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GUIDE TO ARTICLE 8

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Article 8 with PECL Articles 2:102 and 5:101; see also PECL Articles 5:102 through 5:107
CISG Article 8

(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.

(2) If the preceding paragraph is not applicable, statements made by and other conduct of a party 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.

(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

PECL Article 2:102 [Intention]
(complete and revised version 1998)

The intention of a party to be legally bound by contract is to be determined from the party's statements or conduct as they were reasonably understood by the other party.


PECL Article 5:101 [General Rules of Interpretation]

(1) A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words. (2) If it is established that one party intended the contract to have a particular meaning, and at the time of the conclusion of the contract the other party could not have been unaware of the first party's intention, the contract is to be interpreted in the way intended by the first party. (3) If an intention cannot be established according to (1) or (2), the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.


See also the PECL provisions recited below


PECL Article 5:102 [Relevant Circumstances]

In interpreting the contract, regard shall be had, in particular, to: (a) the circumstances in which it was concluded, including the preliminary negotiations; (b) the conduct of the parties, even subsequent to the conclusion of the contract; (c) the nature and purpose of the contract; (d) the interpretation which has already been given to similar clauses by the parties and the practices they have established between themselves; (e) the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received; (f) usages; and (g) good faith and fair dealing.

PECL Article 5:103 [Contra Proferentem Rule]

Where there is doubt about the meaning of a contract term not individually negotiated, an interpretation of the term against the party which supplied it is to be preferred.

PECL Article 5:104 [Preference to Negotiated Terms]

Terms which have been individually negotiated take preference over those which have not.

PECL Article 5:105 [Reference to Contract as a Whole]

Terms are to be interpreted in the light of the whole contract in which they appear.

PECL Article 5:106 [Terms to be Given Effect]

An interpretation which renders the terms of the contract lawful, or effective, is to be preferred to one which would not.

PECL Article 5:107 [Linguistic Discrepancies]

Where a contract is drawn up in two or more language versions none of which is stated to be authoritative, there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up.


Definitions

The term "reasonable" is encountered in CISG arts. 8(2) and (3), and in PECL arts. 2:102 and 5:101(3). For the PECL definition of "reasonable", go to PECL art. 1:302 [Reasonableness] and the comment and notes that accompany this provision. Relevant to the phrase "could not have been unaware of" encountered in PECL art. 5:101(2) is PECL art. 1:305 [Imputed Knowledge and Intention] and the comment and notes that accompany this provision.


Editorial remarks on the manner in which the PECL may be used to interpret or supplement CISG Article 8

Maja Stanivukovic [*]


1. The subject-matter of interpretation
2. Interpretation based on subjective standard (establishing the intention)
3. Interpretation based on objective standard (the criterion of a reasonable person)
4. Auxiliary criteria of interpretation
5. Specific rules of interpretation

1. The subject-matter of interpretation

a. Two kinds of interpretation that both the Convention and the Principles of European Contract Law deal with should always be distinguished - first, the interpretation of their own provisions, subject to Art. 7(1) CISG and Art. 1:106 PECL, respectively; second, the interpretation of the contract, subject to Art. 8 CISG and Art. 5:101 PECL et seq., respectively.[1]

b. Nowhere does the Convention mention the interpretation of the contract, however, but rather speaks of interpretation of unilateral statements and conduct of each party (see, Art. 8 paras. (1) and (2): 'statements made by and other conduct of a party are to be intepreted').[2] In contrast, the Principles expressly state that the contract is the subject matter of interpretation (see, Art. 5:101 para. (1): 'a contract is to be interpreted', para. (2): 'that one party intended the contract to have a particular meaning', 'the contract is to be interpreted', para. (3) 'the contract is to be intepreted'). It is beyond doubt, however, that Art. 8 CISG is also concerned with interpretation of the contract,[3] no matter whether it is a contract made through an exchange of communications, or a single instrument supplied by one party and accepted by the other, or drafted and signed by both parties jointly, or a contract concluded in some other way.[4] This difference between CISG and PECL is in expression and emphasis only. The European Principles are more bilaterally oriented in their formulation, starting from the common intention of the parties,[5] and finishing by applying the standard of reasonableness to both parties,[6] while the Convention concentrates on cases in which one party has had a more active role in the preparing of the contractual instrument. In Art. 8, the Convention puts stress on the intention of each individual party, and on the understanding that the other party would have attributed to its statements and conduct.[7] Although the Principles, too, allow for the possibility of one party's intention to prevail, even when different from the literal meaning of the words, this figures as an exception to the general rule of mutual intention.[8] The practical importance of this difference may appear in the case of contracts in which both parties fully participated in the drafting of the contractual instrument. Paragraphs (1) and (2) of Art. 8 CISG would seem to be inapplicable to such an instrument, because they differentiate between the one who makes a statement and the one who receives it,[9] while Art. 501 PECL would be fully applicable. One reason for the different approach in formulation probably lies in the history of the Art. 8 provision of CISG. If one keeps in mind the fact that this provision originated from the Commission draft on formation of contracts where it was used for interpretation of offer and acceptance, and became applicable to statements and conduct after formation of the contract only later, when the two drafts on formation and sales were merged, its one-party orientation becomes understandable.[10] The second reason for this difference probably lies in the predominance of the theory of mutual intent as the basis of contract in the majority of the laws of European states whose lawyers participated in the drafting of the PECL.[11] Such a unison view of the basis of contract did not exist among the member states of UNCITRAL.[12]

