The latest round of COVID-19-related restrictions has seen a distinction drawn in some parts of the country with a difference in restrictions applied to 'cafés' rather than 'restaurants'. An immediate debate ensued – what was the definition of a 'café'?

When creating obligations, it is important that the words used are as clear as possible. This applies not just to legislation or regulations created by governments but also in contracts between private parties. A vast number of actions raised in the courts each year ask questions regarding whether parties meant what was written down in a contract or which of the two or more possible meanings of a contractual provision is the right meaning.

It is therefore important, when forming a contract, that parties seek to minimise the scope for ambiguity or a lack of clarity.

How do the courts approach interpretation?

As an issue which is often before the courts, the interpretation of contracts is something on which the courts have issued much guidance through case law. However, that, in itself, does not mean that things are straightforward.

The court will consider what the 'reasonable man' would conclude the words of the contract meant (that reasonable man having the relevant background knowledge that the parties had at the time of the contract). Words will be given their 'natural and ordinary meaning' (even if the results are unreasonable) unless the background information and 'business common sense' suggests that this should not be the case. The courts have moved back and forth over how much weight should be given to business common sense and how much should be given to the natural and ordinary meaning (when the two considerations are in opposition), depending on various factors.

Tips to minimise potential disputes relating to interpretation

In order to avoid the risk of a dispute regarding interpretation the following approaches should be considered when drafting a contract:

1. Use plain language

    Contracts should be as plain and precise as possible. Where plain language can be used over 'jargon', it should be. If technical terms or jargon must be used (and cannot be avoided), they should be defined terms and those terms should be explained in clear language, regardless of whether they are common used terms in the industry.

    2. Use defined terms

      Where appropriate, it may be helpful to use defined terms. A defined term is a word in a contract which has a specific meaning in the context of that contract.

      This is often useful for technical terms or for ensuring that words attract a specific meaning and cannot be misinterpreted or given a wider, or more general, meaning. Using defined terms also has the benefit of making the clauses clearer and more succinct. If clauses become long and complicated, with use of multiple parenthesis and the like, there is a greater risk of a claim of ambiguity in its meaning.

      However, if one opts to use a defined term, it is important it is used consistently throughout the document. When referring to a defined term, a capital letter should always be used to indicate it is the defined term that is being used. If the term consists of more than one word, each word should be capitalised.

      3. ...but do not over-use defined terms

      An over-use of defined terms where they are unnecessary may make a contract more complicated than necessary, and thus open to claims of ambiguity or a lack of understanding when signing the contract.

      One thing in particular that should be avoided is use of a defined term which is then only used once in the document. Generally, defined terms should only be used when that term is going to be repeated throughout the agreement.

      4. Identify the parties

      Particularly when dealing with companies or partnerships, it is important to identify each party correctly. Be careful to avoid using a trading name of a company rather than its company name. Organisations may also change names over time but what will remain constant is its registered number. Therefore, including the company name and number will reduce any risk of an argument that the wrong company has been identified.