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Part VI Construction of Contract, 26 Interpretation and Supplementation

From: Global Sales and Contract Law

Ingeborg Schwenzer, Pascal Hachem, Christopher Kee

Content type:
Book content
Product:
International Commercial Law [ICML]
Published in print:
26 January 2012
ISBN:
9780199572984

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Subject(s):
Interpretation of contract

26  Interpretation and Supplementation

  1. A.  General 26.01

    1. I.  Introduction 26.01

      1. 1.  Practical Relevance 26.02

      2. 2.  Relationship between Interpretation and Supplementation 26.03

      3. 3.  Techniques 26.05

    2. II.  Possible Approaches 26.07

      1. 1.  Subjective Approach 26.08

      2. 2.  Objective Approach 26.10

      3. 3.  Uniform Approach 26.13

  2. B.  Wording of the Contract 26.14

    1. I.  Starting Point 26.14

      1. 1.  Literal Meaning 26.14

      2. 2.  Priority of Negotiated Terms 26.17

      3. 3.  Linguistic Discrepancies 26.18

    2. II.  Beyond the Literal Meaning 26.19

      1. 1.  Commonsense Commercial Approach 26.19

      2. 2.  Systematic Approach 26.23

    3. III.  General Principles of Law 26.26

  3. C.  Surrounding Circumstances and Subsequent Conduct 26.28

    1. I.  General 26.28

    2. II.  Surrounding Circumstances 26.33

      1. 1.  Admissibility 26.33

      2. 2.  Examples 26.35

    3. III.  Subsequent Conduct 26.38

      1. 1.  Admissibility 26.38

      2. 2.  Examples 26.41

    4. IV.  Limitations and Exceptions 26.44

      1. 1.  Parol Evidence Rule 26.45

      2. 2.  Merger and Entire Contract Clauses 26.51

  4. D.  Special Rules of Interpretation 26.55

    1. I.  Favor Negotii 26.56

    2. II.  Contra Proferentem 26.60

    3. III.  Favor Debitoris 26.62

  5. E.  Supplementation of the Contract 26.63

    1. I.  General 26.63

    2. II.  Approaches 26.66(p. 290)

(p. 291) A.  General

I.  Introduction

26.01  This chapter deals with the interpretation of statements made by contracting parties as well as the interpretation and supplementation of contracts concluded by them. It specifically does not encompass the interpretation of statutory law. Although overlapping regarding the methodology of interpretation itself, both areas are distinct and to be viewed against different backgrounds of legal policy.

1.  Practical Relevance

26.02  ‘Business men often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise.’1 It follows that the importance of interpretation and subsequent supplementation of statements and contracts cannot be overstated.2 The outcome of disputes usually depends on precisely determining the obligations under a contract, as it is only after these have been determined that an assessment of compliance can be made. Consequently, all legal systems have established general rules on interpretation and supplementation of statements and contracts, although these vary.

(p. 292) 2.  Relationship between Interpretation and Supplementation

26.03  Although some legal systems, especially civil law systems, make a theoretical distinction between the concepts of interpretation and supplementation,3 there is little practical difference. The critical consideration is whether gaps exist in the contract. The theoretical debate is whether the gap exists simply because there is no provision in the contract or whether a gap exists because there is no provision in the contract and there is no default rule which provides a solution. The practical goal in either event is to make the contract operative and therefore, at this level,4 the distinction is not an important one.5

26.04  Fuelled especially by German-speaking authors, the theoretical debate on the distinction of interpretation and supplementation has also received some attention at the international level. Under the CISG it is sometimes disputed that the Convention is familiar with supplementing incomplete contracts where it does not provide any rule for the gap at issue. One view holds that the possibility and criteria for supplementation have to be determined by the applicable domestic law.6 The preferable and clearly prevailing view takes a different stance. In particular, it is argued that, in light of Article 35(2) CISG, the Convention is familiar with supplementing agreements that first of all would have to be made by the parties.7

3.  Techniques

26.05  The sources for rules on interpretation and supplementation differ among legal systems. Among the civil law family some legal systems contain detailed and extensive rules on interpretation;8 others content themselves with a few very general provisions9 or have not even established any written provisions on this issue.10 In the common law, principles of interpretation have evolved through case law.

26.06  At the international level, both uniform law and projects contain provisions on interpretation. However, the reference points for these rules differ. While the PICC 2004 explicitly mentions (p. 293) both the interpretation of statements11 and the interpretation of contracts12, the PECL mentions only the interpretation of contracts.13 On the other hand, uniform laws only mention the interpretation of statements.14 Nevertheless, at least with regard to the CISG, it is undisputed that Article 8 CISG, despite its wording, does not only apply to the interpretation of statements but also to the interpretation of contracts.15

II.  Possible Approaches

26.07  It has briefly been pointed out above that the rules on interpretation vary among legal systems. These differences can be traced to fundamentally different views on contractual theory. On the one hand civil law legal systems tend to follow a subjective theory of contract, whereas the common law favours an objective approach.

1.  Subjective Approach

26.08  The starting point for the interpretation of statements and contracts in most civil law legal systems is a subjective one. Based on the so-called ‘will theory’, interpretation is perceived as a device primarily aiming at discovering the true intention of the parties. This approach is epitomized in the wording of Article 1156 of the French Code Civil which states that ‘On doit dans les conventions rechercher quelle a été la commune intention des parties contractantes, plutôt que de s’arrêter au sens littéral des termes.’16

26.09  Although generally reluctant to apply a subjective interpretation, the common law does at times have regard to subjective intent. This is most evident in equity cases such as actions for rectification of a contract.

2.  Objective Approach

26.10  Common law jurisdictions adopt an objective understanding of the intentions of the parties as they have expressed them.17 The pivotal point for this approach is the understanding of a reasonable person. Two reasons can be identified for the common law taking this position. First, as contracts are a common expression of the parties’ intent, and both parties are presumed to be reasonable parties, the reasonable person’s understanding will reflect their intent. Secondly, perhaps as a pragmatic consequence of the adversarial system, this approach limits the time involved adducing evidence of actual intention.

