What Makes a Contract?

Although a contract is an agreement, when a dispute arises the parties to the contract can have very different ideas as to what was actually agreed. The courts might then be tasked with deciding what the parties agreed. A party might try to point to what was said before the contract was signed, in order to support their views on what the contract means. What can a court consider when deciding on the meaning of a contract?

Interpretation

A court interprets a written contract by objectively considering what the parties meant by the language that they used in the document. What either of the parties might have thought the words to have meant – their subjective intention – is not relevant. The court carries out its task by considering not only the words used in the part of the contract in dispute, but the contract as a whole and the wider context with a view to deciding what a reasonable person with the background knowledge available to the parties would have understood the terms of the contract to have meant. There is no assumption that the literal meaning of the words used is more important than their context: each aspect must be balanced depending on, amongst other things, how formal and well drafted the written contract is.

Prior Negotiations

The background knowledge of the parties' forms part of the contextual considerations. Does this extend to what was said in negotiations prior to the making of the contract? Evidence of prior negotiations is generally not allowed to be considered by the court for the purposes of providing a gloss on what the words used in a contract mean. The general rule was set out by the House of Lords in Inglis v Buttery & Co in the 1870s, a decision in which it was said that words that had been deleted from a contract, but were still legible, could not be considered. One of Brodies' previous incarnations was involved in the appeal and my colleague Tony Jones QC and I discuss it in more detail in the first episode of the upcoming The Case Files series, part of Podcasts by Brodies. The case, about repairs to a ship during the height of Glasgow's shipbuilding industry, remains important and is still referred to in textbooks and legal arguments today.

Why is evidence of prior negotiations not admitted by the courts in order to interpret a contract? It has been said that such evidence would be "unhelpful" to the court's task. Where there are negotiations about the terms of a contract, the parties might begin some distance apart. The negotiations might be fraught and party might adopt a number of different positions in order to finally reach consensus. A written contract is, by its nature, an agreement and it might be suggested that only the final contract truly records what agreement was actually reached as a result of those negotiations.

A fine line?

Does this mean that the courts cannot consider any communications between the parties prior to the contract whatsoever when tasked with ascertaining its meaning? The short answer is "no". The general rule is no longer absolute. In more recent cases, it has been considered permissible for the courts to be referred to pre-contractual communications where the communications are being used not to provide a gloss on the words in the contract but, rather, "to establish the parties' knowledge of the circumstances". The distinction between the two concepts is, in practice, often a very fine one.

Comment

When contracts are being negotiated, care should be taken to ensure the words used in the written document accurately reflect the agreement reached, even if it appears from negotiations to be no dispute. If there is ambiguity in the language, and a dispute subsequently arises, it is the words used and their context that matters, not what was said in negotiations or what either party thought the words meant.