One of the questions clients often ask us is how a contract might be interpreted by the courts in the event of a dispute. Often a balance needs to be struck between using a commercially sensible interpretation and giving words their natural meaning. In Allied Vehicles Limited v Glasgow City Council the Court of Session provided a useful summary of the principles of commercial contract construction.

The parties had entered into an agreement which governed the terms of the leasing of vehicles. However, there were issues with the quality and servicing of the vehicles, resulting in Glasgow City Council raising an action against Allied Vehicles Limited for breach of contract. 

Although the ultimate decision turned on the detail contained in the specific clauses, the judgment provides useful practical guidance as to the four key principles of construction of a commercial contract.

  • The aim of the court in construing a commercial contract is to ascertain objectively the aim of the parties when entering into a contract.
  • In order to be able to ascertain the aim of the parties a court must put itself in the position of a reasonable person. This person will be in possession of all background information which was reasonable available to the contracting parties.
  • If ambiguous language has been used then the court will normally try to give effect to that language.
  • In the event that there are two possible interpretations of a word or phrase, the definition which will be adopted by the court will be the one which makes the most commercial sense. 

This means that in the event of a dispute, courts will try to find a balance between the natural meaning of words in the relevant clause and commercial sense. In reaching a conclusion on this matter, it was held that a court ‘would require to be persuaded that it was clearly more commercially sensible before [he] would let it prevail over…the more natural meaning’. This meant that the Council, arguing for a more natural meaning of the clause in question, were successful in their arguments. The submissions made by Allied Vehicles were not so much more commercially sensible that they could be justified. 

This illustrates that in interpreting contracts it is the natural meaning which prevails unless, and only unless, the alternative makes more commercial sense. This should be borne in mind when drafting a contract – straightforward and simple language will help to provide clarity for all parties.