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Drafting contracts

(b) Statutory guidelines on contract interpretation

Lawyers like to provide certainty on how a contract must be (and will be) interpreted. For them, several legislatures have provided guidelines for interpreting contracts (or legal acts). Despite the broad consensus that such guidelines are not determinative for a case at hand and no more than some hints for a court, lawyers (and typically from other jurisdictions) have anticipated that the guidelines could nevertheless be detrimental and should therefore be excluded explicitly.

Contra proferentem. The CFR provides guidelines for contract interpretation. This is in particular consistent with the civil codes of France, Italy, Spain and Belgium[11], albeit that all EU member states apply such principles. The main interpretation principles have been stated in the previous paragraph; another well-known one is:

II. – 8:103: Interpretation against supplier of term or dominant party

(1)  Where there is doubt about the meaning of a term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred.
(2)  Where there is doubt about the meaning of any other term, and that term has been established under the dominant influence of one party, an interpretation of the term against that party is to be preferred.

Even though the authoritativeness may be questioned, the Restatement (Second) of Contracts explains that a similar principle applies in mainstream U.S. contract law:

§ 206. Interpretation against the draftsman
In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.

The lead-in of the first paragraph of Art. II.8:103 (and Restatement § 206) typically refers to the interpretation of general conditions rather than to ordinary course contracts. The second paragraph of Art. II.8:103 emphasises this, where it introduces a preference in case any negotiations were mainly determined by an economically strong party (vis-à-vis a weak counterparty). Despite this context specific application, the principle has invited many drafters to include a provision expressing that “the parties reviewed and negotiated the entire contract in all its respects” (and accordingly stating or implying that “no provision should be interpreted against the party who drafted it”). Such approach fails to address the real issue: the interpretation rule would first of all only apply to stipulations where there is a (reasonable) doubt about the actual meaning of them. If there is no such doubt, the stipulation would be enforced. Whether such doubt could exist may well be measured against the main rule: for instance, the fact that the parties are business people and advised by professionals who would be keen to understand each oddly phrased provision. Secondly, the principle effectively says that where two interpretations compete, the party who created the ambiguity should not have the benefit. The phrase is to be preferred emphasises that the drafter may well explain why a certain meaning should prevail (and ´win’ the interpretation discussion).

Similar arguments can be made about a dominant party who drafted a contract provision: such party would insist on the inclusion of a particular provision, notably as regards disclaimers or limitation of liabilities. In those cases, there may also be a hint of abuse of power, which is not supported by the law. Art. II. 8:103 section (2) balances out this dominance: a dominant party should contractually express its impositions carefully. Moreover, the provision may well be seen as the complement of section (1), as it would likely apply to circumstances in which the dominant party even refused to talk about an issue.

Drafting technique: introduce mutuality. The interpretation rules suggest that a very one-sided contract may be highly susceptible of being interpreted against the drafter. A technique to diminish this is to improve the sense of mutuality of the contract provisions. The most obvious example is probably the confidentiality provision in most contracts: despite a clear one-party geared interest in continuing confidentiality, typically, this provision is drafted to apply mutually. Well-known other examples of mutuality are force majeure clauses: although the party that can be affected by an event of force majeure is foreseeably only one of the two, the text of the provision often suggests fairness for both.

Rules prioritising interpretation. A few provisions of the CFR clarify that negotiation of a provision increases its enforceability. This is understandable because the more comprehensive discussions about the ins and outs of a provision were, all the more reluctant a court must be in attributing a meaning, which is not at once apparent. Another important interpretation rule (Art. II. 8:106) is that presumably a contract provision was given a meaning or intended effect. If a provision is ambiguous or contains errors, the mere reliance on such ambiguity or error without further merit should not be protected if another interpretation puts a meaning on it.

II. – 8:104: Preference for negotiated terms
Terms which have been individually negotiated take preference over those which have not.

II. – 8:105: Reference to contract as a whole
Terms and expressions are to be interpreted in the light of the whole contract in which they appear.

II. – 8:106: Preference for interpretation which gives terms effect
An interpretation which renders the terms of the contract lawful, or effective, is to be preferred to one which would not.

The Restatement (Second) of Contracts emphasises other aspects of contract interpretation. Interesting enough, the written terms are not necessarily determinative:

§ 203. Standards of preference in interpretation
In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable:
(a)  an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect;
(b)  express terms are given greater weight than course of perfor­mance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade;
(c)   specific terms and exact terms are given greater weight than general language;
(d)  separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated.

Altogether, the importance of one interpretation rule or another is yet a matter of judgement and is not inevitably part of the reasoning a court gives. Where the principles revert to different standards, their actual significance may well differ from country to country or even from judge to judge. Again, this probably also appeals to cultural legal differences identified in the previous paragraph and discussed in paragraph 2.1.

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