be. The party seeking
rectification must set out exact words which he wishes to be added to the
contract.

See Tesven CC & Ano. V South African Bank of Athens 2000 (1) SA 286 (SCA).

See also in Meyer v Merchants Trust Ltd 1942 AD 244

Two parties had reached an agreement after long negotiations. Secretaries then
prepared a written version of the agreement for parties to sign. While doing this
the secretaries omitted some words/ phrases, which made the text signed to be
different from what was intended by parties. Parties signed the document
without realizing these vital omissions.

Meyer applied for rectification which was granted on the basis that both parties
had a common intention which they intended to express in a written contract but
which they failed to so express because of vital mistake.

In Magwaza v Henan 1979 2 SA 1019, the court stated that rectification cannot
be used to validate a contract that is invalid.
- Eg, where a statute requires that an agreement must be reduced to writing
to be valid, and the parties failed to do so, this rule will not apply.

Purpose of rectification was given in the case of Tesven CC v SA Bank of

Athens 1999 (4) ALL SA 396; 2000 (1) SA 268.

The court indicated that, an application for rectification is needed before the
version of the contract can be enforced. This is because of the prohibitive effect
of the Parole evidence Rule. He must be able to prove that his intention is not to
vary terms as already agreed upon.

In this case the court allowed rectification where parties knew what provisions
had been recorded in the document but were mistaken about their legal effect.

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Note: Rectification will not be granted if the result of granting it will be to
prejudice third parties e.g. if creditors of an insolvent’s estate will be
prejudiced, rectification will not be granted.

Conclusion-incorporation, interpretation and rectification

If a dispute arises between the parties as to the contents of their agreement (i.e.
which obligations are created by the contract), it is possible that more than one
set of rules may be involved.

The court will approach the problem in the following manner

a. First -Determine the express terms of the contract using the rules relating
to incorporation of express terms.
b. Second -Determine the meaning of the terms by interpretation of express
terms.
c. Third -ask whether the parties intended the disputed term to form part of
the contract, but omitted it from the document by mistake. If so the
document can be rectified to insert the term.
d. Alternatively, the court will ask whether the disputed term was an implied
or tacit term of the contract.

Prepared by: M. Kulehile, PhD

Faculty of Law
National University of Lesotho,
Roma, Lesotho