4.4.3.2 Interpretation under the Principles of European Contract Law

The approach suggested by the Principles of European Contract Law in relation to interpretation is to attempt to give effect to the intention of the parties, whether or not this accords with the literal meaning of the words used. In this the Principles are taking a similar approach to that currently adopted by the English courts, as outlined in the previous section. In determining the parties’ intentions, if the intention of one party can be established, and the other party could not have been unaware of that intention, then the first party’s intention will prevail. If it is not possible to establish the parties’ subjective intentions, then the contract is to be given the meaning that «reasonable persons of the same kind as the parties would give to it in the same circumstances».

Article 5.102 sets out some of the circumstances which should, in particular, be taken into account in interpreting the contract. These include preliminary negotiations, and the conduct of the parties, «even subsequent to the conclusion of the contract». In contrast, English law does not, as we have seen in the previous section, generally take account of preliminary negotiations, or of subsequent words or conduct, in interpreting an agreement. «Good faith and fair dealing» are also to be considered, which again are not commonly part of the English law approach. Otherwise, the matters set out in Art 5.102 are predictable, and include the circumstances in which the contract was concluded, the nature and purpose of the contract, previous interpretation and practice by the parties the meaning given to terms and expression in the «branch of activity concerned» and the previous interpretation of similar clauses. Finally, «usages» (presumably meaning «customs») should be considered.

The contra proferentem rule is to be applied to a contract term which has not been individually negotiated, and, where there is a conflict between individually negotiated terms and other terms, preference should be given to those individually negotiated. Thus, the Principles operate to control to a limited extent standard term contracts. Terms are to be interpreted in the light of the whole contract.

Finally, an interpretation which renders a contract lawful is, unsurprisingly, to be preferred to one that would not. Article 5.107 suggests the approach to be taken where there are linguistic discrepancies between different language versions of a contract.

Overall, therefore, the Principles suggest an approach similar to that currently adopted by the English courts, but drawing on an even wider range of circumstances when trying to determine the parties’ intentions, and placing the contract «in context». The availability of the criterion of «good faith and fair dealing» would give a broad discretion not generally available to English courts.

4.4.5 Conditions, warranties and innominate terms

Not all terms within a contract are of equal importance. In a contract for the provision of a service, for example, terms specifying the dates on which the service is to be provided and the date for payment will be likely to be more important than, for example, a term requiring the supplier of the service to submit an annual account of the work done. The consequence of breach of one of the first two terms is probably going to be more serious than the latter, and may indeed result in the contract as a whole being terminated. The parties may attempt to give effect to such differences in the status of various contractual provisions by the way in which their agreement is drafted in respect of its «express terms». There is, in fact, a generally accepted hierarchy of terms, with «conditions» being more important than «warranties». Use of these labels may well indicate an intention by the parties as to the relative status of the terms concerned, though any presumption to this effect may be rebutted by other evidence. As indicated above, the distinction between the status of terms is of most importance when the consequences of a breach are being considered. Breach of «condition» may well lead to the other party having the right to treat the contract as being at an end as well as suing for damages. Breach of «warranty will probably only entitle the other party to claim damages. If no labels are used, and the tern is difficult to classify, it may be regarded as an «innominate» term, in relation to which the consequences of the particular breach which has occurred may determine whether the party not in breach has a right to bring it to an end. The context in which the breach occurred will be important, as will its effect on the rest of the contract. The details of the rules which the courts apply in this area are concerned specifically with the issues of performance and breach. It is important, however, that the parties should have such issues in mind when drafting their agreement, so that if they wish, they can include express terms dealing with the consequences of a breach of any particular obligation. They may also wish to agree in advance the amount of damages which will be recoverable in such circumstances.