All questions

Contract interpretation

i Governing law principles

Generally, parties will include a governing law clause in their contracts. If not, if both parties are resident in Ireland, the governing law of the contract is Ireland, but may be changed with the consent of both parties.

However, disputes often arise where one party is not resident in Ireland. Where there is an express absence of a choice of law provision, the European Union regulation (EC) 593/2008 of June 2008 (Rome I) applies to contracts entered into on or after 17 December 2009. The governing law, according to Rome I, is the law of the country where the party who is to perform the contract has its habitual residence or its central administration. Rome I applies where one of the parties is Irish resident, regardless of where in the world the other party is resident.

ii Interpretation

Irish case law stresses that contract interpretation involves broad principles rather than strict rules. The test is an objective one and the classic approach is to construe the plain and ordinary meaning of the words contained in it. However, recent case law suggests that the courts will not only look at the plain and ordinary meaning of the words (textualism) but will also look at the factual matrix and the circumstances in which the contract was drafted (contextualism), particularly where contracts are ambiguous.

The UK Supreme Court has recently confirmed that textualism and contextualism are not conflicting paradigms and should both be used as tools where appropriate in the circumstances of a particular contract to ascertain the objective meaning of the language used in the contract.

Parol evidence may be admissible to explain the subject matter and construction or correct a mistake in commercial contracts. It will not, however, be used to explain or prove the validity of a contract.

The contra proferentem rule provides that where a contractual clause is ambiguous, it should be construed strictly against the party who provided the wording. The Supreme Court recently stressed that there must be an element of ambiguity in respect of the relevant clause for the rule to apply.

iii Implied terms

Where a contract lacks any of the essential requirements such as offer, acceptance, consideration and intention to create legal relations, the courts, having regard to the overall context of the agreement, may imply terms into the contract. Implied terms are provided for by case law and certain statutes, such as the Sale of Goods Acts 1893–1980.

In a recent Court of Appeal decision, the court held that in implying terms into a commercial contract, the terms must:

  1. be necessary to give business efficacy;
  2. be so obvious that it is implied; and
  3. give effect to the parties intentions.

This followed on from an earlier decision where the court found that an agreement was so imprecise and lacking in substance it fell short of business efficacy.