All questions

Contract interpretation

i Governing law of the contract

Parties are free to choose the substantive law that they wish to govern the contract. That law will then govern substantive aspects relating to the contract such as its formation, interpretation, validity and termination.

In the event of a dispute, a court will determine the governing law (also known as the proper law) of the contract at the outset and will give effect to the law chosen by the parties, subject to certain exceptions (such as the fact that the chosen law will not override local statutes that are directly applicable).

If the parties have not expressly chosen the substantive law of the contract, a South African court will determine if there is a tacit choice of law. This is done by trying to determine the parties' intention at the time of concluding the contract, through a consideration of factors such as the surrounding circumstances and any references in the contract to statutes of a specific country.

If no tacit choice can be found, the court will assign a law to the contract by determining which legal system is most closely connected to the contract. This is usually either the place where the contract was concluded or performed.

A conceptual difficulty arises in instances where the conclusion of a binding agreement is in dispute. If there is no binding agreement, then no proper law has been chosen and the question is then what law must a court apply in order to determine the validity of the contract? A leading South African author (CF Forsyth, Private International Law) suggests that the approach adopted in English law ought to be applied in South Africa; namely, the question must be determined by applying the law that would have been the proper law, had a valid contract been concluded. This question has not yet been answered by South African courts.

ii The terms of a contract: express, implied and tacit

In South African law, when interpreting a contract it is first necessary to determine what terms form part of the contract.

A party who alleges that a term forms part of a contract bears the onus of proving that the parties intended it to form part of the contract.

South African law recognises three types of terms, given below.

Express terms

This is a term that the parties expressly agreed to include. There are four rules that the courts utilise in order to determine whether an express term forms part of the contract.

Incorporation by reference

If a contract refers to a separate document with sufficient certainty, it incorporates the terms of that separate document.

Parol evidence rule

This rule states that when a contract has been reduced to writing, a court will assume that the parties intended the document to reflect all of the express terms of the contract and will not consider external (parol) evidence that differs from the written contract.

The rule has, however, been heavily criticised over time, particularly owing to the fact that it contains various exceptions, which can become confusing and defeat the purpose of the rule.

Caveat subscriptor rule

This rule states that a person who signs a contract is bound to all of the terms contained therein, even if he or she did not read them or intend to be bound by them. The rule is an exception to the principle that parties must reach subjective agreement on the terms of the contract.

Ticket case rules

This rule states that a party is bound to a contract, even if he or she did not sign the document, if:

  1. they were willing to be bound by them; or
  2. if the other party took reasonable steps to bring the terms to his or her attention.

An example of such a contract is an indemnity contained at the entrance to a building.

Implied termsTerms implied by law

An implied term is a term that forms part of the contract by operation of law (either by statute or through the common law). These terms automatically apply to a contract, even if agreement on the terms was not reached by the parties. However, parties may, in some cases, choose to change or exclude an implied term, by express agreement.

Terms implied by trade usage

These terms are implied where a practice in a trade is so established that it is assumed to form part of the contract.

Tacit terms

A tacit term is a term that was not expressly agreed to, but that can be read into the contract because of the intentions of the parties. These take the form of unexpressed terms and imputed terms

The test to establish whether a tacit term should be read into a contract is the 'necessary implication test', which looks at whether the term is a necessary implication of the contract. The test has two elements:

  1. business efficacy test: a court will look at whether the term is required to make the contract commercially viable; and
  2. officious bystander test: a court will ask what would have happened if an 'officious bystander' was present at the time of entering into the contract and he or she had asked the parties whether they wished to include the term.
iii Rules of construction

Once it has been determined what terms are applicable to the contract, their meaning must sometimes also be interpreted. The law in this aspect has recently evolved; however, it is useful to explain the 'three-stage approach' that previously applied, given below.

Stage one: the written terms of the contract

As stated above, the parol evidence rule states that the court may only look at the contract to ascertain the meaning of the express terms, as this reflects the intention of the parties.

A court would first look at the written words used by the parties when entering into the contract. The written words would then be applied, even if an unfair result was reached.

Stage two: the surrounding circumstances

Additional factors could be taken into account only where the meaning of the term was not clear from the contract itself.

These surrounding circumstances related to evidence of matters that the parties probably had in mind when contracting.

If the above two stages still resulted in ambiguity, then the court would allow evidence of what was said during negotiations.

Stage three: the rules of construction

If a clear meaning still could not be found, the court would apply certain rules of interpretation. Some of these rules include the following:

  1. the court will find the fairest interpretation of the term, so that neither party is unreasonably disadvantaged;
  2. if the clause is capable of more than one meaning, one of which leads to invalidity and one of which leads to validity, the meaning favouring validity will be chosen; and
  3. the contra preferentem rule is used as a last resort and states that a term will be interpreted against the party who was responsible for the drafting of the clause.
iv Developments in South African law relating to contractual interpretation

The above-mentioned 'staged' approach has been severely criticised in the past, and recent developments have seen a move towards a less formalistic approach to the interpretation of contracts.

In this regard, South African courts recognise the concept of 'substance over form', and a move towards a method of interpretation that gives effect to the intention of the parties has been seen in recent jurisprudence.

The recent Supreme Court of Appeal judgment in Bothma-Batho Transport (Edms) Bpk v. S Bothma & Seun Transport (Edms) (Bpk) emphasised that, although the starting point of contractual interpretation remains in the words of the document (as this is the only medium through which the parties have expressed their contractual intention), the process of interpretation does not stop there. The literal words should be considered in the light of its admissible context; this includes the circumstances in which the document came into being.

As such, it seems that interpretation is no longer a process that occurs in stages but is 'essentially one unitary exercise'.

v Rectification of contracts

Rectification takes place when a written contract, which incorrectly reflects the parties' common intention, is rectified to reflect their intention. The party claiming rectification must prove the common intention of the parties, that the document incorrectly reflects the intention and that the incorrect recordal was the result of a mistake of the parties.