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Contract interpretation

Similar to contract formation, the rules for the interpretation of contracts are contemplated by the civil law: the Federal Civil Code. The rules are as follows, are implicit in all commercial obligations and should be observed when interpreting any contract:

  1. if the terms of a contract are clear and leave no doubt about the intention of the contracting parties, the literal meaning will prevail;
  2. if the words appear contrary to the evident intention of the parties, the latter shall prevail over them;
  3. notwithstanding the generality of the terms of a contract, it is not to be comprehended therein different things or cases from those on which the parties intended to contract;
  4. if a clause admits several meanings, an interpretation must be provided that is most suitable in order to give the contract's purpose;
  5. the contract's clauses must be interpreted as a whole in connection with the other clauses therein, giving an overall meaning to the group of clauses, some of which may be unclear;
  6. it should be understood that words that may have different meanings refer to the one meaning that is most in accordance with the contract's nature and purpose; and
  7. customs and usages can be considered to interpret the ambiguities therein.

When the rules above are insufficient to interpret the true meaning of a provision in a contract, if it refers to accidental or secondary circumstances of a contract, and when there is no legal consideration, it shall be interpreted in favour of the lower transmission of rights. If the contract does have consideration, the interpretation should be in favour of the greater reciprocity between the contracting parties.

Finally, if the main purpose of the contract is unclear, so that the intention of the contracting parties cannot be known, the contract will be null and void.

These rules should be interpreted hermeneutically and can be summarised into three main categories: the literality of the clauses; the intention of the contracting parties; and the effects that the contract may produce.

Based on the above, it can be concluded that, under Mexican law, contract interpretation is more literal than in common (case) law. Therefore, attention must be devoted primarily to the language contained in the agreements in order to evidence the true intention of the contracting parties. In such sense, the parties' intention, however relevant when interpreting a contract, is a secondary source of interpretation, because if the language contained therein is sufficiently clear and it leaves no doubt about the intention of the parties, there should be no other interpretation.

Notwithstanding the importance of the literal meaning of words, when in doubt, a contract should always be interpreted as a whole in order to be able to identify its true purpose. Based on the rules of interpretation set forth above, if the words of a contract seem contrary to the evident intention of the contracting parties, the latter will prevail over them. In addition, the nature of a contract will always depend not on the title or name given to the agreement, which may be inaccurate or mistaken, but on the facts and acts consented by the parties therein.

Another example of the importance of the 'intentional element' when interpreting contracts is the relevance of the parties' conduct, before, during its execution and while performing the obligations therein. With such conduct, courts can analyse and deduce their true intention. For instance, when the parties execute a series of acts in a regular or ordinary way, or when executed by a single party, there is an express or tacit acceptance by the other. Such behaviour indicates the true intention of the parties regarding the scope they wanted to give to the agreement. Likewise, it could be understood that a contract has been automatically renewed if both parties continue executing actions in connection with such contract.