(p. 294) 26.11  Although the standard of interpretation is that of a reasonable person, the exact qualities and characteristics of the reasonable person may differ depending on the context of the contract. While the current emphasis on plain English meaning may suggest that the reasonable person is a member of the community at large,18 the better view is to identify the reasonable person of the kind to whom the contract is addressed. Lord Hoffman described the standard as: ‘a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’.19 His Lordship went on to explain that the meaning a document (or other utterance) would convey to a reasonable person is not the same thing as the meaning of its words. While words are defined by dictionaries, the meaning of a document is affected by the relevant background. The question of the extent to which the background can be considered is dealt with below.20 However, taking the background of a contract into account also means that it is possible for a court to conclude that the parties accidentally recorded their agreement incorrectly. While possible, this would be an unusual circumstance because commercial parties are not easily considered to have made linguistic mistakes in formal documents.

26.12  In more recent times it can be seen that civil law legal systems may also be heading towards applying an objective approach, although it may not always be clearly labelled as a reasonable-person standard.21 This reflects a general trend to protect a party’s reliance. In France the Cour de Cassation has established a principle now known as économie du contrat according to which the interpretation of a contract cannot contradict the general economics of the contract at issue.22 Thus, the contract must be interpreted in the light of its commercial background. Many other civil law legal systems have developed a similar principle of interpretation under the standard of a reasonable third person.23 The legal basis for this development is not always clear. Some legal systems specifically rely on the general principle of good faith.24

3.  Uniform Approach

26.13  At the international level, both uniform law and uniform projects have tried to strike a balance between both starting points with a strong tendency to favour the objective approach. In this spirit, uniform law and projects first of all hold that contracts shall be interpreted according to the common intention of the parties25 and, if that intent cannot be discerned, according to the understanding of a reasonable person.26 As regards statements made by one party, the intent of (p. 295) that party is only relevant if the other party could not have been unaware of that intent.27 If this rule is not applicable, again the understanding of a reasonable person is relevant.28

B.  Wording of the Contract

I.  Starting Point

1.  Literal Meaning

26.14  In the tradition of Roman law, legal systems often still adhere to a stricto sensu approach—that is, taking the literal meaning of the words in the contract. Under this approach, the intention of parties is inferior to the literal meanings of the contract terms. If the contract is plain and unambiguous, the courts’ function is to interpret the contract as written according to its literal meaning.29 A theoretical dispute revolves around the question whether in case of unambiguous terms any interpretative efforts are excluded by the rule in claris non fit interpretatio and taking the statement of contract in question by its literal meaning is not part of interpretation,30 or whether taking the literal meaning qualifies as interpretation but ranks highest in the hierarchy of interpretation methods.

26.15  In the same tradition, common law legal systems to date still favour the approach to start with the ordinary and natural meaning of the words used by the parties.31 This is somewhat different from what is known, particularly in the USA, as the ‘plain meaning rule’. The practical effect of the plain meaning rule is to prevent adjudicators from considering evidence outside a seemingly unambiguous writing for purposes of contractual interpretation.32 This rule has been (p. 296) criticized and various significant changes have been made to it.33 For example, it has been rejected both by the Uniform Commercial Code and the Restatement (2nd) of Contracts.

26.16  Also at the international level, the literal meaning of the terms used by a party in its statement or by both parties in their contract is the starting point for interpretative efforts. However, concepts such as the plain meaning rule barring adjudicators from considering extrinsic evidence when determining the content of statements or contracts have been rejected34 both by uniform law and uniform projects as all of them explicitly list extrinsic materials as part of the interpretation process.35 To the contrary, uniform law and projects display the ever increasing approach of giving wide latitude to adjudicators when determining the content of statements and contracts.

2.  Priority of Negotiated Terms

26.17  Where parties have specifically negotiated terms it stands to reason that such terms more accurately reflect their common intent than those terms which have not been negotiated. This conceptual distinction of terms has an impact on matters of interpretation, in particular where an individually negotiated term and a non-negotiated term contained in one and the same contract contradict each other. Legal systems have established the rule that in such cases the negotiated term takes priority over the non-negotiated term. While in most jurisdictions this merely amounts to a presumption applicable in cases of doubt,36 the rule is absolute in others.37 At the international level the uniform projects have explicitly adopted the latter approach;38 it should, however, be noted that the PICC treat this rule as a matter of contract formation. This is also the prevailing opinion under the CISG.39

3.  Linguistic Discrepancies

26.18  In international trade parties from different countries with different mother tongues may agree on drawing up their contract in different languages. Occasionally, legal systems may even require that the contract be drafted in their language if it involves a party located on their territory.40 When drafting the contract in different languages, the final versions may deviate from each other and the question may arise, which version takes priority. First and foremost, the parties are free to determine the authoritative contract language. Failing such agreement, jurisdictions may prefer the version in their own language.41 The uniform projects rely on the version in which the contract was originally drawn up.42 In the event that there is no single original (p. 297) version, it has been suggested that the interpretation should follow the general principle that all terms are to be given effect.43 If this also does not lead to a result, ‘the meaning which best reconciles the texts, having regard to the object and purpose of the [contract]’ may be utilized.44

II.  Beyond the Literal Meaning

1.  Commonsense Commercial Approach

26.19  Commercial people are presumed to want their contracts to operate in a reasonable way. The literal, dictionary meaning of the words used by the parties may themselves be in conflict. This represents a difficulty for the literal interpretation approach and so legal systems have reacted by looking beyond the wording and turning to an interpretation that fits the commercial needs of the parties.45 The underlying ratio is that ‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense’.46

26.20  A similar approach to be found in other jurisdictions dictates that the interpretation of the statement or contract must not upset the main obligations and/or the nature and purpose of the contract.47 This rule has gained particular attention in France where the interpretation of statements and contracts is vested with the trial judge as a question relating to facts but the Supreme Court nevertheless may remedy denaturation of the contract.48

26.21  It may be the case that the parties effectively establish a private dictionary which attributes a certain meaning to the words of their contract, even though this may not correspond to their literal meaning. This dictionary may be evident from prior dealings or surrounding circumstances, both of which are discussed below. A classic example is the 1920 haakjærringkjøt case.49 In that case the court did not allow a seller to escape liability for delivering goods which neither party had originally intended but happened to be the literal meaning of the contractual term. In this case the parties contracted for haakjærringkjøt believing it to be whale meat. It was in fact shark meat and although shark meat was delivered this was nevertheless a breach of contract. The principle developed in this case is often referred to as falsa demonstratio non nocet,50(p. 298) meaning that as long as the parties by their words meant the same thing, they are considered to have agreed upon it despite the actual meaning of their words.

