INTERPRETATION OF CONTRACTS

INTERPRETATION OF CONTRACTS ISBN 978-98-3519-11-8 Author: Hamid Ibrahim Binding: Softcover/Extent: 532 pp Publication Price: MYR 210.00 The law is stated as of February 1, 2008 PRINCIPLES & CANONS OF CONSTRUCTION CHAPTER 1 Introduction... 1 Interpretation - Meaning of... 1 Construction -Meaning of... 1 Construction v Interpretation... 2 Construction of Contract v Construction of Statutes... 3 Application of Principles in Construing Statutes... 4 Translation & Interpretation... 5 Interpretation and the Arbitrator... 5 Relevant Date of Interpretation Arbitration Rules - Exceptions... 6 CANONS OF CONSTRUCTION & PRINCIPLES OF INTERPRETATION Introduction... 8 Canons of Construction... 9 Construction of Contract - Question of Law... 10 The Principles of Construing a Contract... 12 Object of Construction Exercise Determination of Intention of Parties... 13 Construction Leading to Unreasonable Result- Intention of Parties... 14 Objective Test to be applied in Interpreting Contracts... 14 Common Sense Approach... 16 Construction of Contract - Ordinary Meaning... 16 Process of Construction Parts of a Contract... 16 Good Faith... 17 Reasonable Business Efficacy... 22 Inequality of Bargaining Power - Test of Reasonableness or Fairness... 22 COURTS & INTERPRETATION Introduction... 23 Construction of Contracts - Approach of English Law... 23

Shift from Literal Methods of Interpretation Towards a more Commercial Approach... 24 Ratio Decidendi & Judicial Interpretation... 25 Duty of Court in Interpreting Contract... 25 Courts Strive to Uphold Bargains... 27 Interpretation of Document Effect on Interpretation of Another Document... 28 Part Performance & Uncertainties - Approach of Courts... 29 Construction of Contract s - Summary Determination... 31 Summary Judgment - Extrinsic Evidence... 32 Appeal Construction of Document... 33 Conflicting Evidence Appeal - Use of Contemporary Documentary Evidence... 33 COMMERCIAL CONTRACTS Commercial Document Construction of Commercial Document - Legal Principles to be Applied... 34 Interpretation of Commercial CCoghlan v Cumberlandontracts - Commercial Purpose of Contract... 34 Commercial Contracts - Reasonableness of Construction... 35 Commercial Transactions - Business Sense Approach to Questions of Interpretation... 36 Purposive Construction of Commercial Documents and Contracts... 37 Party cannot take Advantage of His Own Wrong - Legal Presumption... 38 Commercial Contracts and Exclusion Clauses... 38 Cap Clauses... 38 CHAPTER 2 CONSTRUCTION OF CONTRACTUAL DOCUMENTS Principles for Construing Contractual Documents... 39 RULES OF CONSTRUCTION Rules of Construction Mere Guidelines... 43 Guidelines or Rules for Construing Contracts... 44 Golden Rule of Construction... 44 Construing a Written Instrument... 45 Contract to be construed to make it Operative... 45 Document to be Construed as a Whole... 46

Concluded Antecedent Agreement... 48 Draft Contracts... 48 Contractual Term - Contextual Approach to Interpretation... 51 Contract in Printed Form -Writing Superadded Effect of... 58 Construction of Documents Discernment of Intent... 59 True Nature of a Transaction Test to be Applied... 60 Labels - Substance of Instrument... 60 Sham Document... 62 Recitals... 62 Recitals and Operative Part of Instrument... 62 Recitals & Inconsistencies in Guarantees... 66 Meaning of Clause(s) in Contracts... 67 Complete and Unambiguous Clauses... 67 Unambiguous Documents... 68 Ambiguous Documents Admissibility of Subsequent Interpreting Statement... 68 Several Documents forming part of one Transaction - Documents to be read Together... 68 Document not to have any Legal Effect... 69 THE CONTRA PROFERENTUM RULE Interpretation of Documents The Contra Proferentem Rule... 69 Document Inter Partes- Ambiguity Contra Proferentum Rule... 70 Contra Proferentem Motor Insurance Policy... 70 Exclusion Clauses Contra Proferentem Rule... 71 MEANING OF WORDS Interpretation of Words General Principles... 71 Intention of Parties Meaning of Words - Overriding Objective To Attain the Meaning which the Parties Mutually intended the Words to have... 73 Words Meaning of Words Approach of Courts... 74 Construction - Composite Exercise... 76 Lawful Meaning to be Preferred... 76 Words & Clauses Context of Whole Agreement... 77 Uniform and Consistent Interpretation - Terengganu State Development Corporation v Nadefin No Requirement of Uniform and Consistent

