Humpty Dumpty and Contract Interpretation

When I use a word,’ Humpty Dumpty said in a rather scornful tone, ‘it means just what I choose it to mean, neither more nor less’.

Unfortunately many lawyers fall into the same trap as Humpty Dumpty when it comes to interpreting contracts. No one says it should be easy. Faced with contracts which can be many inches (or even 1 metre thick, in one project I worked on!), we should not be surprised if the meaning of words isn’t always clear in contracts.

We can all think of occasions in our social and professional lives when our words have conveyed a different meaning to our audience; this peril is magnified when we are dealing with contracts for technology and outsourcing, where the subject matter is inherently complex and the documents are substantial and created by many people.

Documents and the Matrix

Despite what most people think, the courts aren’t interested in what either or both parties thought the contract means. Courts are interested only in establishing the meaning of contract documents as they would be understood by a reasonable person having all the background knowledge which would reasonably have been available to them in the situation in which they were at the time of contract.

The judge functions as this hypothetical reasonable person when performing that analysis, taking into account evidence of the facts known to the parties at the time of contract (the factual matrix). But the judge isn’t interested in what either or both parties thought the contract means (the exclusionary rule). Even evidence of pre-contractual negotiations is inadmissible for the purpose of interpreting the meaning of the contract, though it may be relevant to establishing ‘the factual matrix’.

Round and Round

And remember, contract documents are interpreted in the round – the intention of the parties is gleaned from reading the contract documents as a whole, not just the passages that support one person’s position.

Lawyers make the common mistake of interpreting words used in contracts in isolation, rather than ‘in the round’. I recall advising a supplier on whether it was required to migrate data from hundreds of legacy systems to its new solution as part of the core service, which would have made it subject to the fixed annual service charge rather than being a chargeable extra – a lot of money was at stake. My research into the correct interpretation involved reviewing thousands of pages of contract and checking hundreds of references to ‘data’, ‘data migration’, ‘data conversion’ and ‘data transformation’.  Read in isolation, certain terms appeared to state that it was part of the core service; other terms suggested that it was the customer’s responsibility. Read in the round, it was clear from the contract that the customer was responsible for the main steps involved in data migration so that the data was available for loading into the supplier’s database in the format specified by the supplier.

Style, Structure and Content – and Intelligibility

One of my mentors as a young lawyer explained that a contract is a set of rules (eg warranties, acceptance criteria & procedures, service levels & service credits) linked to a collection of information (eg specifications, project plans, prices, list of contracts to be novated).  Lawyers tend to focus on the former to the detriment of the latter.  It is important to bear three things in mind when preparing these rules and collections of information:

  1. Style: the style of the contract needs to reflect the needs of the people who will be using it;
  2. Structure: the architecture of the contract represented by defined terms, clause headings, sub-headings and schedules needs to follow a logical sequence (typically dictated by the order in which things will happen) and these individual components need to link together to create a working whole;
  3. Content:  the detailed rules and information should reflect the structure.

The Holy Grail is to produce a contract that can be understood by an intelligent reader with no background knowledge of the deal. A contract that fails that test and which can only be understood by a specialist lawyer fails the most basic test.

Test Your Contract

If you are a customer and your lawyer presents you with a contract, test it using these few simple questions:

  • is it absolutely clear what you are buying?
  • is it clear why you are buying it?
  • where is the thing that you are buying described?
  • what standards of performance is this thing expected to meet?
  • when and how is it to be delivered?
  • how much does it cost?
  • how is it to be paid for?
  • are there any things that aren’t in the price or budget (for example, things that you are expected to do as customer responsibilities) or which could cause the price to change (such as pricing assumptions)?

If the contract fails any of those tests, you might have Humpty Dumpty as your lawyer – and you might want to consider a change.