26.22  At the international level the commonsense commercial approach is reflected in the standard of a reasonable third person which is employed both by uniform law51 and projects and from whose perspective the statement or contract in question is to be viewed.

2.  Systematic Approach

26.23  In the case of provisions of statutory law it is well established and accepted in all legal systems that they have to be viewed in the context of the remainder of the statute.52 This approach is typically labelled ‘systematic approach’.

26.24  Although legal systems seldom explicitly provide for this approach, as regards the interpretation of contract clauses this also seems universally accepted in this field. Thus, words should be distorted beyond their natural meaning, and like sentences and clauses of contracts more generally, cannot be considered in isolation from the contract as a whole.53

26.25  At the international level, the uniform projects explicitly state that when interpreting contract clauses, regard is to be had to the entire contract and the meaning of the respective clause thus to be determined in light of the accompanying provisions.54 Uniform laws do not contain corresponding provisions, but it is also accepted under these sets of rules that the systematic position, the context into which a clause has been put by the parties, is relevant to determine its meaning.55

III.  General Principles of Law

26.26  As a general rule legal systems subject their rules of interpretation to general overarching principles of law. In civil law legal systems this first of all relates to the general principle of good faith. Thus, when interpreting the wording of a statement or contract, the meaning attributed to it must be one which has been discovered in good faith.56 In the same vein, legal systems may (p. 299) make reference to the principle of fair dealing, as it has been recently popularized at the international level by the uniform projects.57

26.27  However, using general principles of law to guide the process of interpretation is also known in common law legal systems. Although the acknowledgement of a general principle of good faith is a subject of its own and currently at the centre of a considerable debate, there is no doubt that general principles of equity must be taken into account when interpreting statements or contracts.58 In practice this will regularly lead to the same results as in civil law legal systems.

C.  Surrounding Circumstances and Subsequent Conduct

I.  General

26.28  The previous section of this chapter has dealt with the wording of statements and contracts as the starting point for all interpretation efforts. This section broadens the scope regarding the materials available to adjudicators when determining the meaning and content of statements and contracts. At the centre of interest lie the circumstances surrounding the (pre-)contractual relationship between the parties and the conduct subsequent to the statement made or the contract concluded. Both groups of factual materials belong to the more general group of extrinsic evidence and thus their admissibility in the interpretation process is not uniformly answered by legal systems.

26.29  As has been pointed out, the wording of the statement or contract is first of all taken by its literal meaning in all legal systems and in case of contract clauses to be viewed in the context of the remainder of the contract, if necessary. It is the availability of other materials which may present problems. All legal systems agree that certainly there is no right and—even less—no duty for adjudicators to rewrite a contract. Thus, in the same way as the wording is the starting point for interpretation, it also marks its borders. In other words, even when taking the most liberal and flexible approach to the use of the wording, the content of the contract cannot be extended or reduced by the mere interpretation using surrounding circumstances and subsequent conduct.

26.30  The interpretation of statements or contracts by use of surrounding circumstances and/or subsequent behaviour must not be mixed up with the subsequent modification of already concluded contracts, which has been dealt with above. Rights and obligations under a contract cannot be established against the wording of the contract by means of interpretation but must meet the requirements of contract modification. Of course, carrying out certain acts may confirm that a contract clause actually establishes the obligation to carry out that act. For example, where the contract obliges the seller to cure defective goods, it may be in doubt whether that includes the delivery of new goods. If the seller then subsequently delivers new goods, this may indicate that the term ‘cure’ also encompassed the delivery of new goods.

26.31  Whether surrounding circumstances and subsequent conduct may at all be used for the interpretation of statements or contracts in theory is disputed among legal systems. Traditionally, common law legal systems have been reluctant to allow adjudicators to make use of these factors when interpreting statements or contracts, although the main reason for concern seems to (p. 300) be having regard to subsequent behaviour. Civil law legal systems on the other hand have felt less constrained in allowing judges to make use of all available factual circumstances.

26.32  The practical effects of this theoretical difference between legal systems, however, must not be overestimated. Furthermore, today, the reluctance towards allowing adjudicators to have regard to surrounding circumstances and subsequent conduct is no longer shared by all common law legal systems. This finding is also confirmed when having regard to the international level where uniform laws and projects without much ado explicitly provide that surrounding circumstances and subsequent conduct are to be used for interpretation of statements or contracts.59 In all cases, these provisions have not been controversial at their respective time of drafting.

II.  Surrounding Circumstances

1.  Admissibility

26.33  Civil law legal systems especially envisage circumstances surrounding the (pre-)contractual relationship between the parties to be part of the interpretative process.60 In a number of jurisdictions this is even explicitly established by statutory provisions.61 Common law legal systems generally also hold that awareness of the surrounding circumstances of the contract is necessary for any interpretation.62 However, in these legal systems, it is a matter of considerable debate where the boundaries of this approach lie. The so-called parol evidence rule, discussed below, is of particular importance in this regard.63 Nevertheless, as a general rule, all legal systems allow adjudicators to have regard to surrounding circumstances when interpreting statements or contracts.

26.34  As has already been mentioned, at the international level uniform laws and projects have no difficulties in taking into account as many factual circumstances as possible to which surrounding circumstances naturally belong.

2.  Examples

26.35  The term surrounding circumstances is broad. Of particular relevance for interpretative purposes are especially those circumstances that the parties themselves have created. This relates first of all to prior dealings between the parties. Previous business contacts can help understanding what was intended. Naturally, in these cases, the borderline between interpretation by use of surrounding circumstances and the parties being bound by practices64 established between them may not always be clear.