Interpretation of Contractual Words... 77 Dictionary Meaning of Words... 78 Dictionary Meaning v Context or Background... 78 Noscitur a Sociis (A Word is known by the Company it Keeps)... 79 Ejusdem Generis Rule (Of the Same Kinds, Class, or Nature)... 80 Words Fairly Capable of Bearing More than One Meaning... 81 Words Fairly Capable of Bearing More than One Meaning - Context of Transaction... 82 Words Capable of Bearing More than one Meaning Extrinsic Evidence... 83 Clear and Unambiguous Terms & Purposive Construction... 83 Words Ambiguity... 84 Ambiguous Language... 87 Latent Ambiguity... 87 Absurdity... 88 Words - Uncertain Meanings Effect of... 89 Terms Uncertain Term(s)... 90 CLAUSES IN CONTRACTS Clause(s) Interpretation of Clause(s) Document to be Read as a Whole... 93 Dispute over the Wordings of a Clause... 94 Clear & Unequivocal Clauses... 94 Absence of Specific Clause Surrounding Circumstances - Understanding of Parties... 95 Inconsistent Clauses Rules of Interpretation... 95 Repugnant & Inconsistent Clauses - Words Inconsistent with Main Purpose of Document... 97 Interpretation Clause... 100 Entire Agreement Clause - Purpose of Entire Agreement Clause... 100 Conclusive Evidence Clauses... 102 Assignment Clause Principles Applicable... 106 Assignment Absolute Assignment... 108 Memorandum of Association - Object Clauses... 110 Exclusion Clauses... 110 Exclusion Clause & Breach of Contract... 112

Later Clause... 112 Time... 113 Time Bar Clauses... 113 Time for Performance... 115 Technical Terms... 121 Technical Terms Expert Evidence... 121 Contract Consideration Proof of... 122 Right to an Indemnity... 122 Plan Annexed to a Conveyance... 123 SPECIFIC CONTRACTS Guarantees... 123 Guarantee Liberal Construction... 125 Guarantees & the Contra Proferentem Rule... 125 Guarantees - Certificate of Indebtedness... 126 Guarantees - Conclusive Evidence Clause... 127 Liability of Guarantor Terms of Guarantee & Intention of Parties... 130 Guarantee - Co-Extensiveness between Primary and Secondary Liability - Terms of Guarantee... 131 TENANCY AGREEMENT Recitals Tenancy Agreement - Creation of Option to Renew... 132 Lease Agreement Various Parts Inconsistencies Effect of... 133 Option Tenancy Agreement Uncertainty Whether Term Void for Uncertainty... 134 Implied Terms in Tenancy Agreements... 140 Tenancy/Licence Exclusive Possession Test... 141 Tenancies - Collateral Contracts... 141 INSURANCE CONTRACTS Interpretation of Insurance Contract - Sound Commercial Principles... 148 Insurance Policies Context... 149 Bailee Clause Marine Insurance - Costs of Proceedings against Third Parties... 149 Exception Clause in Proviso Motor Insurance Policy... 150 Insurance Policy - Basis Clause... 150 Clause Exempting Liability for Negligence... 151 Ambiguous Words Contra Proferentum Rule Contracts of Insurance... 154

Motor Insurance Policy Rules of Interpretation Contra Proferentum Rule... 154 PERFORMANCE BONDS Performance Bonds Interpretation of... 155 BUILDING CONTRACTS No Special Rule of Construction... 157 Final Certificates... 158 Building Contract Forfeiture Clause... 158 Building Contract - Set Off Right of Set Off... 158 EXECUTION OF CONTRACT Party Bound by Signature... 159 Failure to Execute Agreement... 159 Non Est Factum... 162 RECTIFICATION Rectification of an Instrument... 163 Mistakes in Agreement Approach of Courts... 167 Rectification Conditions Common Mistake... 168 Rectification - Standard of Proof... 169 Unilateral Mistake... 170 Rectification Individual Mistake(s) - (1) Individual, mistake, not known to or induced by the second party... 170 (2) Individual Mistake Known to or Induced by the Second Party.... 171 Rectification - Mutual mistake... 171 CHAPTER 3 THE PARTIES AND THE INTERPRETATION OF CONTRACTS Introduction... 173 Parties to Decide upon Terms of Contract - Parties Free to Determine their Primary Obligations... 173 Proper Law of a Contract... 174 DUTY OF PARTIES Duty of Parties to a Contract... 181 Duty to Cooperate... 181 Duty of Promisee to Cooperate with Promisor... 182 Conditional Contract Obligation of Parties... 186

