Interpretation of contracts – Don’t relegate the written text

The Supreme Court of Appeal has decried the growing tendency to lead evidence about what experts think a contract means and about the subjective intention of the parties and details of their negotiation. The written text must not be relegated, but must be considered having regard to the context in which the agreement was entered into.

The point of departure is the language of the document in question. Evidence of the intention of the parties or of their prior negotiations is not admissible except occasionally in the face of enduring ambiguity.

Words have to be interpreted in their context sensibly and not so as to have an un-business-like result.

In the case of The City of Tshwane Metropolitan Municipality v Blair Atholl Homeowners Association there was a dispute between the homeowners association and the municipality regarding an agreement reached to supply water outside the municipality’s normal area. The question was the meaning of the obligation of the municipality to supply water ‘at the normal rate of the municipality’. Was that the bulk rate supplied to other municipalities or the rate for ordinary consumers?

The court refused to accept the evidence of a witness of the homeowners association who sought to give the details of background negotiations and his views as to what the contract meant.

The context of a particular clause is looked at in relation to all the other material clauses and with regard to the factual matrix underlying the conclusion of the contract including its purpose. The court looked at the words and the context and found that the bulk supply rate did not apply.

The court also pointed out that the parol evidence rule prohibiting evidence about negotiations is part of our law and prevents a party from altering, by producing extrinsic evidence, the recorded terms of an agreement in an attempt to rely on an amended contract.

These rules do not apply when there is a claim for rectification of the contract to record expressly what was actually agreed between the parties.

There have been a number of cases recently where evidence has been led from experts about their view of the meaning of a contract. This is inadmissible evidence.