Limitations and Hypothesis Underlying the Use of Interpretation Rules in Construction Contracts Revisited

By Dr. Chandana Jayalath

The whole idea of interpretation is to dig out the intention of the parties had in their minds at the time they entered into the contract. There are rules of interpretation that have been based on common sense connected with the ordinary life. It is the philosophy of language that provides material for interpretation. In contract law, it is now well-established that the context is important in interpreting documents, which is often referred to by the label ‘matrix of facts’, ‘surrounding circumstances’, or ‘factual background’. Courts must place itself in thought in the same position as the parties to the contract were placed, in fact, when they made it. Accordingly, those involved in contract interpretation should not try to make a bargain for the parties, but instead seek to understand what the parties meant by reference to the words which they chose.

A contract is a law between the parties, which can acquire force only by consent. It is the consent that makes the law as between the parties, conveyed in the legal instrument called contract agreement. Agreement takes the place of the law because it is the express understanding of parties superseding such understanding as the law would imply. Contract documents are complementary and mutually explanatory; what is called for by one is as binding as if called for by all. They are to be read in conjunction with other parts of the document and shall be construed in accordance with the laws of the State.

It is the intent of the contract documents to describe a functionally complete project to be constructed in accordance therewith. For instance any reference to standard specification, whether such reference, be specific or by implication, shall mean the latest standard specification in effect at the time of tender submission. If said standard specification, is amended, revised or otherwise changed subsequent to the tender submission, the contractor shall notify the engineer who may direct compliance under this clause. Most construction contracts use standard terms and have other special or bespoke terms supplementing them, particularly bill of quantities, specifications, and drawings. In these circumstances, the bespoke terms will prevail over the standard terms, unless the printed terms clearly stated otherwise. The reason is fairly prosaic, namely that the courts will give effect to their words which the parties have chosen for their contract.

When there is an inconsistency which can not be reconciled, then the earlier clause will prevail over the later one. The whole idea of this ruling is to avoid disturbing their obligations through the addition of later wording. This is in accordance with the doctrine of repugnancy where the courts will not give effect to a term of the contract if it is repugnant to the primary obligation as set out in the contract documents. However the better view today is that the parties should construe the contract as a whole and deal with the inconsistencies on their individual merits.

It is ambiguity that usually invites interpretation. Ambiguity is defined as capable of bringing more than one meaning when viewed objectively; be them “patent ambiguity” resulting from the language of the contract or “latent ambiguity” when the language is applied to a factual situation.  Conversely, however, contractual language is unambiguous when it has a definite and precise meaning, unattended by any danger of misconception in the purport of the contract itself. In all cases the contract documents are read together and the engineer shall instruct what is to be applied. Equally if matters of interpretative doubt exist between the general conditions and conditions of particular application, it would be the conditions of particular application that take precedence since they have been amended to suit the particular contract. Whenever an ambiguity or discrepancy is identified at the time of tender, which is readily apparent on the face of the documents and should have been capable of identification and clarification, the matter should be cleared with the engineer. Proceeding to a contract with a known and recognized ambiguity is to invite contention and probable loss on the part of the contractor. The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.

The engineer shall make his own interpretation based not only between two documents but also within documents. If the contractor can demonstrate the existence of the ambiguity or discrepancy, which he could not foresee at the time of tender, he ought to be reasonably compensated. Because the ambiguity is of a latent nature and it will thus not have been possible to resolve at the time of tender, then the engineer is required to certify the contractor an additional sum as may be reasonable to cover such cost actually suffered. Accordingly, the criteria that influence the admission of such cost into account are therefore threefold; whether such cost has been incurred in the opinion of the engineer, the contractor could not anticipate the cost and the contractor had a valid reason not to anticipate such cost. The engineer is usually empowered to decide on the extent of the contractor’s capacity to foresee any ambiguity and thereby the cost effect on the contract. However, the tender shall be deemed to allow for the requirements of the tender drawings, specifications and bill of quantities, all of which form part of the tender document. In the event any discrepancy between the details of drawings and the descriptions in the specifications or in bill of quantities is found, then such items shall be deemed to have been priced in accordance with the description of the bill of quantities, unless stated otherwise.