c. The rules on interpretation of contract, i.e., of the parties' statements and conduct constituting the contract, are necessary when the meaning of certain provisions is ambiguous, or when the different clauses of a contract contradict each other.[13] The interpretation of unclear or contradictory provisions may be necessary in order to determine whether the contract came into existence, what is its content, and what is the effect of certain notices or other acts of parties upon the performance or existence of the contract.[14] One of the purposes that the rules on interpretation have to serve - determination whether a contract has been concluded - has been treated by a separate provision in the PECL, Art. 2:101, thus giving rise to another formal difference between the CISG and PECL. The Principles state in Art. 2:101 that a party's intention to be legally bound, as a condition for concluding a contract under Art. 2:101(1)(a), shall be determined on the basis of that party's statements and conduct, i.e., whether these statements or that conduct gave the other party a reason to believe that the first party wanted to be legally bound. This provision is clearly more inclined to the objective standard of interpretation (see infra, f). However, in their Notes, the PECL Commentators refer judges and arbitrators to the whole set of rules of interpretation contained in chapter 5 (with subjective standard inclusive) in determining whether the party to whom statement or other conduct was addressed had reason to assume that the first party intended to be bound.[15] The CISG does not dedicate a particular provision to this purpose, but instead, relies on Art. 8, an all-embracing provision, which applies to interpretation of all statements and conduct of the parties, either during the formation of contract, or during its performance and possible termination. Professor Honnold points out that this article has an even wider scope, because it applies also to post-contract communications and actions.[16]

d. There is an obvious difference in the type of contract to which these rules can possibly be applied. While Art. 8 CISG is to be applied only to interpretation of contracts for the international sale of goods, this being further limited by the exclusion of certain international sales by the Convention text itself, the purpose of the interpretation rules contained in Chapter 5 of PECL is much wider, i.e., they are intended to serve for interpretation of "any sort of contract,"[17] including contracts for the international sale of goods.

2. Interpretation based on subjective standard (establishing the intention)

e. The basic similarity between CISG and PECL rules on interpretation of contracts lies in the combination of the subjective and objective methods of interpretation. Both the Convention (Art. 8(1) CISG) and the Principles (Arts. 5:101(1) and 5:101(2) PECL) instruct the judge or arbitrator to start by establishing the intention of the parties. But, as indicated above, the PECL wants judges and arbitrators to primarily look for their common intention (Art. 5:101(1)), and only exceptionally to interpret the contract in the way intended by one party (Art. 5:101(2)), while the CISG does not refer to the common intention of the parties at all, but only to intent of an individual party. There are some further differences in the wording of the respective rules. For example, PECL in Art. 5:101(2) elegantly avoids the repetitive and tautological nature of the formula used in the CISG to describe the awareness that one party had of the other party's particular intent: "where the other party knew or could not have been unaware what that intent was."[18] Instead, the PECL simply states: "[if] the other party could not have been unaware of the first party's intention." Further, the PECL specifies the relevant moment for assessment of the other party's awareness - this is the moment of conclusion of the contract. Such precision is lacking in CISG Art. 8, perhaps naturally, since it refers more broadly to interpretation of statements and conduct of a party whenever they were given or undertaken.

3. Interpretation based on objective standard (the criterion of a reasonable person)

f. If there are no indicators of the parties' true intentions, both the Convention and PECL instruct the court or arbitrator to apply the objective criterion of an understanding that a reasonable person would attribute to the statements and conduct of the party, i.e., to the contract, in the equivalent circumstances. Again, the PECL is somewhat more precise in defining the situation which triggers the switch from the subjective to objective criterion. This is the case when no intention different from the literal meaning of the words can be established, i.e., when no evidence of parties' actual intentions is available. The CISG, somewhat laconically introduces the second paragraph of Art. 8, which calls for an objective interpretation, with the wording: "If the preceding paragraph is not applicable."

