(1) A contract shall be interpreted according to the common intention of the parties.
(2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.
1. Common intention of the parties to prevail
Paragraph (1) of this Article lays down the principle that in determining the meaning to be attached to the terms of a contract, preference is to be given to the intention common to the parties. In consequence, a contract term may be given a meaning which differs both from the literal sense of the language used and from the meaning which a reasonable person would attach to it, provided that such a different understanding was common to the parties at the time of the conclusion of the contract.
The practical importance of the principle should not be over-estimated, firstly because parties to commercial transactions are unlikely to use language in a sense entirely different from that usually attached to it, and secondly because even if this were to be the case it would be extremely difficult, once a dispute arises, to prove that a particular meaning which one of the parties claims to have been their common intention was in fact shared by the other party at the time of the conclusion of the contract.
2. Recourse to the understanding of reasonable persons
For those cases where the common intention of the parties cannot be established, paragraph (2) provides that the contract shall be interpreted in accordance with the meaning which reasonable persons of the same kind as the parties would give to it in the same circumstances. The test is not a general and abstract criterion of reasonableness, but rather the understanding which could reasonably be expected of persons with, for example, the same linguistic knowledge, technical skill, or business experience as the parties.
3. How to establish the common intention of the parties or to determine the understanding of reasonable persons
In order to establish whether the parties had a common intention and, if so, what that common intention was, regard is to be had to all the relevant circumstances of the case, the most important of which are listed in Article 4.3. The same applies to the determination of the understanding of reasonable persons when no common intention of the parties can be established.
4. Interpretation of standard terms
Both the “subjective” test laid down in paragraph (1) and the “reasonableness” test in paragraph (2) may not always be appropriate in the context of standard terms. Indeed, given their special nature and purpose, standard terms should be interpreted primarily in accordance with the reasonable expectations of their average users irrespective of the actual understanding which either of the parties to the contract concerned, or reasonable persons of the same kind as the parties, might have had. For the definition of “standard terms”, see Article 2.1.19(2).
(1) The statements and other conduct of a party shall be interpreted according to that party’s intention if the other party knew or could not have been unaware of that intention.
(2) If the preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances.
1. Interpretation of unilateral acts
By analogy to the criteria laid down in Article 4.1 with respect to the contract as a whole, this Article states that in the interpretation of unilateral statements or conduct preference is to be given to the intention of the party concerned, provided that the other party knew (or could not have been unaware) of that intention, and that in all other cases such statements or conduct are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.
In practice the principal field of application of this Article, which corresponds almost literally to Article 8(1) and (2) CISG, will be in the process of the formation of contracts where parties make statements and engage in conduct the precise legal significance of which may have to be established in order to determine whether or not a contract is ultimately concluded. There are however also unilateral acts performed after the conclusion of the contract which may give rise to problems of interpretation: for example, a notification of defects in goods, notice of avoidance or of termination of the contract, etc.
2. How to establish the intention of the party performing the act or to determine the understanding of a reasonable person
In applying both the “subjective” test laid down in paragraph (1) and the “reasonableness” test in paragraph (2), regard is to be had to all the relevant circumstances, the most important of which are listed in Article 4.3.
In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including
(a) preliminary negotiations between the parties;
(b) practices which the parties have established between themselves;
(c) the conduct of the parties subsequent to the conclusion of the contract;
(d) the nature and purpose of the contract;
(e) the meaning commonly given to terms and expressions in the trade concerned;
1. Circumstances relevant in the interpretation process
This Article indicates circumstances which have to be taken into consideration when applying both the “subjective” test and the “reasonableness” test in Articles 4.1 and 4.2. The list mentions only those circumstances which are the most important and is in no way intended to be exhaustive.
2. “Particular” and “general” circumstances compared
Of the circumstances listed in this Article some relate to the particular relationship which exists between the parties concerned, while others are of a more general character. Although in principle all the circumstances listed may be relevant in a given case, the first three are likely to have greater weight in the application of the “subjective” test.
1. A contract for the writing of a book between A and B, a publisher, indicates that the book should consist of “about 300 pages”. During their negotiations B had assured A that an approximate indication of the number of pages was necessary for administrative reasons and that A was not bound to stick precisely to that number of pages, but could exceed it, substantially if need be. A submits a manuscript of 500 pages. In interpreting the meaning of “about 300 pages” due consideration should be given to these preliminary negotiations (see Article 4.3(a)).
2. A, a Canadian manufacturer, and B, a United States retailer, conclude a number of contracts for the delivery of optical lenses in which the price is always expressed in Canadian dollars. A makes B a new offer indicating the price in “dollars” without further specification, but intending to refer again to Canadian dollars. In the absence of any indication to the contrary, A’s intention will prevail (see Article 4.3(b)).