26.36  Apart from prior dealings, the communications between the parties in the negotiation phase may help when interpreting their statements or contract. Reference can be made to the above-given example of the parties misnaming whale meat as haakjærringkjøt.65 Here, the communications (p. 301) between the parties may have established what was referred to above as a private dictionary—that is, they have attributed a certain meaning to certain terms and have always used the terms in the same way although the term itself is open to several interpretations or—as in the case of haakjærringkjøt—entirely misused.

26.37  Furthermore, during the negotiation phase, the parties may have reached different stages and fixed them in letters of intent, memoranda of understanding, or heads of agreement.66 In the drafting of the main contract these points may have accidentally been left out or expressed in a different way. The meaning of terms in the contract as well as the scope of the rights and obligations but also contractual requirements regarding the quality of the goods may be more easily clarified when having regard to these prior communications. For example, it is conceivable that the parties in a memorandum of understanding established the country in which the goods to be delivered by the seller will be used and this is not repeated in the main contract. In a given case, this may answer the question of whether the goods have to comply with public law regulations in that country.

III.  Subsequent Conduct

1.  Admissibility

26.38  The differences among legal systems regarding the availability of factual materials for interpretative purposes become visible in relation to the admissibility of subsequent conduct as a factor in the interpretation process. Again, civil law legal systems seem to have no greater concerns about adjudicators using a wide range of factors when determining the content of statements or contracts.67 A reason for this may be seen in the general inclination of these legal systems to operate with very general and abstract provisions which regularly also require adjudicators to take into account all relevant circumstances of the case.

26.39  On the other hand, common law legal systems are more restrictive, although not all common law jurisdictions deny recourse to subsequent conduct for interpretative purposes. Nevertheless, the scepticism displayed by common law jurisdictions in this regard directly correlates with the above-mentioned plain meaning rule and adds to the notion that common law legal systems fear to have the parties’ agreements upset by interfering adjudicators. Consequently, there is still a strong view in common law legal systems according to which the meaning and effect of contracts must be determined once and for all at the time of the agreement.68

26.40  In light of these differences, one might be surprised how explicitly the CISG avails adjudicators of the parties’ subsequent conduct for interpretative purposes. On the other hand, it once more confirms the above-made suggestion that the differences mentioned in their practical effects are of less relevance than what the theoretical debate would suggest. The reason for this finding may be that adjudicators at the time of decision-making are always aware of what happened after the conclusion of the contract and that it seems illusive that adjudicators will be able to completely free themselves from this knowledge when interpreting statements or the terms of the contract.

(p. 302) 2.  Examples

26.41  Subsequent conduct of the parties may be of particular relevance when it comes to determining the content and scope of contractual rights and obligations. For example, where the parties have agreed that the seller shall cure any defects the goods delivered might display, it may be doubtful whether this includes the delivery of new goods. Where, however, the seller without any reservations delivers new goods, there is a strong indication that the parties understood the term cure to include the delivery of new goods.

26.42  Furthermore, where the parties carry out acts of performance, this demonstrates that they have considered themselves bound to a contract. Any claim that the contract has never been formed will then not be successful. Similarly, the subsequent conduct of a party may indicate that a contract has been modified subsequent to its conclusion. This is of particular relevance where such modification by virtue of the original contract is subject to certain agreed formal requirements. Where a party subsequently acts in accordance with the modified terms, although the modification was not done in the necessary form, this indicates that the modification is nevertheless accepted and that the agreed-upon formal requirement has been derogated from.

26.43  These examples show that the concept of subsequent behaviour as factual circumstances to be considered in the interpretation process is closely related to the general prohibition of contradictory behaviour which is acknowledged in all legal systems—be it called estoppel or venire contra factum proprium. This adds to the notion that although common law legal systems may be reluctant to have subsequent behaviour included in the materials available for interpretation, the results achieved in these cases are the same by use of the principle of estoppel.

IV.  Limitations and Exceptions

26.44  So far it has been demonstrated that adjudicators enjoy considerable freedom regarding the availability of factual circumstances when interpreting statements or contracts, especially in civil law legal systems and at the international level with common law legal systems taking split positions but by and large arriving at the same results. Nevertheless, this freedom has limits and exceptions.

1.  Parol Evidence Rule

26.45  The first notable limitation is the so-called ‘parol evidence rule’ which has been developed in common law jurisdictions. This rule purports to exclude a party from introducing extrinsic evidence which attempts to add to, vary, or contradict the terms of a written contract. Typically this arises where one party seeks to rely on orally agreed terms which were not subsequently recorded in the written contract. This rule can therefore have the effect of an indirect form requirement.69

26.46  The name ‘parol evidence rule’ is a misnomer, as the rule does not relate merely to parol evidence (parol being an old English synonym for oral); nor is it actually a rule of evidence. Where the rule exists it more accurately applies to extrinsic evidence as it purports to exclude more than simply oral testimony. A typical case involves representations made during the negotiations by the seller regarding the quality of the goods.70 Under the parol evidence rule, the seller may ask the tribunal to bar introduction of evidence of any representations not incorporated into the written contract.71 Finally, in those systems where the ‘rule’ is recognized, it is part of the substantive law72 and not simply a matter of evidentiary procedure.73

(p. 303) 26.47  The rule has its origins in the common law, but has been subsequently been put into legislation in a number of jurisdictions.74 However it has received wide criticism and its effectiveness has been questioned.75 Opinions on the extent to which the rule still exists within the common law vary from jurisdiction to jurisdiction. In 1986 the Law Commission of England and Wales was of the view that a broad parol evidence rule no longer existed in English law, limiting it instead to simply excluding evidence which would be inconsistent with the parties’ intentions.76 It appears now that the rule is a rebuttable presumption in favour of all terms being included in the written agreement.77

26.48  In the USA the parol evidence rule provides for a two-step procedure. First, the written document must be qualified as ‘integrated’, meaning that the writing must be intended to represent the final expression of the terms it contains.78 This excludes drafts or notes made by the parties.79 If the document is qualified as ‘integrated’ neither party may introduce parol evidence to contradict the terms of the writing.80 Secondly, the document must be ‘completely integrated’—that is, the document must be deemed to represent the complete expression of the parties’ agreement.81 USA courts, however, differ in approaches when it comes to determining whether a document is ‘completely integrated’.82