Express Agreement between the Parties - Technicality of Misdescription in a Pleading 186 INTENTION OF PARTIES Intention of the Parties... 188 Intention Meaning of... 189 Manner of Ascertaining the Intention of the Contracting parties Examination of Entire Contract... 190 Mutual Intentions of the Parties... 190 Intention of Parties Objective Approach... 190 Subjective Approach Relevance... 196 Subjective Intentions Draft Contracts... 196 Intention of Parties Language of Contract & Words Used... 197 Process of Interpretation - Language used by the Parties... 197 Intention of Parties Meaning of Words Used... 199 Intention of Parties Chosen Words... 199 Words Used & Intention of Parties Unequivocal Contract... 202 Intention of Parties Clear Words... 203 Clear and Unambiguous Words and Intention... 203 Intention of Parties &Quality of Drafting... 204 Written words v Printed Words... 204 Further Expressions by Parties and the Process of Interpretation... 205 Contract Retrospective Application... 205 Party s Intention and Reliance on Wrong Interpretation of Contract... 206 Party Cannot Take Advantage of His Own Wrong Legal Presumption... 209 Rebuttal of Presumption... 214 Intention of Parties & Extrinsic Evidence... 215 Written Words v Surrounding Circumstances... 223 SPECIFIC CLAUSES IN A CONTRACT & INTENTION OF PARTIES 223 Recitals Construction of Recitals and Intention of Parties... 223 Covenants Intention of Parties... 224 Time Intention of Parties - Whether Time is of the

Essence of a Contract... 226 Affirmation or Repudiation Election... 226 EXISTENCE OF CONCLUDED CONTRACT CHAPTER 4 Introduction... 229 Whether there was a Binding Contract - Question of Expressed Intention... 230 Existence of Contract - Surrounding Circumstances & Parol Evidence Rule... 230 Set of Documents - Whether a Binding Agreement was concluded on a Set of Documents... 231 Correspondence Exchange of Correspondence between Parties... 231 Memorandum of Understanding... 236 MOU - Nature & Magnitude of Agreement... 239 Incomplete Terms - Uncertainty... 241 No Contract Document Executed Between the Parties... 242 SUBJECT TO CONTRACT Introduction... 242 Subject to Meaning of... 243 Subject to Contract Rebuttal of Presumption - Requirement of Cogent Evidence... 243 Execution of Further Contract... 249 Execution of Formal Contract... 250 Subject to Ratification... 253 Conditional Contract... 253 Condition Meaning of... 253 Condition Precedent... 256 Subject to a Condition Precedent... 256 Types of Conditional Arrangements... 256 Presence of Essential Elements of an Agreement Absence of Company Stamp... 257 Open Contract... 258 Subject to the Sale and Purchase Agreement... 259 Substantial Agreement... 259 Option to be clarified by Both Parties in Two Weeks... 260 Upon Such Terms as shall be Determined or Advised by our Solicitors... 262

TERMS OF CONTRACT CHAPTER 5 Contractual & Pre-Contractual Statements... 263 Terms & Representations Nature of... 265 Doctrine of Estoppel & Representations... 267 Terms of Contract - Conduct of the Parties & Surrounding Circumstances... 267 Specific Term and General Term... 268 Contractual Obligations Nature of Contractual Obligations... 268 Conditions... 269 Conditions or Warranties... 269 Condition or Warranty - Materiality of Breach... 272 Conditions or Warranties - Test of Essentiality... 272 Breach of Contract Importance of Term Whether a Condition or Warranty... 274 Fundamental Term... 275 Breach of Fundamental Term... 278 Obligation to Pay the Purchase Price Breach of Fundamental Term... 281 Variation of Terms - Rate of Interest... 282 Breach of a Warranty... 284 Terms Used in Statute Use in Contract... 284 IMPLIED TERMS CHAPTER 6 Introduction... 287 Implied term Meaning of... 288 Presumption against Implying Terms... 288 Interpretation of Contract & Implication of Terms... 289 Implied Terms - The Law - Determining Whether a Term is to be Implied... 290 Where Terms will not be Implied... 291 Tests to be Satisfied... 291 Where the Court will Imply a Term - Incomplete Bargain - Criteria to Implying a Term... 291 Expressed Terms... 292 Implying an Unexpressed Term... 294

