How rules of contractual interpretation in construction differ around the world

One way to secure success, or to protect key interests in the event of fallout, is to draft clauses using words that leave as little room for uncertainty as possible. Clear wording will encourage decision makers – be they courts, arbitrators, adjudicators, or experts – to consult the recorded expression of common intent in all matters contested between the parties.

However, when the expression is vague or ambiguous, those seeking to interpret a contract must turn to governing law rules of contractual interpretation that have been developed as a part of the applicable laws. We have taken a look at how subtle yet important differences in those rules apply across a representative sample of jurisdictions, with reference specifically below to the laws of France, Australia, and South Africa. This small sample of national laws points to the inherent risks of ignoring the diversity of laws concerning contractual interpretation.

The French approach

Under French law, the rules of contract interpretation are codified under Articles 1188 to 1992 of the Civil Code, as reformed in 2016.

The major rule, stated under Article 1192, is that if the expression of contract party intent is clear then it is to be recognised and carried out. It is only to the extent that the expression of party intent is unclear that there is scope for interpretation.

Where interpretation is legitimate, the decision maker must search for the common intention of the parties. To that end, Article 1188 requires the decision maker to first try to ascertain the parties’ actual common intention. In doing so, French law adopts a subjective approach, focusing on the intentions of the parties at the time of contract formation, based on the triumvirate of language, context, and conduct. Ultimately, however, the decision maker must search out the meaning that a reasonable person in the same situation as the parties would attribute to the recorded expression of intent.

In this process of contractual interpretation, certain techniques come to the fore, such as holistic contextualism. Article 1189 specifies that the terms of a contract are to be interpreted in relation to each other, giving to each the meaning which respects the consistency of the contract as a whole. It also provides that several contracts contributing to the same commercial purpose must be interpreted by reference to it.

Furthermore, under Article 1191, where a provision can bear two meanings, the one which gives it some effect must be preferred to the one which makes it produce no effect.

The last two general guidelines specified under Article 1190 are that bespoke agreements must be interpreted against the creditor and in favour of the debtor, and that a standard-form contract is interpreted against the party that proposed it.

The Australian approach

Under the Australian common law, a fundamental tenet of contractual interpretation, the ‘plain meaning rule’, dictates that priority is to be given to the plain meaning of the words used, to the extent that such meaning is capable of being ascertained. The surrounding circumstances – so-called ‘extrinsic evidence’ – pertaining to events, discussions or facts that occurred or took place prior to the ‘meeting of minds’ as manifested by the execution of the contract are inadmissible “unless the words are ambiguous, or there is a proven special technical meaning, trade usage or custom, or application of the plain meaning would lead to a manifest absurdity or inconvenience”.

The plain meaning rule has given rise to another longstanding common law rule of contractual interpretation known as the ‘parol evidence rule’, which restricts courts to the words used in the terms of the instrument and the instrument as a whole in their attempts to construe the meaning of its terms: “evidence of prior negotiations is not admissible to the interpretation of contract terms, unless it provides evidence of the surrounding circumstances.” Recent decisions emphasise the limited circumstances in which courts will rely upon extrinsic evidence to inform the meaning of contractual terms. Generally, they approach the task of interpreting the terms of a contract by reference only to the instrument itself, its terms, and the whole that those terms comprise.

The 1982 High Court of Australia case of Codelfa Construction Pty Ltd v State Rail Authority of New South Wales cemented what had been the traditional position of courts adhering to English case law, namely that resort may be had to extrinsic evidence in narrow exceptional circumstances only.

The most common circumstance, and the first to be recognised, is in the case of ambiguity in one or more of the terms of the contract. This is known as the ‘ambiguity exception’ or, more evocatively, the ‘ambiguity gateway’. Over time, the recognised circumstances in which extrinsic evidence is admissible has grown, albeit at the lumbering pace characteristic of the common law.

The Supreme Court of Victoria decision in Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd confirmed that a contractual term must be “ambiguous or susceptible of more than one meaning” before the courts will look to the surrounding circumstances to assist in its interpretation. Ordinarily, the admissible surrounding circumstances are limited to the events and circumstances known to both parties. Evidence of the parties’ statements and actions reflecting their actual intentions and expectations is inadmissible, even in the case of ambiguity.

The rule has not been followed unanimously, however, with courts in other Australian jurisdictions diverging in recent years from the so-called ‘ambiguity gateway’ – that being the requirement that ambiguity must first be established before a court is entitled to look beyond the words of the contract – in favour of an approach where regard may be had to extrinsic evidence, without ambiguity being made out. For instance, the Supreme Court of New South Wales found in the case of Cherry and Another v Steele-Park that it didn't have to establish ambiguity before it was able to look to extrinsic evidence.

