Words matter: literal meaning of contracts more important than commercial common sense or parties’ intent

Written on 6 Apr 2017

A recent case in the High Court has reiterated that if the meaning of words in a contract is clear and unambiguous, common sense and the intention of the parties are irrelevant.  In addition, inconsistent use of terms such as “any” and “all” and the use of negatives in conditions may result in the court interpreting your contract differently to how you intended.

What happened?

In Dooba Developments Ltd v MacLagan Investments Ltd, the High Court was asked to determine an appeal over whether a clause in a conditional sale agreement that entitled a party to rescind “if all of the conditions have not been discharged“, gave a party the right to rescind if only 3 of the 4 conditions had been discharged by a longstop date.

At first sight, the clause appears to be capable of being interpreted in one of two ways, and these alternatives were proposed by the opposing parties; either:

  • The right to rescind arises where any of the conditions have not been discharged; or
  • The right to rescind arises where none of the conditions have been discharged.

In Dooba, the judge held that the language of the catch-all right was not ambiguous.  The subject of the clause was “all of the conditions“, and the characteristic to be met was “have not been discharged“.  Therefore the judge held that on a literal interpretation, a right to rescind only arose when none of the conditions had been discharged.

Of note, the agreement also contained deadlines for each of the 4 conditions separately, with a right of rescission if any (rather than all) of the individual conditions were not met by a certain date.  The judge placed reliance on the use of the word “any” in relation to the individual conditions was in contrast to the “all” in relation to the catch-all condition.

Has the decision changed the law on interpretation of contracts?

No.  The decision followed that of Arnold v Britton, which emphasised that it is not necessary to consider commercial common sense or the intent of the parties when the wording of a clause is unambiguous.

However, the decision does highlight some points worthy of consideration by those drafting and interpreting contracts.

Practice points

  • If the meaning of the words of a contract is unambiguous, the court will apply the contract literally, without consideration of commercial common sense or the parties’ intent.
  • Be consistent when drafting. For example, don’t use “any” and “all” interchangeably if you intend those words to have the same effect.
  • Draft conditions using clear, and ideally positive, language. In this case, the clause “if all conditions have not been discharged…” would have been easier to interpret if one of the alternatives below had been used:

if not all conditions have been discharged…“; or

if any of the conditions remain unsatisfied…“; or

if any of the conditions have not been satisfied…“.