Court is not generally entitled to ‘go behind’ the contract to determine the parties’ intentions but within the four corners of the contract. Court is not generally entitled to have regard to extrinsic evidence in determining what the parties’ true intentions were. What this means is that documents, correspondence, draft agreements or discussions during the course of negotiations cannot be relied on to ascertain the parties intentions and therefore the parties’ obligations, unless the parties have expressly adopted those documents as forming part of the contract. The usual argument from the employer that the contractor should have reasonably assumed a fair projection on price increases beyond the original contract completion so that the price quoted for should be comprehensive enough to include a certain period of extension can be considered as a pure subjective interpretation that goes beyond four corners of the contract. There are exceptions, however. For instance the time is of the essence meaning that any violation of deadlines will amount to a breach of contract. “Time is of the essence” can be presumed in some contracts but typical construction contracts are not in essence of time since the failure to meet scheduled completion does not invalidate the contract or is not the sole reason to terminate the contract.

In commercial contracts the parties usually intend the works to be completed by an agreed date. In many contracts the date for completion will be stated as an express term. The term “time at large” is not a legal term, but describes the situation where there is no identified date for completion, either by absence from the contract terms or arising from events and the operation of law. Time is said to be “at large” because the time or date for completion is not fixed before carrying out the work, but determined after the work has been completed.

Some contracts contain ‘an entire agreement clause’ which states the parties’ intention that the written documents comprising the contract record the whole agreement between the parties. These clauses are generally taken as conclusive evidence that the written document represents the entire agreement between the parties. The provision of a geotechnical report at tender stage by one party and reliance on it by the other is an example. If the geotechnical report provided by the engineer is included in the contract documents; the contractor has relied on the report; and the report is incorrect in its description of site conditions, then the contractor will likely be able to rely on the latent condition provisions in the contract where conditions differed from those stated in the report. If the report did not form part of the contract documents the contractors claim may be much more difficult.  Another example is where a document has been provided to define the scope of works and the contractor has priced and tendered for the work accordingly. Problems often arise when a number of documents (including plans and drawings) are provided but only some are specifically incorporated into the contract as contract documents. If the contractor has priced the job based on non-contract documents and those documents are inaccurate or inconsistent with the contract documents, then the contractor may be left without any recourse.

Construction contracts set forth the rights and obligations of the parties when conditions encountered during the performance of the work differ from those which were envisaged at the time the parties entered into the contract. The three most common contractual provisions we often come across are the “differing site conditions” clause, which creates a right to claim; the “site investigation” clause which limits the right to claim; and the “disclaimer clause” which attempts to prevent any claims. The concept of “foreseeability” has been used for over a century as a legal test for liability. It is a concept used to limit the liability of a party for the consequences of his or her acts to consequences that are within the scope of a foreseeable risk, which of course embodies a subjective standard, ie the way the engineer decides. The test of entitlement is foreseeability, i.e., that which is foreseeable by an experienced bidder does not qualify whereas that which is not, and which was not actually foreseen, does.

The issues related to letter of intent are many. Letter of intent is a statement of intention that outlines an intended agreement between two or more parties.  Letters of intent can be used for a number of purposes; as a ‘comfort’ letter, that without more will not form any type of contract or as a preliminary contract between the parties. The function of letter of intent may even go up to the extent of a commencement order. In determining whether or not the letter should be construed as a binding contract, we must keep in mind that the ‘primary test as to the actual character of a contract is the intention of the parties, to be gathered from the whole scope and effect of the language used, and mere verbal formulas, if inconsistent with the real intention, are to be disregarded. It does not matter by what name the parties chose to designate it. But the existence of a contract, the meeting of the minds, the intention to assume obligations, and the understanding are to be determined in case of doubt not alone from the words used, but also the situation, acts, and the conduct of the parties, and the attendant circumstances.