Further north, the Queensland Court of Appeal, in the case of Built Qld Pty Limited v Pro-Invest Australian Hospitality Opportunity (ST) Pty Ltd found that extrinsic evidence was admissible because a term in the contract, being the “contractor’s alternative proposal”, had virtually no meaning without referring to extrinsic evidence. Accordingly, it was held that the court can look to extrinsic evidence to discover what is meant by a “descriptive term” because the extrinsic evidence does not add or change the meaning of the contract. Instead, it provides the court with information as to the subject matter of the contract.

The decision maker’s ability to look beyond the literal terms of the contract in these exceptional circumstances is not unfettered. Rather, it is “restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction”.

The South African approach

Across the Indian Ocean, South Africa, with its mixed Roman-Dutch and English legal system, traditionally held a particularly conservative view on contractual interpretation. Contracts were, simply put, governed by ’the four corners of the contract’. If the implementation of a contract generated harsh or unanticipated outcomes, courts would have had little sympathy with parties who have sought judicial assistance in seeking to avoid those outcomes.

The approach adopted has, however, undergone significant change in the last years, reflecting the sentiment that the ever-evolving nature of South Africa’s constitutional democracy requires a legal system which can respond to the country’s socio-economic reality.

In the past, the courts applied the ‘golden rule’ of interpretation, which dictated that “the language in the document is to be given its grammatical and ordinary meaning, unless this would result in some absurdity, or some repugnancy or inconsistency with the rest of the instrument”. Courts could not have regard to the surrounding contractual circumstances or other extrinsic factors if the ordinary grammatical meaning of the words used were clear, unambiguous and did not lead to an absurdity when considered in the context of the document as a whole.

Recent case law has watered down the ‘golden rule’.

The Supreme Court of Appeal, in the case of Natal Joint Municipal Pension Fund v Endumeni Municipality, summarised: “Interpretation is the process of attributing meaning to the words used in a document, be it legislation, some other statutory instrument, or contract, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production. The 'inevitable point of departure is the language of the provision itself, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document.” This ‘unitary’ exercise must be adopted even in the absence of ambiguity.

The starting point remains the words of the documents recording the parties’ intentions, but the perceived literal meaning of those words must be considered “in the light of all relevant and admissible context, including the circumstances in which the document came into being". The case of Bothma-Batho Transport (Edms) Bpk v S Bothma & Seun Transport (Edms) Bpk, in a clear departure from the ‘golden rule’, endorsed the view that interpretation was a ‘unitary’ exercise, not a ‘staged approach’.

In the case of the University of Johannesburg v Auckland Park Theological Seminary and Another, the Constitutional Court stated that “parties will invariably have to adduce evidence to establish the context and purpose of the relevant contractual provisions”. Whilst endorsing the approach adopted in the Endumeni case, the Constitutional Court clarified that extrinsic evidence was not always admissible and a court’s recourse to it is not limitless, given that interpretation is a matter of law, not fact, and extrinsic evidence must only be used to establish facts and to contextualise a document.

The use of extrinsic evidence remains a judicial hot potato. In the 2020 case of Capitec Bank Holdings Ltd and Another v Coral Lagoon Investments 194 (Pty) Ltd and Others, the Supreme Court of Appeal reaffirmed that the old and uncompromising bastion that houses the ’golden rule’ is rapidly crumbling.

In summary, the South African position is evolving, but with recent case law suggesting a shift toward a more liberal view of how decision makers are required to interpret and contextualise contractual obligations.

General guidance

The jurisprudential approaches of French law, Australian law and South African law to the attribution of meaning to the written text of a contract share much in common – but not everything. The acceptable positioning of the ‘ambiguity gateway’ and the role of presumptions present two prominent areas of both difference and some degree of flux. Consequently, they serve to illustrate the diversity among interpretative rules across legal systems. This only serves to illustrate the inherent risks of ignoring what the particular applicable law will have to say on the meaning of written contractual obligations.

The use of clear expression of the common contractual intent is important. Short of clarity, the challenge of inferring common contractual intention is context-heavy, teleological, and highly circumstantial. What is also clear, however, is that, despite the formal differences resulting from each jurisdiction’s own constitutional foundations, decision makers are guided by similar rules: foregrounding the plain meaning of the words used, and intervening to second-guess party intent in the case of ambiguity.

Co-written by Phillipa Beck of Pinsent Masons.