Where parties signed a memorandum of understanding as an interim arrangement for ten months in anticipation of entering into a more comprehensive and lasting agreement the MOU was binding because the full agreement did not materialise. An attempt to call contextual evidence to change the agreement was not allowed.
In the case of Urban Hip Hotels v KCarrim there were two competing hotels in one building and negotiations were held for the one hotel to take over some facilities of the other hotel. In signing the MOU the parties agreed on a management fee based on turnover. There was a dispute over whether additional operating costs were due over and above the management fee.
The company claiming the additional expenses suggested that the management fee had to be supplemented by their normal practice of allocating rental income and deducting operating costs.
Where parties deliberately and conclusively deal with an issue in agreement there is no room for incorporating a tacit term.
There was held to be no merit in the argument because the MOU was complete and efficacious. The parties had applied their minds to the subject of operating costs and provided that no other expense or payment over and above the fee was payable. Where parties deliberately and conclusively deal with an issue in agreement there is no room for incorporating a tacit term.
It is now well-established that the meaning of a contract, whether it is ambiguous or not, must be ascertained by consideration of the words used, the contract as a whole and the context or factual matrix in which the contract was concluded.
In an appropriate case the manner in which the parties carry out the agreement may be considered as part of the context but there are three provisos to this.
- First, the evidence must be indicative of a common understanding of the terms and meaning of the contract.
- Second, the evidence may be used as an aid to interpretation and not to alter the words used by the parties.
- Third, the evidence must be used as conservatively as possible. The court refused to apply anything but the clear meaning of the contract.