The remaining circumstances listed in this Article, i.e. the nature and purpose of the contract, the meaning commonly given to terms and expressions in the trade concerned and usages, are important primarily, although not exclusively, in the application of the “reasonableness” test.
The criteria in sub-paragraphs (e) and (f) may at first sight appear to overlap. There is however a difference between them: while the “usages” apply only if they meet the requirements laid down in Article 1.9, the “meaning commonly given […] in the trade concerned” can be relevant even if it is peculiar to a trade sector to which only one, or even neither, party belongs, provided that the expression or term concerned is one which is typical in that trade sector.
3. A and B conclude a contract for the sale of a cargo of oil at USD 80 per barrel. The parties subsequently disagree on the size of the barrel to which they had referred, A having intended a barrel of 42 standard gallons and B one of 36 Imperial gallons. In the absence of any indications to the contrary, A’s understanding prevails, since in the international oil trade it is a usage to measure barrels in standard gallons (see Article 4.3(f)).
4. A, a shipowner, concludes a charterparty agreement with B for the carriage of grain containing the standard term “whether in berth or not” with respect to the commencement of the lay-time of the ship after its reaching the port of destination. When it subsequently emerges that the parties attached different meanings to the term, preference should, in the absence of any indication to the contrary, be given to the meaning commonly attached to it in the shipping trade since the term is typical in the shipping trade (see Article 4.3(e)).
3. “Merger” clauses
Parties to international commercial transactions frequently include a provision indicating that the contract document completely embodies the terms on which they have agreed. For the effect of these so-called “merger” or “integration” clauses, in particular whether and to what extent they exclude the relevance of preliminary negotiations between the parties, albeit only for the purpose of the interpretation of the contract, see Article 2.1.17.
Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear.
1. Interpretation in the light of the whole contract or statement
Terms and expressions used by one or both parties are clearly not intended to operate in isolation but have to be seen as an integral part of their general context. Consequently they should be interpreted in the light of the whole contract or statement in which they appear.
A, a licensee, hears that, despite a provision in their contract granting A an exclusive licence, B, the licensor, has concluded a similar contract with C, one of A’s competitors. A sends B a letter complaining of B’s breach and ending with the words “your behaviour has clearly demonstrated that it was a mistake on our part to rely on your professional correctness. We hereby avoid the contract we have with you”. Despite the use of the term “avoid”, A’s words interpreted in the light of the letter as a whole, must be understood as a notice of termination.
2. In principle no hierarchy among contract terms
In principle there is no hierarchy among contract terms, in the sense that their respective importance for the interpretation of the remaining part of the contract is the same regardless of the order in which they appear. There are, however, exceptions to this rule. Firstly, declarations of intent made in the preamble may or may not be of relevance for the interpretation of the operative provisions of the contract. Secondly, it goes without saying that, in cases of conflict, provisions of a specific character prevail over provisions laying down more general rules. Finally, the parties may themselves expressly establish a hierarchy among the different provisions or parts of their contract. This is frequently the case with complex agreements consisting of different documents relating to the legal, economic and technical aspects of the transaction.
Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect.
It is to be expected that when drafting their contract parties do not use words to no purpose. It is for this reason that this Article lays down the rule that unclear contract terms should be interpreted so as to give effect to all the terms rather than to deprive some of them of effect. The rule however comes into play only if the terms in question remain unclear notwithstanding the application of the basic rules of interpretation laid down in Articles 4.1 to 4.3.
A, a commercial television network, enters into an agreement with B, a film distributor, for the periodic supply of a certain number of films to be transmitted on A’s network in the afternoon, when only those films that are admissible for all viewers may be transmitted. According to the contract the films submitted must “have passed the admission test” of the competent censorship commission. A dispute arises between A and B as to the meaning of this term. B maintains that it implies only that the films must have been released for circulation, even if they are X-rated, while A insists that they must have been classified as admissible for everybody. If it is not possible otherwise to establish the meaning to be attached to the term in question, A’s understanding prevails since B’s interpretation would deprive the provision of any effect.
If contract terms supplied by one party are unclear, an interpretation against that party is preferred.
A party may be responsible for the formulation of a particular contract term, either because that party has drafted it or otherwise supplied it, for example, by using standard terms prepared by others. Such a party should bear the risk of possible lack of clarity of the formulation chosen. It is for this reason that this Article states that if contract terms supplied by one party are unclear, there is a preference for their interpretation against that party. The extent to which this rule applies will depend on the circumstances of the case; the less the contract term in question was the subject of further negotiations between the parties, the greater the justification for interpreting it against the party who included it in the contract.
