Court Clarifies How To Interpret Commercial Contracts In Dispute

Businesses will benefit from a clear summary of the rules the court will apply when interpreting commercial contracts in the event of a dispute, following a recent ruling in Scotland.

A local authority alleged breach of contract following issues about the quality and servicing of vehicles leased from a supplier company. In deciding the dispute the court gave useful guidance on the principles to be applied when interpreting a commercial contract:

• the aim of the court in construing a commercial contract is to ascertain objectively the aim of the parties;
• for this purpose, the court must put itself in the position of a reasonable person in possession of all background information reasonably available to the parties at the time the contract was entered into;
• when unambiguous language has been used in a contract, the court will normally give effect to that language;
• when there are two possible interpretations, the court will prefer that which makes the most commercial sense.

These principles show that the courts will try to give words in a contract their natural meaning, whether commercially sensible or not but, if words are ambiguous, it will then look to commercial common sense to work out what the parties intended them to mean.

Recommendation

Parties negotiating contracts should ensure contract clauses clearly and unambiguously say exactly what the parties intend at the time. If in doubt, take specialist legal advice.

Case ref: Allied Vehicles Limited v Glasgow City Council [2013] CSOH 192