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Contractual Interpretation - What the Law Says

There are two all-important rule books that require our constant, thorough and relentless study of, in the quest to know the truth about the rules for correctly interpreting construction contracts.


Rule Book #1 The Standard form Contract, like NZS3910:2023, and its predecessors, others; and


Rule Book #2 The legal Principles of Contractual Interpretation.


No matter your choice of standard form of contract, we all need to know Rule Book #2, The legal Principles of Contractual Interpretation. For a NZ authority on the subject the best starting point is SC 65/2008 - Vector Gas Limited v BoPE Limited [2010] NZSC 5.


What the NZ Supreme Court Says


In SC 65/2008 - Vector Gas Limited v BoPE Limited [2010] NZSC 5, McGRATH J   at [61] Summarised Lord Hoffman a widely recognised English law authority had to say:


[61] In 1998, the House of Lords further clarified English law on when it is permissible to refer to extrinsic material in the interpretation of commercial agreements when Lord Hoffmann fashioned five principles of interpretation in his judgment on behalf of the majority in Investors Compensation Scheme Ltd v West Bromwich Building Society. In summary, Lord Hoffmann said that;


(1) interpretation of a commercial agreement is the ascertainment of the meaning it would convey to a reasonable person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contract.


(2) The language the parties use is generally given its natural and ordinary meaning, reflecting the proposition that the common law does not easily accept that linguistic mistakes have been made in formal documents.


(3) The background, however, may lead to the conclusion that something has gone wrong with the language of an agreement.


(4) In that case the law does not require the courts to attribute to the parties an intention which they clearly could not have had.


(5) The natural and ordinary meaning should not lead to a conclusion that flouts business common sense.


McGRATH J was one of three out of the five NZ Supreme Court judges in SC 65/2008 - Vector Gas Limited v BoPE Limited [2010] NZSC 5, who discussed the Principals of Contractual Interpretation in some detail in this important NZ Reference Case. Refer to;


TIPPING J  on     “Legal principles”                                                                      at [19] - [37]

McGRATH J  on   “Contextual interpretation of commercial agreements”    at [57] – [79]

Wilson J  on       “Principles of interpretation”                                                   at [119] – [130]



A Commercial Managers take on Contractual Interpretation


In my role (1) as a Commercial Manager and (2) as a part time Adjunct Associate Professor (from industry) at Taylor’s University, Kuala Lumpur, Malaysia, I have presented an industry perspective on the subject of Contractual Interpretation.

Download PDF formatted PowerPoint Slides HERE.

Contractual Interpretation Taylors University
Download PDF • 2.19MB

I share the detailed work of Lord Hoffman UK Law Lord, NZ Law Professor David McLauchlan, UK Lawyer Law Professor and Author Richard Calnan, and add my commentary from industry experience.

Caution with the RED Ink when Interpreting Contracts


We each have our own intentions going into a contract, often they are not the same, but we compromise on the words we chose to seal the deal. When it comes to contractual interpretation our actual subjective intentions are no longer relevant. What is relevant is what a reasonable person would determine the common intentions of the parties to be at the time of formation considering the background facts reasonably available to the parties. If the contract is written, then the focus is on what was written more than what was said or done. If the plain meaning of the words in context with the background facts are clearly ambiguous or not in accord with the manifest common intentions of the parties, then words must be added, amended or redefined, to give the meaning to the contract the parties are most likely to have intended. Or if the parties embarked on a common misunderstanding of the contract, they will be bound by that misunderstanding, to the extent it would be unjust to go back on it.


It must be plainly clear the ordinary meaning of the words in context are wrong, before any red ink can flow. Expressing an interpretation of contract, must be supported by providing sound reasoning, the key when communicating a meaning the parties objectively intended, if we are to cooperatively manage agreements, we are bound work with, despite any poor drafting upon its formation.

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“Celebrating 50 years of New Zealand Building Economist 1972 to 2021”

By Matthew Ensoll

Life Member NZIQS. Reg.QS.

Editor New Zealand Building Economist.



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