Hence, the person interpreting the contract should give effect to the literal meaning of the words.  The “rule” that words must be given their ordinary and natural meaning means that the law does not easily accept that people have made linguistic mistakes, but on the other hand, if one would conclude from the background that something has gone wrong, the law will not attribute to the parties an intention which they plainly could not have had.  They will also attempt to give effect to the whole of the document and to try to give meaning to every word.  There is naturally the scope for interpretation, but it is not generally permitted, under English canons of interpretation to find meaning when none exists or to look behind the words to find the true intentions of the partiesThe basic approach is literal, not purposive.  In other words, the law is to read, word for word and should not divert from its true meaning. This is why we often include a ‘definitions’ section within a contract to explicitly define the most important terms used throughout. But some contracts fail to define a particular term. The plain meaning rule attempts to guide that turns on the meaning of a term not defined by the contract, or on that of a word found within a definition itself. According to the plain meaning rule, absent a contrary definition within the contract, words are given their plain, ordinary and literal meaning. If the words are clear, they must be applied, even though the intention of the parties may have been different or the result is harsh or undesirable. The literal rule is what the law says instead of what the law means.

In law, the Golden rule allows the interpreter to depart from a word’s normal meaning in order to avoid an absurd result. It is a compromise between the literal rule and the mischief rule explained below. Like the literal rule, it gives the words of a contract their plain, ordinary meaning. However, when this may lead to an irrational result that is unlikely to be the initial intention, the judge can depart from this meaning. If the word only has one meaning, but applying this would lead to a bad decision, the judge can apply a completely different meaning. The grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some absurdity or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid any absurdity or inconsistency, but not farther. The second use of the golden rule is in a wider sense, to avoid a result that is repugnant to accepted public norms, even where words have only one meaning. No one should profit from a crime, and so used the Golden rule to prevent an undesirable result.

The mischief rule attempts to determine the mischief and defect that the contract in question has set out to remedy, and what ruling would effectively implement this remedy. The application of this rule gives the judge more discretion than the literal and the golden rule as it allows him to effectively decide on the intent. Repugnancy in a contract must be reconciled, if possible, by such an interpretation as will give some effect to the repugnant clauses, subordinate to the general intent and purpose of the whole contract. In essence, where two clauses of contract appear to be contradictory, the court should attempt to reconcile conflicting clauses so as to give effect to whole of instrument, assuming that is possible within framework of general intent of the contract.

The blue pencil doctrine gives courts the authority to either strike unreasonable clauses from a noncompete agreement, leaving the rest to be enforced, or actually modify the agreement to reflect the terms that the parties could have – and probably should have – agreed to. Courts generally put the blue pencil down and refuse to enforce noncompete agreements imposing unreasonable restraints. Moreover, courts have indicated a greater willingness to refuse to reform agreements that are not reasonable on their face. A classic example is where some contracts have been drafted in a one sided language biased towards the employer. There are contracts with full of eventualities subject to penalty imposition, instead of delay in scheduled completion owing to contractor own delays. However, courts are reluctant to use the blue pencil and strike off such clauses provided the intention is exactly the same the parties had in their minds that was entered into a contract without coercion.

Also, the tendency to use ‘without prejudice’ is seen in much contractual correspondence. It should be noted that if a letter is written ‘without prejudice’, the rule of thumb is that it is privileged and cannot be used in court as evidence. This is a statement set onto a written document such as a letter, which qualifies the signatory as exempt from the content to the extent that it may be interpreted as containing admissions or other interpretations which could later be used against him or her.

In case of a doubt, a contract is construed against the interests of the author of the contract, according tocontra preferentum rule. This rule provides that an ambiguous term will be construed against the party that imposed its inclusion in the contract – or, more accurately, against the interests of the party who imposed it. Therefore, the interpretation will favour the party that did not insist on its inclusion. The rule only applies if, and to the extent that, the clause was included at the unilateral insistence of one party without having been subject to negotiation by the counter-party, which is often the case in construction where the parties agree on standard forms of contract. Additionally, the rule only applies if the court determines the term to be ambiguous, which often forms the substance of a contractual dispute. The reasoning behind this rule is to encourage the drafter of a contract to be as clear and explicit as possible and to take into account as many foreseeable situations as it can. Additionally, the rule reflects the court’s inherent dislike of standard-form take-it-or-leave-it contracts, also known as contracts of adhesion. The court perceives such contracts to be the product of bargaining between parties in unfair or uneven positions. To mitigate this perceived unfairness, legal systems apply the doctrine of contra preferentem; giving the benefit of any doubt in favour of the party upon whom the contract was foisted. Contra preferentem also places the cost of losses on the party who was in the best position to avoid the harm. This is generally the person who drafted the contract. An example of this is the insurance contract where the insurance company is the party that is completely in control of the terms of the contract and is generally in a better position to, for example, avoid contractual forfeiture.

