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Contract interpretation

In Portugal, choice-of-law principles are, hypothetically, determined by Regulation (EC) 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). According to Rome I and, as a general rule, parties are free to choose the applicable law. The law that the parties choose will govern the contract unless the right to choose the law is limited or restricted by other provisions of Rome I (e.g., Article 3 (3)). If the parties do not agree on the applicable law, the rules of Rome I will apply to determine the applicable law.

Should Portuguese law apply to a commercial contract, Portuguese rules on interpretation will also apply. According to Portuguese law, the fundamentals of contract interpretation are as follows.

In general, if the true will of the parties is known, the meaning of the contract is valid in accordance with such true will (Article 236(2) of the Portuguese Civil Code), regardless of how the parties express such will. In principle, a party can resort to any type of evidence to prove the true will of the parties (i.e., documentary evidence or witness evidence).

However, if the true will of the parties is unknown or cannot be established, then a contract has to be interpreted according to the meaning that a normal party, under the same set of circumstances, would hypothetically give to it (Article 236(1) of the Portuguese Civil Code). This standard of interpretation relies on several elements, such as:

  1. the literal element (the wording of the contract);
  2. the historical element (namely, pre-contractual negotiations);
  3. the contextual element (the contract as a whole);
  4. the purposive element (the purpose and nature of the contract); and
  5. the behavioural element (the conduct of the contracting parties).

In other words, the interpreter – the courts – will rely and consider all these elements when establishing the meaning of a contract or contractual clause.

With regard to formal commercial contracts (i.e., those in written form), the purpose or intention of the contracting party must be stated in the contract with a minimum correspondence, even if in a deficient, rudimentary or imperfect way (Article 238 of the Portuguese Civil Code). This is known as the minimum correspondence test. For example, a lease agreement is subject to this interpretative standard because it constitutes a formal agreement (Article 3 of Decree-Law 149/95). However, even in formal contracts, the real intent of the parties can prevail if the grounds determining the form of the agreement do not hinder the prevalence of such a meaning (Paragraph 2 of Article 238 of the Portuguese Civil Code).

Under Article 237 of the Portuguese Civil Code, if the meaning of a commercial contract is ambiguous or dubious, it must be interpreted in a way that guarantees an adequate balance between the parties' mutual obligations. However, there are specific rules for interpreting adhesion contracts. In fact, in the event of ambiguous general contractual terms, the prevailing meaning is that which is more favourable to the party adhering to the contract (Article 11 of Decree-Law 446/85 of 25 October).

It is not unusual for parties to commercial contracts to include a merger clause. However, under Portuguese law, this type of clause does not automatically render prior statements or agreements irrelevant and thus they may still be used as a means of interpreting the contract.

Finally, if something is not expressly regulated in the commercial contract and no special provision applies, this gap must be filled in accordance with the hypothetical intention of the parties had they foreseen such gap or according to good faith principles (Article 239 of the Portuguese Civil Code).