26.49  Statements, agreements, and conduct that arise after the writing are not considered parol evidence in the USA and are therefore not barred by the parol evidence rule.83 By contrast, English law attempts to avoid the situation in which a contract’s original meaning at the time of its conclusion varies at a later date.84 Therefore, English law does not permit evidence of the parties’ statements or conduct after the conclusion of the contract to impact the issue of contract interpretation.85 However there are significant exceptions recognized, most notably in relation to modification of the contract.86

26.50  The parol evidence rule as it has been described here is an exclusive feature of common law legal systems. Nevertheless, certain elements of it are also to be found in other legal systems. For example in France Article 1341 Code Civil gives rise to a rebuttable presumption that the contract is to be the sole evidence of the agreement between the parties.87 Similarly, in a number of civil law legal systems, written documents are presumed to be accurate and complete, an approach which is also acknowledged by the Nordic legal systems.88 At the international level, (p. 304) it is undisputed that the parol evidence rule is neither part of the uniform laws89 nor of the uniform projects.

2.  Merger and Entire Contract Clauses

26.51  Merger and entire contract clauses allow parties to influence the materials to be used by adjudicators when interpreting their contract. Such clauses are terms in a contract stating that the entire agreement between the parties has been expressed in the agreement. These clauses thus aim at excluding evidence that is derived from representations made prior to the written agreement.90

26.52  Legal systems differ regarding the effects such clauses have in legal proceedings. In particular, the question arises whether evidence of representations outside of the documents encompassed by the merger clause is admissible. The dividing line does, however, not run between common law and civil law legal systems, but between those that consider merger and entire contract clauses to create a rebuttable presumption which still allows a party to present extrinsic evidence as to the existence of prior declarations and agreements,91 and those that consider these clauses to exclude any extrinsic evidence whatsoever from being presented before the adjudicators to contradict terms of the contract or prove additional agreements.

26.53  At the international level, uniform law and uniform projects have struggled with the effects of merger clauses. The CISG does not contain specific rules on merger clauses, but on the grounds of Article 6 CISG allows for the modification of its rules of interpretation in Articles 8, 9 CISG.92 The validity of such clauses is, of course, subject to the applicable domestic law (Article 4, sentence 2(a) CISG).93 The effect of the merger clause in CISG contracts has to be determined by interpretation of the clause itself.94 Where a subjective intention of the parties is established that contradicts the objective meaning of the merger clause the subjective intent of the parties prevails.95 In practice, however, the usual result will be that a merger clause not only eliminates oral sub-agreements but also limits the circumstances to be taken into account when interpreting the contract to the written document.96 Where a merger clause is ‘protected’ by a ‘no oral modification’ clause, meaning that it can only be modified by written agreement, Article 29 CISG applies also to the merger clause.97

(p. 305) 26.54  The uniform projects are split on this issue. While Article 2.1.17 PICC attributes evidentiary value to merger clauses, Article 2:105 PECL and Article II.-4:104 DCFR take a different stance. The two latter projects distinguish between merger clauses that have been individually negotiated and are considered to exclude all prior representations and merger clauses which have not been individually negotiated and are considered to only establish a presumption of completeness.

D.  Special Rules of Interpretation

26.55  In the previous sections of this chapter the general approaches to the interpretation of statements and contracts have been laid out and the materials available for interpretative purposes have been outlined. In a given case, however, adjudicators may find themselves in a situation where doubt remains as terms still are ambiguous. Legal systems have developed special rules of interpretation which provide guidance in these cases.

I.  Favor Negotii

26.56  The principle of favor negotii is universally accepted both at the domestic level98 as well as at the international level by uniform laws99 and projects. This principle has been briefly addressed above in the context of the law applicable to contractual relationships.100 As has been demonstrated, where several laws are possibly applicable, it is preferable to apply the law under which the agreement is valid. In the present context, the principle of favor negotii relates to the way in which adjudicators should interpret terms of a contract.

26.57  As the name of the principle itself suggests, adjudicators should interpret contracts and their terms in a way that works in favour of what has been negotiated by the parties. This concept is based on the assumption that the parties intended to negotiate and conclude operative contracts and terms. In this regard, the principle of favor negotii has two strands.

26.58  First of all, contracts and their individual terms should be interpreted in a way to achieve validity. In other words, where there are several possible interpretations, the interpretation that leads to the validity of the contract or term is to be given priority.101

26.59  Second, terms of a contract should be interpreted in a way so as to render the clause useful. Parties are assumed to have drafted clauses for a reason and to have intended them to have (p. 306) legal effects.102 Therefore, an interpretation that would render a clause meaningless is to be avoided and an interpretation to be followed that gives meaning and use to the clause.103

II.  Contra Proferentem

26.60  The principle of contra proferentem also enjoys global acknowledgement both at the domestic level as well as at the international level by uniform laws and projects. In essence this principle states that any ambiguity of the terms is to be held against the party that has drafted the term.104

26.61  Legal systems have regularly used this principle of interpretation primarily in the area of consumer protection and often generally where non-negotiated contracts were at issue. The roots of this principle lie in the Roman law duty to speak clearly and the liability derived from breaching the trust built among the parties and the principle of good faith.105 Nowadays, the principle of contra proferentem is no longer limited to B2C transactions but its scope has been extended so as to also encompass B2B transactions. This is impressively demonstrated by its reception at the international level where the uniform projects explicitly establish this principle without any reservations106 and its virtually undisputed application to CISG contracts.107

III.  Favor Debitoris

26.62  The principle of favor debitoris in essence states that ambiguous terms must be interpreted in a way that is favourable to the debtor of the obligation established therein or at least in a way that is not onerous for the debtor by creating additional obligations. Its roots can also be traced back to Roman law where creditors would usually provide the terms of the contract.108 It can also be said to have been the basis for the development of the above described principle of contra proferentem.109 At the domestic level as well as at the international level the principle of favor debitoris has been acknowledged.110

(p. 307) E.  Supplementation of the Contract

I.  General

26.63  The issue of the supplementation of a concluded contract has already been briefly mentioned above regarding its relationship to the interpretation of contracts.111 In the present context, the idea of supplementing concluded contracts shall be presented on its own.