The parol evidence rule is the legal application of a rule of evidence in contract cases that prevents a party to a written contract from contradicting (or sometimes adding to) the terms of the contract by seeking the admission of evidence outside to the contract. This means that oral terms and conditions made before execution of the written contract that contradict its express terms are inadmissible. In order for this rule to be effective, the contract in question must be a fully integrated writing; it must, in the judgment of the court, be the final agreement between the parties (as opposed to a mere draft, for example). One way to ensure that the contract will be found fully integrated is through the inclusion of a merger clause, which recites that the contract is, in fact, the whole agreement between the parties.

Parties tend to define, contest and dispute each other arguing that the terms have been implied in the contract so that they are inherent obligations on the part of the contractor or employer. A term may either be expressed or implied. An express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract. There are many ways a term can be implied. Terms can be implied in fact. The Privy Council established a five stage test in BP Refinery Western Port v. Shire of Hastings; Reasonableness and equitableness, Business efficacy, Obviousness, Necessity, Clear expression and Consistency. The implied term must be reasonable and equitable. The implied term must be necessary for the business efficacy of the contract. For instance, if the term simply causes the contract to operate better, that does not fit this criterion. The term must be so obvious that it goes without saying. Furthermore, there must be one and only one thing that would be implied by the parties. The term must be capable of clear expression. No specific technical knowledge should be required. The implied term may not contradict an express term. The term must be necessary to ensure reasonable or effective operation of a contract. Terms can also be implied in law. These are terms that have been implied into standardized relationships. Liverpool City Council v. Irwin established a term to be implied into all contracts between tenant and landlord that the landlord is obliged to keep the common areas in a reasonable state of repair. Terms can also be implied by custom or trade. One is generally bound by the custom of the industry that one is in. To imply a term due to custom or trade, one must prove the existence of the custom, which must be notorious, certain, legal and reasonable. A custom can be incorporated into contract only if there is nothing expressly or impliedly in the terms of the contract that prevent its inclusion. Customs can often be a part of a particular trade or business sector, but to have effect they must reinforce and assist the agreed contractual terms.

Generally, any term to be implied must not contradict any express term of the contract. Where a term is implied to fill a gap in the contract so as to give effect to the presumed intention of the parties, the term is implied in fact and depends on a consideration of the language of the contract as well as the surrounding circumstances. A term will be implied only if it is so necessary that both parties must have intended its inclusion in the contract. The fact that it would be reasonable to include the term is not sufficient for the implication, as the courts will not re-write the contract for the parties. Terms may also be implied because this is required statutorily, or on public policy considerations.

A contract comprises the construction, completion and maintenance of the works and everything needed to fulfil the same including labour, materials, plant etc irrespective of whether they are temporary or permanent in nature and whether specified or reasonably inferred from the contract. This clause sets out in too general terms the output expected in execution of the contract. The word ‘everything’ is sufficient to dispel the limitations to fulfil any contract requirement.  The phrase ‘reasonably inferred’ covers every minor detail necessary for the satisfactory execution of the contract beyond what is expressly stated in various parts of the contract document. Any work, materials or equipment that may reasonably be incidental or anecdotal from the contract as being required to produce the intended result will be supplied whether or not specifically called for. Notations, details or other descriptions which apply to one of a number of situations, materials, processes or work items shall apply to all except as specifically stated otherwise.

