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When contractual interpretation isn’t what you want it to be

Updated: Oct 10, 2019


When I decided to manage projects for clients, I turned in my poachers cap and sneakers and reached into my law library to brush up on the quasi-legal training a Quantity Surveyor receives at university.


My preceding career as a senior QS focused on successfully processing variation entitlement claims had come to an end but I had a firm unsatisfied view of those claims that did not succeed. Some that had clear merit in my mind, were defeated by a willingness to please a client on what appeared to be marginal issues that I thought were actually pretty black and white. If only the truth could be easier to see in those lost claims, there would be more runs on the scoreboard before compromise rolls the dice.


I vowed to be a better project manager

I vowed to be a better project manager by studying hard, researching issues presented, consulting colleagues with specialist knowledge, so I can deliver decisions that are, always right, well explained, acceptable, even if disliked.


In searching for the truth about the law for deciding contractual entitlements, there was only a small amount of focused commentary and even less serious academic work. What was available came from a wide range of jurisdictions and varied in style and terminology. It was a rich tapestry of views to sift through until you isolated the texts that contributed at least part of the puzzle pieces needed to understand the whole competency of contractual interpretation, distinct from the many other facets of contract law that polluted the texts of value.


Finding Context and Purpose in contractual interpretation

A whole lot of legal and academic dialogue was focused on the seemingly indeterminable arguments for and against the permissibility of extrinsic evidence. The argument for, is one of relevance, and adds a burden to the task. The argument against, is expediency, and with haste lurks distaste. It was clear Lord Hoffman’s ruling in “Investors Compensation Scheme vs West Bromwich Building Society” 1998 is holding ground as the way, the truth and the light on the subject. The Supreme Court of New Zealand had weighed in, in Vector Gas Limited v BoPE Limited 2010. And again in May 2019 the Supreme Court of New Zealand republished their paper to Asia Pacific Judicial Colloquium on the modern approach.


Finding an authoritative reference tool

Only two authors seemed diligently focused on contractual interpretation as a whole topic to be completely understood.


David McLauchlan a NZ law professor whose contractual interpretation paper I found on the internet and Richard Calnan whose book “Principles of Contractual Interpretation”, 2013, I had to buy and read. The purpose of this book is to guide anyone who has to interpret contracts. Contractual interpretation is ultimately intuitive, an artform. Richard sets out 10 Principles and explains each within the context of five clusters, 1. The Guiding Principle, 2. Text and Context, and 3. Understanding, 4. Changing or 5. Adding of Words. The Book starts with a one-page quick reference summary of all 10 principles to aid easy 2 minute revision by the student of contractual interpretation. A legal textbook focused on contractual interpretation is rare and this 2017 Second Edition is up to date and expanded to 228 pages from the 2013 first edition 191 pages.


The Constructive or “Golden Rule” Principles - Principles one to five

I have divided Richard Calnan’s 10 Principles of Contractual interpretation into two parts,

1. Constructive Principles, and 2. Reconstructive Principles.


The first five principles Richard lays out are universal in arriving at a correct interpretation of a contract. The most common of erroneous contractual interpretations are a failure to observe these golden principles. Armed with these five principles you can construct an authentic interpretation of a contract, assuming the original drafting is error free.


The Reconstructive Principles (to be applied if needed) – Principles six to ten

The second five principles are reconstructive tools for correcting an interpretation that following application of the “golden rule” principles is incongruous on it’s face by being either duplicitous in meaning, defiant of any commercial logic, absent of obviously necessary words, unequivocally inconsistent with intention or does not reflect past dealings of mutual assent.


Richard Calnan’s 10 Principles of Contractual interpretation

1. The purpose of contractual interpretation is to establish the intention of the parties to the contract. This is done objectively: what would a reasonable person understand their common intention to be from what they have written, said, and done?

2. Where the contract is in writing, it is the writing which is the primary source of the parties’ objective intention;

3. Contracts are read as a whole;

4. Contracts are read in the context of their background facts. These are the facts reasonably available to the parties which are relevant to establishing how a reasonable person would understand what the parties intended by the contract, when it was entered into;

5. Words are nearly always given their ordinary meaning in their context;

6. If words are ambiguous in their context, they are given the meaning the parties are most likely objectively to have intended;

7. Very occasionally, it is clear that the parties cannot objectively have intended words they have used to have their ordinary meaning. If so, they are given the meaning which the parties must have objectively intended. The more unreasonable the result, the more unlikely it is that the parties can have intended it;

8. Words are implied into a contract if the parties must objectively have intended them. This will be the case either if they are so obvious that there was no need to express them, or if they are necessary to make the contract work in a business context;

9. If a written contract does not record the parties’ common intention at the time it was entered into, it will be amended to reflect that intention;

10. If the parties to a contract have dealt with each other on the basis of a common understanding about the meaning or effect of the contract, that interpretation will bind them if it would be unjust to go back on it.


Take it easy on today’s emerging professionals, they have a lot to learn

Having walked a few miles in my peer project manager’s shoes, I have to acknowledge that mostly the project managers who denied my younger me entitlement claims, were right, when I was clearly having unpleasant thoughts about them. For those unpleasant thoughts, I apologise. They were probably wondering how they could get this kid to see sense. And there lies the challenge we all face today.


By Matthew Ensoll Editor, The New Zealand Building Economist (NZBE).

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Note: NZBE stocks Richard Calnan’s Second edition of “Principles of Contractual interpretation” because we believe that sharing a common understanding of the rules of contractual interpretation, the more efficiently we practice in the service of our clients.


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'Principles of Contractual interpretation'

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