26.64  The very first requirement for supplementation to exist is that a contract has once come into existence in accordance with the rules on the formation of contracts which have been dealt with above.112 This means that supplementation is not possible as far as the essentialia negotii of a contract are concerned, as these are required to conclude the respective contract in the first place. The concept of supplementation aims at ensuring the contract to be operative, but not to create a contractual relationship, where the parties have not even reached agreement on the fundamental elements of the contract.113

26.65  Furthermore, supplementation presupposes a gap in the contract concluded by the parties. It is clear that parties almost never make provision for each and every legal question that may arise between them in the course of the performance of their contractual obligations.114 Generally speaking, where the parties fail to address a legal question in their contract and where neither established practices nor trade usages provide a solution, the default rules of law apply. However, it is conceivable that even when making use of these operations, the gap may not have been filled. In these situations, the question arises whether adjudicators may step in and fill the gap by way of contract supplementation. This effectively means that adjudicators are enabled to draft contract terms on behalf of the contracting parties.

II.  Approaches

26.66  In civil law legal systems, supplementation of concluded contracts by adjudicators is considered an integral part of the field of contract interpretation.115 Although varying in details, civil law legal systems use general principles of law such as good faith116 or économie du contrat 117 as the (p. 308) basis for justifying this interference with the contract concluded by the parties. However, a certain restrictedness is to be observed in French law where terms will only be read into the contract if the parties intended it to apply but neglected to actually mention it.118

26.67  Similar to French law, common law legal systems are more reluctant to have adjudicators constructing terms to supplement the contract drafted by the parties. In any case, such mechanisms are considered to lie outside of the field of contract interpretation. Rather, the question arises in cases where a party claims rectification of a contract. The approach adopted by the common law to the issue of supplementation appears to be influenced by its adversarial nature. As a matter of practice, the issue only comes before an adjudicatory body when one party is arguing that a particular term is, in fact, implied in the contract. Consequently the court does not consider in a generic sense what terms are in a contract, but rather whether a specific term as alleged by one of the parties, is implied in the contract.119 The court, itself, is not the one which derives the term to be supplemented. The burden of establishing an implied term of fact rests with the party asserting it exists.120 Consistent with the understanding the court is merely articulating a term which the parties had in fact already agreed; once the burden has been met the term is implied from the time of contract formation.121

26.68  Common law courts generally apply the following criteria to determine whether a term has been implied in a contract:122 (i) it must be reasonable and equitable; (ii) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (iii) it must be so obvious that ‘it goes without saying’; (iv) it must be capable of clear expression; and (v) it must not contradict any express term of the contract. A court will only imply a term if the contract is not commercially effective without it.123

26.69  At the international level, the uniform projects explicitly acknowledge the authority of adjudicators to supplement contracts which display a gap. Interestingly enough, the PICC 2010 deal with this matter in the context of contract interpretation124 and follow a classic civil law pattern, while the PECL125 and the DCFR126 address this issue in the section on the contents and effects of contracts and operate with the concept of implied terms—a concept of Anglo-American descent.

26.70  In supplementing the contract the uniform projects are rather vague and establish general factors to be considered. For example, the PICC and the PECL list the intention of the parties, the nature and purpose of the contract, as well as good faith and fair dealing.127 The PICC add the general standard of reasonableness.128 The DCFR specifically mentions the circumstances in which the contract was concluded.129

(p. 309) 26.71  Under the CISG it is sometimes disputed that the Convention is familiar with supplementing incomplete contracts where it does not provide any rule for the gap at issue. One view states that the possibility and criteria for supplementation have to be determined by the applicable domestic law. The preferable and clearly prevailing view takes a different stance. In particular, it is argued that, in light of Article 35(2) CISG, the Convention is familiar with supplementing agreements that first of all would have to be made by the parties.130

Footnotes:

1  Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503 per Lord Hoffmann.

3  Arabic/Middle east (Egy) Al Sanhuri/Al Maraghy, p 242; Ibero-America Muñoz, p 263; Aut Koziol et al/Bollenberger, § 914, paras 5, 8; Che Schwenzer, para 33.01; Deu MünchKommBGB/Busche, § 133, para 6; Tur Kocayusufpaşaoğlu et al, vol I, § 32.1 for interpretation and § 33.1 for supplementation, Oğuzman/Öz, p 150.

4  In common law legal systems the distinction may, however, have procedural effects regarding the question whether the matter is a question of law, to be decided by the judge, or a question of fact, to be determined by the jury.

5  See eg Che Schwenzer, para 33.01.

6  Schiedsgericht der Börse für landwirtschaftliche Produkte in Wien, 10 December 1997, CISG-online 351.

7  See Schlechtriem/Schwenzer/Schmidt-Kessel, Art 8, paras 26, 27; Audiencia Provincial de Madrid, 20 February 2007, CISG-online 1637.

8  See for PECL Arts 5:101–5:107; PICC Arts 4.1–4.8; Afg Arts 706, 717 CC; Shari’a Al Majalla, Art 14; Are Arts 265, 266 CC; Arg Art 218 Com C; Art 1198 CC; Bhr Arts 125, 126 CC; Bol Arts 510–18 CC; Bra Arts 110–14 CC; Chl Arts 1560–6 CC; Col Arts 1618–24 CC; Dza Arts 111, 112 CC; Ecu Arts 1603–9 CC; Egy Arts 150 and 151 CC; Est § 29 CO; Gtm Arts 1593–604 CC; Hrv Arts 319–21 CO; Hun Arts 205–7 CC; Irq Art 167 CC; Ita Arts 1362–71 CC; Jor Arts 239, 240 CC; Kwt Arts 193, 194 CC; Lbn Arts 366, 369 CO; Lby Arts 150, 151 CC; Ltu Art 6.193 CC; Lva Arts 1504–10 CC; Mar Arts 461, 462, 473 CO; Mda Arts 725–32 CC; Art 7 SL; Mex Arts 1851–7 CC; Mng Art 198(1), (6) CC; Mrt Arts 473, 474, 485 CO; Phl Arts 1370–9 CC; Prt Arts 236–9 CC; Pry Arts 708–14 CC; Qat Arts 169, 170 CC; Slv Arts 1431–7 CC; Srb Arts 99–101 CC; Syr Arts 151, 152 CC; Tun Arts 473, 474, 514, 529 CO; Ury Arts 1297–307 CC; Vnm Art 409(1), (8) CC; Yem Arts 212, 213 CC.

