Chapter 11 Slides PDF

For the eight consecutive year, according to THE World University Rankings, 2024, UP LAW ranks best in Africa and Top 65th in the world. A feat unequalled in Africa! Before we begin Let’s recap.. Nature and basis of contract Formation of contract Requirements of a valid contract Contents and operati...

For the eight consecutive year, according to THE World University Rankings, 2024, UP LAW ranks best in Africa and Top 65th in the world. A feat unequalled in Africa! Before we begin Let’s recap.. Nature and basis of contract Formation of contract Requirements of a valid contract Contents and operation of a contract Chapter 11: Interpretation of Contracts Introduction Interpretation of a contract aims to give effect to the purpose expressed in those terms. Accurate interpretation is crucial for enforcing what the parties legally agreed upon and resolving disputes arising from differing understandings of the contract’s terms. Before we start… A WARNING! and… Everything done from hereon is for the purpose of – 1. Clarifying Ambiguities 2. Contextualising the Agreement: the context in which the contract was formed, including the commercial or practical setting and the relationship between the parties. Evolution in court South African courts have consistently evolved their approach to interpreting contracts, moving towards a more integrated and contextual understanding as exemplified in landmark cases such as Bothma-Batho Transport (Edms) Bpk v S Bothma & Seun Transport (Pty) Ltd → dealt with the interpretation of legal documents. Natal Joint Municipal Pension Fund v Endumeni Municipality → dealt with the interpretation of contracts. Endumeni case Dispute over interpretation of a contract term relating to pension fund contributions. ® What is the correct interpretation of the contractual clause in question? The court remarked on the need to avoid “excessive reliance on a purely grammatical interpretation” and stated interpretation is – 1. The process of attributing meaning to the words used in a document; 2. With regard to the context provided, 3. By reading the particular provision or provisions in the light of the document as a whole; and 4. The circumstance attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to 1. The language used in the light of the ordinary rules of grammar and syntax, 2. The context in which the provision appears, 3. The apparent purpose to which it is directed, and 4. The material is known to those responsible for its production. The SCA in both Endumeni and Bothma-Batho clarified and reinforced the approach that the interpretation of contractual terms is a unitary exercise. ® This means integrating these factors rather than applying them sequentially or in isolation. This unitary or holistic approach deviates from the older, traditional step-by-step method, which involves looking at the plain language of the text before considering any contextual elements only when ambiguity remains. So, what does the interpretation process entail? 1. The purpose of the contract. 2. The words used by the parties. 3. The textual context. 4. The broader context (the parol evidence rule). 5. Canons of construction. 1. The purpose of the contract This involves looking beyond mere words to understand the functional and practical implications of the contract in the commercial world, focusing on what the parties intended to achieve. Although giving effect to the common intention of the parties remains essential. ® The courts should not embark on an investigation into the subjective intentions of the parties. The enquiry should not go beyond expressing the purpose of the contract by ascertaining ‘the meaning of the language of the provision itself’. 2. The words used by the parties In giving meaning to a contract, the point of departure has always been the words in which the parties expressed their agreement. ® Why? Because there may be more than one possible meaning. The court in Endumeni emphasised that interpretation involves considering the language used in the light of the context of the contract as a whole, as well as the circumstances and facts surrounding its formation. This approach suggests that the context and purpose of a contract should not be an afterthought or considered only when there is ambiguity. ® However, context cannot be used to create a meaning that the language, when viewed in context, cannot bear. This is beyond mere interpretation. 3. The textual context: In giving an appropriate meaning to the disputed term or terms of the contract, the court must interpret the wording in the context of the other provisions of the document. This was referred to as the ‘linguistic treatment.’ ® Words ought to be interpreted in their contextual setting to give effect to a contract. If the ordinary or narrow meaning of the words results in ‘some absurdity, some repugnancy or inconsistency with the rest of the instrument’ The ordinary meaning will yield a broader or ‘less immediately apparent meaning’ consistent with the rest of the contract, namely the textual setting. Consider how different sections or provisions of the contract relate to each other, often shedding light on the interpretation of particular phrases or clauses. 