A contract between A, a contractor, and B for the construction of an industrial plant contains a provision drafted by A and not discussed further stating that “[t]he Contractor shall be liable for and shall indemnify the Purchaser for all losses, expenses and claims in respect of any loss of or damage to physical property (other than the works), death or personal injury caused by negligence of the Contractor, its employees and agents”. One of A’s employees plays around with some of B’s equipment after working hours and damages it. A denies liability, contending that the provision in question covers only cases where A’s employees act within the scope of their employment. In the absence of any indication to the contrary, the provision will be interpreted in the manner which is less favourable to A, i.e. as also covering cases where its employees are not acting within the scope of their employment.
Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up.
International commercial contracts are often drawn up in two or more language versions which may diverge on specific points. Sometimes the parties expressly indicate which version shall prevail. If all versions are equally authoritative the question arises of how possible discrepancies should be dealt with. This Article does not lay down a hard and fast rule, but merely indicates that preference should be given to the version in which the contract was originally drawn up or, should it have been drawn up in more than one original language version, to one of those versions.
1. A and B, neither of them a native English speaker, negotiate and draw up a contract in English before translating it into their respective languages. The parties agree that all three versions are equally authoritative. In case of divergences between the texts, the English version will prevail unless circumstances indicate the contrary.
A situation where a different solution may be preferable could arise where the parties have contracted on the basis of internationally and widely known instruments such as INCOTERMS or the Uniform Customs and Practices on Documentary Credits. In case of divergencies between the different versions used by the parties it may be preferable to refer to yet another version if that version is much clearer than the ones used.
2. A contract between a company from country X and a company from country Y drawn up in three equally authoritative versions, the language of country X, the language of country Y and English, contains a reference to INCOTERMS 2000. If the French version of INCOTERMS is much clearer than the other three on a point in dispute, that version might be referred to.
(1) Where the parties to a contract have not agreed with respect to a term which is important for a determination of their rights and duties, a term which is appropriate in the circumstances shall be supplied.
(2) In determining what is an appropriate term regard shall be had, among other factors, to
(a) the intention of the parties;
(b) the nature and purpose of the contract;
(c) good faith and fair dealing;
1. Supplying of omitted terms and interpretation
Articles 4.1 to 4.7 deal with the interpretation of contracts in the strict sense, i.e. with the determination of the meaning which should be given to contract terms which are unclear. This Article addresses a different though related issue, namely that of the supplying of omitted terms. Omitted terms or gaps occur when, after the conclusion of the contract, a question arises which the parties have not regulated in their contract at all, either because they preferred not to deal with it or simply because they did not foresee it.
2. When omitted terms are to be supplied
In many cases of omitted terms or gaps in the contract the Principles will themselves provide a solution to the issue (see, for example, Articles 5.1.6 (Determination of quality of performance), 5.1.7 (Price determination), 6.1.1 (Time of performance), 6.1.4 (Order of performance), 6.1.6 (Place of performance) and 6.1.10 (Currency not expressed). See also, in general, Article 5.1.2 on implied obligations). However, even when there are such suppletive, or “stop-gap”, rules of a general character they may not be applicable in a given case because they would not provide a solution appropriate in the circumstances in view of the expectations of the parties or the special nature of the contract. This Article then applies.
3. Criteria for the supplying of omitted terms
The terms supplied under this Article must be appropriate to the circumstances of the case. In order to determine what is appropriate, regard is first of all to be had to the intention of the parties as inferred from, among other factors, the terms expressly stated in the contract, prior negotiations or any conduct subsequent to the conclusion of the contract.
1. The parties to a construction contract agree on a special interest rate to be paid by the purchaser in the event of delay in payment of the price. Before the beginning of the work, the parties decide to terminate the contract. When the constructor delays restitution of the advance payment the question arises of the applicable interest rate. In the absence of an express term in the contract dealing with this question, the circumstances may make it appropriate to apply the special interest rate agreed for delay in payment of the price by the purchaser also to delay in restitution by the constructor.
If the intention of the parties cannot be ascertained, the term to be supplied may be determined in accordance with the nature and purpose of the contract, and the principles of good faith and fair dealing and reasonableness.
2. A distribution franchise agreement provides that the franchisee may not engage in any similar business for a year after the termination of the agreement. Although the agreement is silent on the territorial scope of this prohibition, it is, in view of the parti¬cular nature and purpose of the franchise agreement, appropriate that the prohibition be restricted to the territory where the franchisee had exploited the franchise.