4. The commercial purpose

The court will consider the commercial purpose of the contract, or more narrowly the commercial purpose of a particular provision.

In Reardon Smith Line Ltd. v Yngvar Hansen-Tangen [1976] 1 W.L.R. 989 a Japanese tanker was chartered in order to finance building before work started. The charterparty referred to the vessel as one to be built at Osaka, hull number 354. Because of its size it was eventually built at Oshima, hull number 004. Its physical attributes conformed with those required under the charter. Then due to the oil crisis the market collapsed. The charterers rejected the vessel on the ground that, by analogy with contracts for the sale of goods, the vessel did not comply with its contractual description.

The court held that “in a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating”. The commercial purpose of the charter parties was to make available a medium-sized tanker suitable for use to be constructed in a Japanese yard and made available on charter. The court held that the hull and yard number had no special significance and could not be treated as a condition.

The absence of a sensible commercial justification for a particular interpretation will weigh heavily against its adoption (Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38).

5. Reasonableness

When choosing between alternative interpretations, reasonableness alone may not indicate a correct interpretation. The parties may have agreed something unreasonable, or even commercially foolish. The courts will nevertheless be reluctant to embrace an interpretation that leads to very unreasonable or absurd results or practical consequences.

In L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 S Co., a German company, entered into a contract with W Co., an English company, giving W Co. the sole rights to sell S Co.'s panel presses in England. Clause 7(b) provided that "it shall be a condition of this agreement" that W Co.'s representatives should visit six named firms each week to solicit orders. W Co.'s representatives failed on a few occasions to do so. S Co. claimed to be entitled to repudiate the agreement, on the basis that a single failure was a breach of condition, giving them an absolute right to treat the contract as at an end.

Held, that such a breach did not entitle S Co. to repudiate, since such a construction of the clause was so unreasonable that the parties could not have intended it. The court stated

“The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear”.

6. The whole contract approach

The document must be construed as a whole, in its context. The other terms must be considered. It is inappropriate to focus excessively on a particular word, phrase, sentence, or clause.