9  CISG Arts 8, 9; OHADA Art 238 AUDCG; Arm Art 447 CC; Aut §§ 914, 915 CC; Aze Art 404 CC; Blr Art 401 CC; Che Art 18 CO; Chn Art 125 PRC CL; Deu §§ 133, 157 CC; Geo Art 325 CC; Grc Arts 173, 200, 220 CC; Kaz Art 392 CC; Kgz Art 392 CC; Pol Art 65 CC; Rus Art 431 CC; Tha Art 171 CCC; Tjk Art 463 CC; Tur Art 18 CO; Twn Art 98 CC; Ukr Art 213 CC; Uzb Art 363 CC.

10  This holds true for Nld and the Nordic legal systems where the issue of interpretation of declarations and contracts is a matter of case law and doctrine. The Dutch legislature has consciously refrained from establishing any rules on interpretation in the Dutch Civil Code of 1992.

11  See Art 4.2 PICC.

12  See Art 4.1 PICC.

13  See Arts 5:101 PECL et seq.

14  See Art 8 CISG.

16  ‘One must in agreements seek what the common intention of the contracting parties was, rather than pay attention to the literal meaning of the terms.’ See for this rule also Afg Art 706 CC; Are Art 265(2) CC; FHC, challenge no 96, session dated 26 January 1993, JY 14, TO 15, p 138; Arg Art 218(1) Com C, Muñoz, p 241 citing ICC Final Award Case no 11404: the literal wording of the memorandum of understanding at stake created ambiguity with regards to its scope of application. The tribunal made use of the rule of interpretation in Art 218(1)(4) Com C; Aut § 914 CC; Ben Art 1156 CC; Bfa Art 1156 CC; Bhr Art 125 CC; Bol Art 510(1) CC; Supreme Court, 28 July 2005, Empresa DICA SRL v José Fernando Cadima Camacho: confirming the principle with statutory and doctrinal referents; Bra Art 112 CC; Gomes, p 241; Caf Art 1156 CC; Che Art 18(1) CO; Chl Art 1560 CC; Civ Art 1156 CC; Cmr Art 1156 CC; Cog Art 1156 CC; Col Art 1618 CC; Deu § 133 CC; Dza Art 111(2) CC; Ecu Art 1603 CC; Egy Art 150(2) CC, Egyptian Cass Civ, session dated 25 December 1958, CCRC 9, no 108, p 824; Est § 29 CO; Gab Art 1156; Gin Art 1156 CC; Gtm Art 1593 CC; Jor Art 239(2) CC; Kwt Art 193 CC; Lbn Art 366 CO; Lby Art 150(2) CC; Ltu Art 6.193 CC; Mar Art 462 CO; Mda Art 725(2) CC; Mdg Art 1156 CC; Mex Art 1851 CC; Mli Art 1156 CC; Mrt Art 474 CO; Ner Art 1156 CC; Prt Art 239 CC; Pry Art 708 CC; Qat Art 169(2) CC; Slv Art 1431 CC; Syr Art 151 CC; Tun Art 514 CO; Tcd Art 1156 CC; Tgo Art 1156 CC; Tha Art 171 CCC; Tur Art 18(1) CO; Twn Art 98 CC; Ury Art 1298 CC; Art 296 (1) Com C.

17  Aus Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] 219 CLR 165 at 179.

19  Eng Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28.

20  See paras 26.28 et seq.

21  Arm Art 447 CC; Aze Art 404 CC; Blr Art 401 CC; Kaz Art 392 CC; Kgz Art 392 CC; Lva Art 1505 CC; Mda Art 7 SL; Rus Art 432 CC; Tjk Art 463 CC; Ukr Art 213 CC; Uzb Art 363 CC.

22  See Civ 1, 4 January 2005, no 00-20136: ‘la contradiction qu’elle entraînait dans l’économie du contrat’.

23  For Ibero-America see Muñoz, p 243 noting none of the Ibero-American laws makes reference to such reasonable person standard, nevertheless, arbitral tribunals have already applied similar principles when interpreting Ibero-American law, citing ICC Partial Award Case no 12949; Che BGer, 25 May 1999, BGE 125 III 305, 308; Schwenzer, para 27.41; Chn Art 125 PRC CL; Cze 266(2) Com C; Est § 29(4) CO; Ltu Art 6.193(1) CC; Mng Art 198(2) CC; Phl Art 1374 CC; Tur Kocayusufpaşaoğlu et al, vol I, § 32.12, Oğuzman/Öz, p 151; Vnm Art 409(6) CC.

24  Arabic/Middle East (Egy) Al Sanhuri/Al Maraghy, p 236; Are Art 265(2) CC; Bhr Art 125 CC; Che BGer, 25 May 1999, BGE 125 III 305, 308; Dza Art 111(2) CC; Egy Art 150(2) CC; Egyptian Cass Civ, session dated 3 January 1962, CCRC 13, no 1, p 13; Jor Art 239(2) CC; Kwt Art 193 CC; Lby Art 150 CC; Ltu Art 6.193(1) CC; Qat Art 169(2) CC; Syr Art 151(2) CC; Sawar, p 316; Tur Kocayusufpaşaoğlu et al, vol I, § 32.12, Oğuzman/Öz, p 151.

