This is how you interpret a contract:
- The starting point is the words of the contract.
- You consider the perceived literal meaning of the words in the light of the context, including the circumstances in which the document came into being. This includes the background to the agreement and the surrounding circumstances when it was entered into.
- This is not a stage-by-stage approach but a single exercise.
A reasonable commercial person will be unimpressed with technical interpretations and undue emphasis on the niceties of language. The outcome must reflect what the parties clearly intended from the circumstances under which they came to a deal.
Be careful what you say in the preamble or introduction. Keep earlier drafts.
The starting point inevitably is the language of the provision itself. If more than one meaning is possible (and that is after all why people have disputes), the language must be read in context and the reader must have regard to the purpose of the provision and the background to the preparation of the document.
Facts of the case
The two parties in this case, Bothma-Batho Transport (Pty) Limited and S Bothma & Seun Transport (Pty) Limited, were companies owned by brothers. Their relationship excluded any possibility of brotherly love or other charitable benevolence and this was part of the surrounding circumstances.
There was a dispute how certain costs had to be allocated against money received from a third party for the proportional benefit of each company. Bothma-Batho Transport failed to persuade the court that it was entitled not only to a share of the expenses but also a share of rentals due to Bothma & Seun. In coming to this conclusion the court looked at an earlier settlement agreement which had dealt with the way of calculating the amounts due, the background and contents of that agreement as well as the agreement being interpreted.
Anybody drafting or interpreting a contract should read this case.
This means that you must:
- Be careful what you say in the preamble or introduction to the agreement about the background and circumstances.
- Keep earlier drafts.
- Not try to gain an advantage out of a grammatical instead of a commercial interpretation.