Implied Terms Absence of Ambiguity... 294 Onus on Party who contends that Term is to be Implied... 295 Implying Terms and the Parol Evidence Rule... 296 Intention of the Parties... 296 Business Efficacy & Officious Bystander Test... 298 Officious Bystander Test & a Clear & Unambiguous Contract... 299 Business Efficacy & Test of Reasonableness... 300 Intention of the Parties & the Business Efficacy & Officious Bystander Test... 305 Types of Implied Terms... 306 First Test Intention of the Parties... 309 Second Test or Type of Implied Term Contracts of a Particular Type - Relationship of Parties - Categories of Cases... 311 Party s Obligations & Implied Terms... 315 Implied Term of Party s Engagement... 316 Party to Act Reasonably... 317 Implying a Correlative Obligation... 317 Prevention of Performance... 320 Negative Implied Stipulation... 328 Bad Faith... 329 Implying Covenants... 329 Time Implying a Term... 330 Implied Warranty of Fitness... 331 Implied Term Goods - Reasonably Fit for Purpose for which it was Acquired... 338 Employment Contracts Implied Transferability Clause... 339 Utmost Good Faith - Contract of Insurance... 340 Guarantee Execution by more than one Guarantor... 340 EXTRINSIC EVIDENCE CHAPTER 7 Interpretation of Contracts & Extrinsic Evidence... 341 Extrinsic Evidence General Principles... 343 Extrinsic Evidence... 344 Extrinsic Evidence Inadmissible... 344 Ambiguity Admissibility of Extrinsic Evidence... 345

Extrinsic Evidence of Objective Matters... 349 PRE CONTRACTUAL NEGOTIATIONS 349 Introduction... 349 Evidence of Negotiations... 350 Interpretation of Contracts Admissibility of Pre-Contractual Negotiations... 355 Pre-Contractual Negotiations v Parties Declaration of Subjective Intent... 356 Evidence of an Antecedent Agreement... 356 Prior Contracts... 356 Evidence of Negotiations Leading up to the Final Version of the Contract... 356 Ambiguity... 358 Pre-Contractual Negotiations & Collateral Contract... 359 Rules of Construction - Private Dictionary Principle - Pre-Contractual Negotiations... 359 Exceptions Meaning of Phrases - Agreement in Pre-Contract Negotiations... 362 SURROUNDING CIRCUMSTANCES Introduction... 373 Judicial Opinion - Divergence - Australia... 377 Meaning of Surrounding Circumstances... 380 Surrounding Circumstances Statutory Background... 381 Surrounding Circumstances - Legal Background... 382 Insurance Policy Surrounding Circumstances... 382 The Context The Background The Factual Matrix... 382 Context Meaning of... 383 Objective Factual Background... 388 Objective Factual Background and the Contracting Parties... 391 Factual Matrix... 391 Extrinsic Evidence Establishing the Factual Matrix... 393 Admissibility of Factual Background Limitations... 401 Factual Matrix Prior Contracts... 402 Factual Matrix Employment Contracts... 402 Factual Matrix - Uncommunicated Intentions or Personal Interpretations... 402 Objective Approach of Courts... 403 Intention & Prevailing Circumstances... 408

Surrounding Circumstances Evidence of Actual Intention of Parties... 408 SUBSEQUENT CONDUCT Introduction... 411 Subsequent Conduct of Parties Evidence of Course of Dealings between Parties... 420 Subsequent Conduct - Estoppel by Convention... 424 Estoppel by Conduct... 429 Surrounding Circumstances... 430 Where Subsequent Conduct May be Relevant... 430 Subsequent Documents... 431 PAROL EVIDENCE Parol Evidence Rule - Inadmissibility of Evidence Extrinsic to Contract Document... 432 Exception to Parol Evidence Rule - True Nature of a Transaction... 433 Transaction Evidenced in Several Documents Admissibility of Parol Evidence... 435 Statutory Prohibitions... 435 Section 92 of the Evidence Act 1950... 436 Scope of Section 92... 437 Parol Evidence Rule - Admissibility of Oral evidence... 438 Proof of Oral Agreement - Contemporaneous Documents... 438 Clear & Unambiguous Words Parol Evidence... 439 Exceptions - Sections 91 and 92 of the Evidence Act 1950... 439 Where Extrinsic Evidence Admissible Construction of Contracts... 440 Evidence of Factual Background... 440 Intention to Contract... 441 Interpretation v Validity of Contract Extrinsic Evidence... 441 Exception to Parole Evidence Rule Factual Matrix of the Case or Surrounding Circumstances... 443 Admissibility of Oral Representations... 443 Pleadings & Section 92 of the Evidence Act 1950... 444 Section 92 and Intention to Contract... 444

Section 92 Exceptions... 445 Collateral Contracts Approach of the Courts... 453 Collateral Contracts Burden of Proof... 453 Extent of Collateral Contract... 456 Collateral Contracts & the Extrinsic Evidence Rule... 457 Collateral Warranty... 462 Collateral Warranty - Distinguishing Features of a Collateral Warranty... 464 Proviso (f)... 466 Exceptions - Any fact may be proved which shows in what manner the language of a document is related to existing facts.... 466 Ambiguity... 468 Section 94 of the Evidence Act 1950Section 94 of the Evidence Act 1950 469