The Supreme Court has confirmed that emphasis should be placed on giving effect to the natural meaning of clear contractual wording as drafted and agreed by the parties, even if this has disastrous consequences for a party [1]. Recently, however, the case of Ace Paper Ltd v Fry [2] has highlighted that this approach is not always suitable where wording is genuinely ambiguous and capable of having more than one meaning. In these situations the courts may interpret a contract to reflect business common sense.

An ambiguous arrangement

The case involved an invoice discounting agreement whereby the appellant assigned all debts owed to it by its customers. On termination of the agreement via an exchange of letters, a question arose regarding the proper construction of one of these letters and whether, pursuant to that letter, a particular debt was re-assigned to the appellant. The appellant had already received full value for the debt from the respondent. The relevant contractual provisions in this case were capable of being given a range of possible interpretations, which were either absurd or unlikely given the commercial background. The High Court was of the opinion that the re-assignment was counterintuitive and clearer wording was needed. Furthermore, the letter containing the ambiguous wording had been drafted by the appellant, thus it should be construed ‘contra proferentum’ [3]. The letter was therefore interpreted in a manner which reflected commercial common sense.

Practical points

  • The courts will apply the ordinary, natural meaning when interpreting a contract where words are clear.
  • The courts are generally not required to look beyond the words if those words are capable of only one meaning.
  • The courts will, however, apply the concept of commercial reasonableness or business common sense where it is necessary to do so – for example where there is genuine ambiguity which requires the court to choose between more than one possible meaning.
  • There can be no substitute for careful drafting. Check that parties are clear about each others’ intentions; check that any contractual wording reflects their desired outcomes; and ensure that the wording is clear and not open to any other interpretation.