Recent developments in the interpretation of agreements

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Recent developments in the interpretation of agreements

A3_BOur Supreme Court of Appeal has recently given clarity and guidelines on the interpretation of contracts and legislation when it decided on the matter of Bothma-Batho Transport (Pty) Ltd v S Bothma & Seun Transport (Pty) Ltd. Without delving into the merits of the matter it would suffice to state that the parties entered into agreements, which resulted in arbitration proceedings and further litigation proceedings, both of which led to the concluding of settlement agreements. A dispute arose on the interpretation of the second agreement between the parties.

In delivering its judgement the Court cited the earlier approach adopted by our Courts and the application of the so-called “golden rule” of interpretation which is as follows:

The correct approach to be followed once the literal meaning of a word or phrase has been determined is to regard the following:

  1. The context in which such a word or phrase is used, having considered the contract as a whole, including the nature and the purpose of such an agreement.
  2. The background circumstances that existed when entering into the agreement (such as what the parties had in mind when entering into the agreement).
  3. If the language, on the face of it, is ambiguous, the court would consider surrounding circumstances such as previous negotiations and correspondence, and conduct of parties that would be indicative of how they interpreted the agreement, save for direct evidence of their own intentions.

The Court found the above not to be consistent with the new approach to the interpretation now adopted in South Africa. It found that although the starting point to the interpretation of agreements remained the words or phrases used, the process of interpretation did not stop at a “perceived literal meaning” of the words or phrases. These words or phrases must be considered in light of the entire “admissible context”, including the circumstances in which the document came into being. The former distinction between permissible background and surrounding circumstances, never very clear, has fallen away. Interpretation is no longer a process that occurs in stages but is “essentially one unitary process”.

It is suggested that practitioners also consider the matter of Natal Joint Municipal Fund v Endumeni Municipality 2012 (4) SA593 (SCA), which matter was referred to in the Bothma-Batho case. The Court found that the following should be taken into account in the interpretation of agreements:

  1. The language used, in light of the ordinary rules of grammar and syntax.
  2. The context in which the word or phrase is found.
  3. The purpose to which the provision is directed.
  4. The knowledge of the parties.
  5. Where more than one meaning is possible it must be considered against the background of the above factors.
  6. Whether the process of interpretation is an objective one.
  7. A sensible meaning is to be preferred to one that would lead to absurdity.

Lastly the Court warned that judges must guard against the temptation to substitute reasonable and sensible words for the words that are actually used.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.