Exception clauses that seek to exclude or limit a contracting party’s liability are commonly, but not exclusively, found in standard form agreements. The English Unfair Contract Terms Act 1977 either invalidates an exception clause or limits the efficacy of such terms by imposing a requirement of reasonableness. Whether an exception clause will have its intended effect depends on a number of factors. The threshold requirement is that the clause must have been incorporated into the contract. There are generally three ways in which such incorporation may occur. Where a party has signed a contract which contains an exception clause, the signatory is bound by the clause, even if he or she had not read or was unaware of the clause. An exception clause may also be incorporated, in the absence of a signed contract, if the party seeking to rely on the clause took reasonably sufficient steps to draw the other party’s attention to the existence of the clause. The determination of this issue is heavily dependent on the facts of the particular case. Finally, exception clauses may be incorporated because there has been a consistent and regular course of dealing between the parties on terms that incorporate the exception clause. Even if no steps were taken to incorporate the clause in a particular contract between such parties, it may have been validly incorporated by the parties’ prior course of dealing.

As a general proposition, only persons who are party to a contract may enforce rights or obligations arising from that contract. This is sometimes referred to as the ‘privity rule.’ A third party who is not privy to a contract is generally not allowed to bring any legal action in his or her own name for breach of contract against a contracting party who fails to perform his or her contractual obligations, even if such failure of performance has caused the third party to suffer a loss. However, there is no clear definition as to when a person is or is not privy to a contract. Generally, a party who is an offeror or offeree will be privy to the contract. However, it seems that merely being mentioned in the contract is not enough. It is, nevertheless, possible to have a multilateral contract where there are multiple offerees (one or more of whom accept the offer on behalf of the others) or where there are multiple offerors (one or more of whom make the offer on behalf of the others). In either case, each offeree or offeror is a joint party to the contract and the privity rule will not apply to them. In construction contracts this rule is more likely to apply to one party’s unilateral terms i.e. bespoke construction contracts / bespoke amendments to standard forms of contract. These often seek to give a distinct advantage to the proffered over the other party. However it is doubtful that this rule would be applied to un-amended industry recognised standard forms of contract such as FIDIC or JCT. Whilst selected for use by the employer, these are not unilateral, being negotiated by representatives from all sides of the industry.

Good faith and fair dealings is another concern. It is common for lengthy negotiations to be written into a heads of agreement document that includes a clause to the effect that the rest of the agreement is to be negotiated. Although these cases may appear to fall into the category of agreement to agree, Courts will imply an obligation to negotiate in good faith provided that certain conditions are satisfied. Negotiations were well-advanced and the large proportion of terms have been worked out; and there exists some mechanism to resolve disputes if the negotiations broke down. The test of whether one has acted in good faith is a subjective one; the cases suggest honesty, and possibly also reasonably.

An incomplete agreement also cannot amount to an enforceable contract. Agreements made ‘subject to contract’ may be considered incomplete if the intention of the parties, as determined from the facts, was not to be legally bound until the execution of a formal document or until further agreement is reached. If a contract specifies “subject to contract”, it may fall into one of three categories: The parties are immediately bound to bargain, but they intend to restate the deal in a formal contract that will not have a different effect; or the parties have completely agreed to the terms, but have made the execution of some terms in the contract conditional on the creation of a formal contract; or it is merely an agreement to agree, and the deal will not be concluded until the formal contract has been drawn up.

There are contingent conditions under two categories: condition precedent and condition subsequent. A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due. Conditions precedent are conditions that have to be complied with before performance of a contract. With conditions subsequent, parties have to perform until the condition is not met. Failure of a condition repudiates the contract but is not to necessarily discharge it. Repudiation will always give rise to an action for damages. The term subject to contract ought not to be confused with agreements which contemplate that a later agreement will be made of a more formal variety but where nonetheless the parties wish to bind themselves in the meantime.

A condition precedent need not be explicitly described as such in a contract. But the existence of one term as an explicit condition precedent may by negative implication make other terms promises and not conditions. However, a party may waive a condition precedent to its own performance; however, it may also withdraw that waiver before the other party has acted in reliance on that waiver. A condition precedent clause, sometimes called a ‘time bar’ clause, is a provision of a construction contract which requires the giving of a notice by the contractor, usually within a specified period of time, for any matter that may give rise to a claim for additional time or money. The intention of such clauses is that a failure to issue the required notice will have the effect that the contractor’s rights in respect of that matter will be lost.

