In a July 2021 judgment the Supreme Court of Appeal in Capitec Bank Holdings Limited and Another v Coral Lagoon Investments 194 (Pty) Ltd and Others (470/2020) [2021] ZASCA 99 considered the question of how to interpret the wording of a subscription agreement in dispute which governed the basis on which a sale of shares may take place. The principles applied relate to any contract.

The court reaffirmed that the language used, understood in the context of which it is used, and having regard to all the provisions of the contract constitute the unitary exercise of interpretation, but that the combination of text, context and purpose should not be used in a mechanical fashion.

The relationship between the words used, the concept expressed by the words, and the place of the contested provision within the scheme of the agreement as a whole constitutes the enterprise by which a coherent and salient interpretation is determined.

This is not a charter for judicial interpretation based upon what a contract should be taken to mean not located in the text which the parties in fact agreed. The courts must not import meaning into a contract so as to make it a better contract or one that is ethically preferable.

Even in the absence of ambiguity, the conduct of the parties in implementing the agreement may provide evidence as to how reasonable persons of business construes a disputed provision in a contract.

Extrinsic evidence is admissible to understand the meaning of the words used in a written contract. That evidence may be relevant to the context within which the contract was concluded and its purpose. That is so whether or not the text of the contract is, patently or latently, ambiguous or not.

The court also referred to the parol evidence or integration rule. Except in certain circumstances such as fraud or duress, where the parties to a contract have reduced their agreement to writing and assented to that writing as a complete and accurate contract, extrinsic evidence is inadmissible to contradict, add to or modify the contract.

The court referred to the recent Constitutional Court judgment in University of Johannesburg v Auckland Park Theological Seminary and Another (CCT 70/20) [2021] ZACC 13; 2021 (8) BCLR 807 (CC) which affirmed that an expansive approach should be taken to the admissibility of extrinsic evidence of context and purpose whether or not the words used in the contract are ambiguous. The court must determine what the parties to the contract intended.

The Constitutional Court judgment in the University of Johannesburg judgment gives a very wide remit to the admissibility of extrinsic evidence of context and purpose. Even if there is a reasonable disagreement as to whether the evidence is relevant to context, courts should incline to admit such evidence, not least because context is everything. The courts will then weigh the evidence when they undertake the interpretative exercise of considering text, context and purpose.

Reasonable disagreement as to the relevance of extrinsic evidence should favour admitting evidence and the weight of the evidence may then be considered.

There are limits to the evidence that may be admitted as relevant to context and purpose. The court’s aversion to receiving evidence of the parties’ prior negotiations and what they intended (outside cases of rectification) or understood the contract to mean should remain an important limitation on what may be relevant to the context and purpose of the contract. What a contract means is strictly a matter for the court. Accordingly it is not appropriate to harvest evidence on an indiscriminate basis of what the parties did after they concluded their agreement. Such evidence must be relevant to an objective determination of the meaning of the words used in the contract.

The meaning of a contested term in a contract, or statute is properly understood not simply by selecting definitions of particular words, often taken from dictionaries, but by understanding how the contested words and sentences fit into the larger structure of the agreement, its context and purpose.

The position is that evidence is now permissible to contextualise a contract in assisting in interpretation despite the parol evidence rule. The weight and benefit of the evidence will be determined in each case.

This new approach will unfortunately mean that many more contracting parties will be encouraged to litigate their disputes. The fact that we require a number of cases to explain the earlier cases and how to interpret documents is itself telling.