Making sense of Contracts – Presumptions in the Interpretation of Contracts

Presumptions are aids for obtaining clarity when reading and applying the terms of written contracts. They originate from what is known to happen in the ordinary course, and generally promote outcomes that are fair and reasonable. As contracts often leave things unsaid, presumptions help to close gaps. Presumptions apply in the absence of compelling considerations indicating that they should not apply in a specific case.

These are the six most important presumptions relied upon when contracts are interpreted. They underline the importance of clear, careful and thoughtful drafting whenever an agreement is reduced to writing.

1. Words used in contracts, are used in their normal, ordinary sense

This includes a presumption that, where the parties are involved in a specific business or trade, the words used in their contract are used in the sense usually understood in that business or trade.

The exceptions will be when the context makes it clear that the parties intended a different meaning, or where applying the ordinary meaning would have absurd results.

2. The parties have chosen the words used in their contract carefully, and those words express their intention precisely and exactly

3. Where a particular word or expression is used more than once in a contract, that word or expression has the identical meaning throughout the contract

The exception will be where the context clearly indicates otherwise, or where applying a consistent meaning would lead to absurd or unjust results.

For example, where “the house” refers to 1 Quality Street in clause 1 of a lease agreement, the term “the house” should not be used in clause 5 to refer to a different property, unless clause 5 clearly specifies that the term has a different meaning in that clause, and specifies that meaning.

4. Different words and expressions used in a contract indicate different meanings (this is the corollary of the presumption above)

For example, one should not use different terms such as “the house”, “the property” and “the premises” in different clauses all to indicate the same thing, such as 1 Quality Street. In interpreting the contract one must assume that “the house” means something different to “the property”, which in turn means something different to “the premises”, or otherwise the drafters would have used the same term.

5. The contract contains no superfluous words and no purposeless terms

It is assumed that everything to be found in a contract, is there for a reason and with a specific purpose. For that reason, every word and expression in a contract must be taken account of and given effect to, unless no sensible meaning can be extracted from the word or expression used.

6. There are no omissions

The parties are assumed to not have left out of the contract any words which should have been inserted, that is the contract is assumed to be complete and comprehensive.