4. The broader context: Intra-textual treatment may not clearly yield an appropriate meaning. The interpreter may also consider extra-textual elements – the extended context – to be able to draw valuable inferences as to the intended meaning from 1. Nature of contract; 2. Purpose of the contract; and 3. Background of the conclusion of the contract. There are two matters of concern here: 1. An interpretation favouring validity, practicality, and business efficacy should be preferred to one that does not. However, this interpretation also carries a risk of deviating from the reason for a written contract. ® Judges must guard against the temptation of substituting what they regard as reasonable, sensible, or business-like for the words actually used. 2. If parties were allowed to adduce any evidence they liked, the purposes of reducing the contract to writing (such as certainty and prevention of litigation) would be undermined. ® In the search for a sensible middle way, our law adopted the parol evidence rule. The Parol Evidence Rule serves as a balance between relying solely on the written contract and considering external evidence. This rule generally prevents the admission of extrinsic evidence (oral or written statements not included in the contract) that contradicts or modifies the contract's written terms. This rule's purpose is to maintain the integrity of written agreements, provide certainty, and reduce litigation by focusing on the agreement as documented. Application: → Where the parties intended their agreement to be fully and finally embodied in writing: evidence to contradict, vary, add to or subtract from the terms of the writing is inadmissible. As an evidentiary rule, the parol evidence rule is still subject to the fundamental principle governing the admissibility of all evidence, namely, that irrelevant evidence is inadmissible. The parol evidence rule manifests itself in two ways: 1. Integration rule ® what evidence is admissible to prove the contents of the contract. 2. Interpretation rule ® what evidence is admissible in proving the meaning of the words used by the parties to express those terms. Integration aspect of the Parol Evidence Rule: The reasoning behind the parol evidence rule is that the parties are said to have consolidated or integrated their earlier negotiations into one document, which is then to be taken as the final expression of their will. The integration aspect of the parol evidence rule concerns determining whether a written contract represents the complete and final agreement between the parties (i.e., whether it is an integrated document). This determination is vital because if a contract is deemed fully integrated, the parol evidence rule strictly limits the use of external evidence that contradicts the written terms. While the parol evidence rule limits external evidence, it does not entirely prevent using contextual information to interpret a contract. It is possible to lead extrinsic evidence in the following instances 1. Whether or not the parties intended to reduce the contract to writing: A party wishing to lead evidence that the written document does not reflect the whole of an agreement is, therefore, free to do so on the following grounds – a) It was intended to be part of a more significant transaction involving a condition precedent to its operation or b) Although ostensibly contracting as principal, the party, in reality, contracted as agent on behalf of an undisclosed principal. 2. Pertaining to an adjunct (accessory) oral part of a written contract: The integration rule does not apply to an oral part of the agreement that the parties did not intend to be embodied in writing – that is, where there has been only ‘partial integration’. Evidence of the oral agreement, which would usually be supplementary to the main or dominant agreement, is nevertheless not permitted – a) Where it would contradict the terms of the written agreement, or b) Where it deals in an inconsistent manner with a topic dealt with in the written agreement. In a case like this, the written agreement may be conclusive. 3. Where a party pleads and has to prove fraud, error, misrepresentation, duress, undue influence or legality 4. Where a document is signed by only one party (except for negotiable instruments) It governs the admissibility of evidence in the case of negotiable instruments. Interpretation aspect of the Parol Evidence Rule: The interpretation aspect allows for a more nuanced use of extrinsic evidence. This aspect acknowledges that understanding a contract’s terms in their true context sometimes necessitates looking beyond the four corners of the document. Concerned with the evidence that can prove the meaning of the word. Controls the kind of evidence that may be led to establish the meaning of the contractual provisions It ‘determines when and to what extent extrinsic evidence may be adduced to explain or affect the meaning of the words contained in a written contract.’ Until recently, Delmas Milling v Du Plessis served as an example of applying the parol evidence rule in ensuring the integrity of written contracts while also delineating the limits of its flexibility regarding contract interpretation. To limit the circumstances in which extrinsic evidence could be brought, our courts traditionally made a distinction between: a) Evidence of background circumstances – admissible as a matter of course. b) Evidence of surrounding circumstances – admissible in cases of ambiguity. However, this distinction proved to be more of a hindrance than a help as it was never clear precisely which contextual circumstances were regarded. However, recent developments in Johannesburg v Auckland Park Theological Seminary 2021 (6) SA 1 (CC) – “only the integration aspect survives…” and Capitec Bank Holdings Ltd v Coral Lagoon Investments 194 (Pty) ltd “…extrinsic evidence may be admitted as relevant to context and purpose”. As it stands, courts should err on the side of admitting the evidence; however, this must be done conservatively. NB! Self-study paras 11.5.1.2 - 6 Circumventing/bypassing the parol evidence rule: A litigant who is confronted with difficulties of proof thrown up by the parol evidence rule has, in any event, always potentially been able to circumvent it, either – 1. By alleging a tacit term: The restricted scope of the interpretation rule becomes apparent here. It may either be terms that the parties envisaged but should have included in the contract or terms that are so essential to the commercial viability of the contract that the parties would inevitably have inserted them into the contract had they thought about them. 2. By including a claim for rectification: Another device commonly used when the rules of interpretation get in the way is the rectification doctrine. A party alleging that the parties mistakenly inserted a term into a written contract or that they mistakenly failed to include one in it may apply to rectify the mistakenly concluded contract. 5. Canons of construction: The canons of construction are to be regarded, at most, merely as guidelines to assist the court in interpreting contracts. There is no closed list; more may be added, and a court is optional to apply all of them. These guidelines are employed to resolve ambiguities and clarify the meanings of words or phrases within a document, ensuring that the interpretation aligns with the intent of the parties involved or the legislator's purpose in the case of statutory laws. Self-study para 11.6 Primary rules: Aim to ascertain the meaning of the words as expressed by the parties 1. Intention of parties 2. Ordinary meaning of the word 3. Contract as a whole Secondary rules: These rules aim to achieve a fair result based on the presumption of Good Faith. There is no limited number and no sequence. 1. Eiusdem Generis (of the same kind) - General meaning of words restricted by words of a specific class. 2. Noscitur a Sociis – A Word is Known by the Company it Keeps 3. Inconsistent text - Effect is given to printed or typed insertions. 4. Ambiguous words – choose a meaning that makes the clause valid rather than void. 5. Legal rather than illegal - choose the meaning that makes it legal. 6. Attain an equitable and fair result – only where the contract is ambiguous. See paragraph 11.6 Tertiary rules (last resort): Finally, certain rules are ‘applied as a last resort, without any pretence at attempting to find the expressed intention of the parties’. ® They are used when dealing with contracts and other legal documents where terms may be ambiguous or carry more than one possible meaning. These rules are intended to provide a fair outcome rather than to give effect to the parties’ common intention or purpose as expressed in the document. 1. Contra Preferentem (interpretation against the drafter) This rule directs that the ambiguous terms should be interpreted against the interests of the party that drafted the document. The rationale behind this principle is to discourage parties from including vague or unclear terms within contracts and to protect the party who did not draft the contract from any unfair disadvantage. It operates under the assumption that the drafter, who had control over the language of the agreement, could have clarified the ambiguous provision and thus should bear the consequences of the ambiguity. 2. Quod Minimum (narrow interpretation) It is a lesser-known but relevant principle primarily used when interpreting obligations or debts. Under this principle, any ambiguous words or phrases that define the scope of an obligation or a debt must be interpreted as narrowly as possible, limiting the burden or encumbrance on the debtor as much as possible. This principle is rooted in the idea that no one should be presumed to take on an obligation or debt beyond what they explicitly agreed to. All rules exhausted: When all the rules have been exhausted and the ambiguity still exists, the contract is void for vagueness. Interpretation of disclaimers, indemnities and exemption clauses: a special category? Where there is ambiguity as to the intentions of the parties, however, the word or phrase in question will be interpreted contra proferentem or contra stipulatorem. ® Meaning, an ambiguous clause will be given an interpretation that least favours the party who inserted the clause. Preparation for next the class Engage with discussion points, prompts and practice questions. Compulsory material: Hutchison & Pretorius (4th ed) chapter 11 pgs. 284 – 305. Bothma-Batho Transport (Edms) Bpk v S Bothma & Seun Transport (Pty) Ltd. Natal Joint Municipal Pension Fund v Endumeni Municipality. Self-study: NB! Self-study paras 11.5.1.2 – 6, 11.6, and 11.8 – 9. Next lecture: Thursday, 2 May 2024 at 08:30 – 10:20.