25  Art 8(1) CISG; OHADA Art 238(2) AUDCG; Art 4.1(1) PICC; Art 5:101(1) PECL; Art II.-8:101(1) DCFR.

26  OHADA Art 238(1) AUDCG; Art 4.1(2) PICC; Art 5:101(3) PECL; Art II.-8:101(3) DCFR.

27  Art 8(1) CISG; Art 4.2(1) PICC; Art 5:101(2) PECL; Art II.-8:101(2) DCFR.

28  Art 8(2) CISG; Art 4.2(2) PICC.

29  This position is reflected in the Art 41 of Mng Civil Law and Art 1370 Phl Civil Code. See further Are Art 265(1) Federal CC; FHC, challenge no 18, session dated 18 April 1995, JY 16, TO 16, p 401; FHC, challenge no 244, session dated 9 March 1993, JY 14, TO 15, p 532; FHC, challenge no 202, session dated 10 March 1992, JY 13, TO 14, p. 197; Arm Art 447 CC; Aze Art 404 CC, Bhr Art 125 CC; COC, challenge no 138, session dated 19 December 1999, TO, year 10, 1999, p. 652; Blr Art 401 CC; Che BGer, 23 September 2003, BGE 129 III 702, 707 et seq; Dza Art 111(1) CC; Egy Art 150(1) CC; Cass Civ, session dated 15 February 1962, CCRC 13, no 38, p 259, Cass Civ, challenge no 64, session dated 4 May 1961, CCRC 12, p 444, Cass Civ, session dated 24 January 1952, CCRC 3, no 66, p 390; Jor Art 239(1) CC; Kaz Art 392 CC; Kgz Art 392 CC; Kwt Art 193 CC; Lby Art 150(1) CC; Lva Art 1505 CC; Mar Arts 461, 462 CO; Mda Art 7 SL; Mrt Arts 473, 474 CO; Per Art 1361 CC supported by Per Supreme Court, Sala Civil permanente, Resolution 002671-2001, 12 August 2002; Prt Arts 236, 238 CC, Muñoz, p 239 citing ICC Final Award Case no 11570; Qat Art 169(1) CC, COC challenge no 6, session dated 20 December 2005, TO, year 1, 2005, p 302; Rus Art 431 CC; Sau Saudi Arabian Board of Grievances, Order no 79/T/4, year 1413 Hijri, The Body of Commercial Scrutiny, Case laws from the year 1407 to 1419, p 164; Shari’a Al Majalla, Art 14; Syr Art 151(1) CC, Sawar, pp 312ff; Tun Arts 473, 474 CO; Tjk Art 463 CC; Tur Kocayusufpaşaoğlu et al, vol I, § 32.5, Oğuzman/Öz, p 151; Ukr Art 213 CC; Uzb Art 363 CC; Yem Art 212 CC.

30  Arg Lorenzetti, p 458; Bol Supreme Court, Sala Civil, 6 February 2007, Empresas Agrícolas Ganaderas San Jorge y Rincón Chuchío v CITIBANK NA Sucursal Bolivia, Kaune Arteaga, V 1, pp 178–9; Chl Supreme Court, 10 June 1929, RDJ vol 27, s 1, p 365, López Santa María, nn 640–52; Esp Art 1281(2) CC; Muñoz, p 240 citing ICC Final Award Case no 13678: applying the rule established by Esp Art 1281 (2) CC; Supreme Tribunal, 2 April 1994, Id Cendoj: 28079110011994103098; Mex Art 1851 CC, Muñoz, p 240 citing ICC Final Award Case 11256, ICC Final Award Case 11722: ‘only when the words of a contract appear to contradict the evident intent of the parties will their intentions prevail’; Prt Muñoz, p 240 citing ICC Final Award Case no 11570; Tur Kocayusufpaşaoğlu et al, vol I, § 32.7; Ven Supreme Tribunal, Judgment 202, Cass civ, file 99-458 of 14 June 2000; Mélich-Orsini, p 409.

31  Common Law (UK) Chitty on Contracts, para 12-051 citing Lord Hoffman in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (HL).

32  See CISG-AC, Op 3 (Hyland), Comment 3; USA § 2-202 UCC, Comment 1(b); Restatement (2d) of Contracts § 212, Comment (b). However, many jurisdictions retain some incarnation of the plain meaning rule through common law see WWW Associates, Inc v Giancontieri, NY Ct App, 27 December 1990, 566 NE 2d 639, 640.

33  See CISG-AC, Op 3 (Hyland), Comment 3.1.

34  See for the CISG, CISG-AC, Op 3 (Hyland), Comment 3.1; Schlechtriem/Schwenzer/Schmidt-Kessel, Art 8, para 18.

35  See Art 8(3) CISG; Art 4.3 PICC; Art II.-8:102(1) DCFR.

36  Che see Schwenzer, paras 33.04 et seq and 45.09; Tur Kocayusufpaşaoğlu et al, vol I, § 32.17, Oğuzman/Öz, p 152; USA § 203(d) Restatement (2nd) of Contracts.

37  See for Aut Rummel/Rummel, § 864a, paras 4 et seq, Koziol et al/Bollenberger, § 864a, para 2; Deu § 305b CC; MünchKommBGB/Basedow, § 305b, para 2; Ita Art 1342 CC.

38  See Art. 2.1.21 PICC; Art 5:104 PECL; Art II.-8:104 DCFR.

40  Under the Gtm law, contracts to be concluded and having effect in the Guatemalan territory shall be passed in the Spanish language: Art 671 Com C; Pol Art 8 of the Act on the Polish language, 7 October 1999; Tur see law no 805 on Mandatory Use of the Turkish Language for Corporations, which requires all Turkish companies and enterprises to execute the agreements which are concluded in Turkey with other Turkish entities or individuals to be in the Turkish language. Accordingly, foreign companies must also use Turkish in their transactions and correspondence with Turkish companies and entities and any documents submitted to governmental authorities in Turkey. However, foreign companies and entities are also allowed to use, in addition to Turkish, a different language for these purposes. Nonetheless, the Turkish version prevails over the foreign-language version.

41  See eg Tha Art 14 CCC.

42  Art 4.7 PICC; Art 5:107 PECL; Art II.-8:107 DCFR; Est § 29(9) CO; Ltu Art 6.194 CC.

44  Quote from Art 33(4) Vienna Convention on the Law of Treaties to which Vogenauer/Kleinheisterkamp/Vogenauer, Art 4.7 PICC, para 6 refers as enunciating a general principle that can be used in these situations. See also for Chn Art 125(2) PRC CL.

45  Aus McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 (HC