If a contract is ambiguous, should the courts interpret it in a literal manner or should they look at the commercial reality? There has long been a tension between these two approaches, and two recent cases show that even the CA is not entirely clear as to the preferred approach: 


The contract said ‘we undertake to pay you... all such sums due to you under the contract’. The question was whether the words ‘all such sums’ referred to (a) all sums under the contract, or (b) just those sums mentioned in the previous paragraph. The CA favoured a literal interpretation, saying:


‘Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the court has no alternative but to give effect to its terms. To do otherwise would be to risk imposing obligations on one or other party which they were never willing to assume and in circumstances which amount to no more than guesswork on the part of the court.’ (Kookmin [2010]). 


A work order included the phrase: ‘terms and conditions available on request’. The CA decided that was sufficient to incorporate those terms and conditions into the contract. They rejected the trial judge’s literal interpretation of the words used (‘you can see and incorporate our terms if you want’), preferring to look instead at the commercial reality – that a reasonable person would have understood the words used as referring to the contractual terms on which the supplier was agreeing to work. (Rooney [2010]). 


There is an inherent conflict between the two decisions. While the principle seems to be that ‘the reasonable person with knowledge’ test will be applied until the effect of the mistake becomes irrational, absurd or unintentional – whereupon the courts will reinterpret or ignore the term – it is not at all clear where that line will be drawn. For the full authorities, with commentary, see article in [2010] SJ 12 October 25.