Where a contractor’s claim is rejected on the grounds that it has failed to serve appropriate notices, the contractor will often argue that the employer’s position is contrary to the “prevention principle“. Put simply, the prevention principle is based upon the established rule in common law jurisdictions that no person can take advantage of the non-fulfilment of a condition, the performance of which has been hindered by himself. In the 2007 case of Multiplex Construction v Honeywell Control Systems the court noted that “one consequence of the prevention principle is that the employer cannot hold the contractor to a specified completion date if the employer has by act or omission prevented the contractor from completing by that date. Instead time becomes at large and the obligation to complete by this specified date is replaced by an implied obligation to complete within a reasonable time”. Whether the prevention principle will defeat a properly drafted condition precedent clause has been examined in a number of cases.

There are conditions of satisfaction that lay down a one of contractor’s fundamental obligations under the contract. The contractor shall execute and maintain works in strict accordance with the contract to the satisfaction of the engineer. He shall obtain instructions only from the engineer and the engineer’s representative subject to limitations. Further the contractor is also bound to follow instructions irrespective of whether such instruction is issued under the contract or not. Such instruction can be on any matter whether mentioned in the contract or not. An element of contradiction therefore exists within the clause since the contractor shall only follow the contract in carrying out works without going out of what is prescribed in the contract. However, the contractor cannot be asked to carry out works, which are legally or physically impossible. The contractors must at all times record this distinction.

The contractor is obligated to justify any physical or legal impossibility, which prevented working on site against such instruction to proceed with work. This clause allows the engineer to adopt a ‘criteria of satisfaction’ in deciding whether work has achieved a particular standard. However, such statements of opinion, satisfaction or approval will not be final or binding on the parties without express and clear provisions in the contract. Satisfaction does not constitute approval of works, for instance in the clause for setting out. The question remains then to what extent statements of satisfaction are binding on the parties and the standard to be adopted. It is suggested that if the contract does not contain an objective standard to be applied, it may be that the parties intended that the standard of satisfaction is that of an objective engineer in which case the decision has to be reasonable. If instead the intention was that the engineer should adopt his own standard, then the requirement is likely to be that the decision must be made in good faith. However, the modern trend is to rely on quality assurance systems for checking of drawings and designs, and to adopt objective testing standards instead of the subjective opinion of the engineer.

It is presumed that a contract will be interpreted so as to be internally consistent. A particular section of the contract document shall not be divorced from the rest of the contract document. The ‘ejusdem generis’ rule applies to resolve the problem of giving meaning to groups of words where one of the words is inherently unclear. It must be given a meaning of the “same kind” as the word of established meaning. This is particularly the case when two or more words are conjoined, i.e., linked by the word “and,” as opposed to placed in a disjunctive relationship, by the word “or,” where the interpretation of two or more words might be different depending on the circumstances . As such, various canons give common sense guidance to interpret the meaning of clauses. The same word used in one place in a contract should be given the same meaning throughout the document. The word “may” is permissive and not obligatory. The word “about”, “approximately” or “almost” do not constitute any guarantee that the signatory will meet or exceed estimates worded in such a fashion unless performance falls significantly short of these estimates.

Handwritten or typewritten clauses take precedence over printed clauses. This for two reasons: written clauses are posterior to printed clauses, and, secondly, written words are the immediate language selected by the parties themselves to express their meaning, while the printed words are a general formula applicable to all parties. Where the rule applies, the special clause will override the printed clause to the extent of the inconsistency. The special clause however only takes precedence when it is in direct contradiction with the printed clause.

Recitals may be resorted in case of ambiguity. Usually the articles of agreements or recitals are no more than the standard printed forms where we get evenly and uniformly the same content irrespective of the individual contract. The recitals can not be resorted to if the express words of the contract are clear or there is no doubt about what they mean. However, in modern law the extrinsic evidence are sometimes looked into find the intension of the parties, so is the recitals having similar preference.

In conclusion, a contract will be read as a whole. No one should construe words in a vacuum but consider all background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties. “It can neither be uncompromisingly literal nor unswervingly purposive; the instrument must speak for itself, but it must do so in-situ and not to be transported to the laboratory for microscopic analysis” according to Sir Thomas Bingham.

Discover more from CMGuide

Subscribe now to keep reading and get access to the full archive.

Continue Reading

Scroll to Top