4. Auxiliary criteria of interpretation

g. Both the Convention and the Principles give the judge or arbitrator a non-exhaustive list of matters which may be relevant in determining either the meaning intended by the parties or the reasonable meaning of the contract (see Art. 8(3) CISG and Art. 5:102 PECL).[19] The PECL list is more comprehensive. If we make a close comparison of relevant factors, we notice that the Convention does not mention the following: good faith and fair dealing, the nature and purpose of the contract, the interpretation which has already been given to similar clauses by the parties, the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation that similar clauses may have already received. Surely, most of these factors may also be taken into account when applying the auxiliary interpretation rule from CISG Art. 8, para. (3).

h. Some may question, however, whether good faith and fair dealing could be used as a tool of interpretation of a contract governed by the Convention, because of the well-known fact that the proposals for imposition of this requirement upon parties and their conduct were expressly rejected during the drafting process.[20] In spite of such legislative history of the Convention text, it has become commonplace among commentators of the CISG to mention the observance of good faith by the parties as a general principle on which the Convention is based.[21] If this view is accepted, the principle of good faith and fair dealing could also serve as a potential auxiliary factor in interpretation of the parties' statements, conduct and contractual provisions in general, even though it is not expressly mentioned in the relevant article of the CISG, as it is in the PECL.

i. Both Art. 8(3) CISG and Art. 5:102 PECL include preliminary negotiations as one among the factors to be taken into account by the judge or arbitrator interpreting the contract. This is generally understood to mean that the parol evidence rule existing in some legal systems is precluded.[22] Even a merger clause possibly inserted into the contract, does not automatically bar the judge from considering any evidence of preliminary negotiations for purposes of interpretation, under either of these instruments.[23] The parties wishing to exclude such evidence for all purposes, including the purposes of interpretation, can still do so, however, by stating accordingly in the merger clause. This would be a derogation from Art. 8(3) CISG and Art. 5:102 PECL, which is allowed on the basis of party autonomy (see Art. 6 CISG; Art. 1:102(2) PECL).[24]

5. Specific rules of interpretation

j. The Convention does not frame any rules on interpretation other than the general rule contained in Art. 8 CISG. In contrast, the PECL contain five such specific rules of interpretation: the contra proferentem rule (Art. 5:103), the rule on giving preference to negotiated terms (Art. 5:104), the rule on interpreting the individual provisions with reference to contract as a whole (Art. 5:105), the rule on giving preference to interpretation which renders the terms of contract effective (Art. 5:106), and the rule on interpretation in case of linguistic discrepancies (Art. 5:107). Undoubtedly, these specific rules may be referred to as supplementary rules in aid of interpretation of the CISG, because they are not inconsistent with, and are in accord with the evident intent of, Art. 8 CISG. Indeed, some of these rules are described as the origin of solutions adopted in Art. 8.[25] They are an absolute necessity for interpretation of contracts made in an international and, often, multilingual setting.

[See also commentary by the author on this subject in: John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 272-277.]


FOOTNOTES

* Dr. Maja Stanivukovic is Professor of Private International Law and Vice-Dean of The Novi Sad Faculty of Law.

1. The Comment to Art. 5:101 PECL also mentions completive interpretation, as a process akin to regular interpretation of contract, but intended for filling the gaps that may arise in the contract. This can be done by resort to implied obligations in accordance with Art. 6.102(c) PECL. There is no comparable provision in the Convention. The closest CISG equivalent that can be used for completive interpretation is Art. 9 CISG.

2. Secretariat Commentary on Art. 7 of the 1978 Draft, Official Records, p. 18, paragraph 2;

3. This is borne out by the emerging case law on the CISG. As of the date of this analysis, the cisgw3 website reports 900 cases <http://www.cisg.law.pace.edu/cisg/text/casecit.html> [viewed 9 March 2002], cases which reflect an abundance of express or implicit attention to Art. 8 CISG by judges and arbitrators, including rulings which draw on this provision to assist in the interpretation of the contract as well as the intention of the parties.

4. Secretariat Commentary on Art. 7 of the 1978 Draft, Official Records, p. 18, paragraph 2; J. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, Second Edition, Kluwer Law and Taxation Publishers, Deventer, Boston 1991, p. 163; J.S. Ziegel, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods, Commentary of Art. 8, para. (3), available at <http://www.cisg.law.pace.edu/cisg/text/ziegel18.html>.

5. PECL, Art. 5:101, para. (1).

6. PECL, Art. 5:101, para. (3).

7. J. Vilus, Komentar Konvencije UN o meunarodnoj prodaji robe [Commentary on the United Nations Convention on the International Sale of Goods], Obvezno pravo, Druga knjiga, ed. A. Goldštajn, Informator, Zagreb, 1981, p. 24.

8. Provided that the other party could not have been unaware of such intention at the time of conclusion of the contract. See PECL, Art. 5:101 para. 2.

9. This would mean that a judge or arbitrator would have to interpret such an instrument by reference to Art. 8(3). J. Honnold, op. cit. p. 163; Ziegel, loc. cit.

10. J. Honnold, op. cit., p. 162.

11. J. Honnold, op .cit., p. 164. Principles of European Contract Law, Parts I and II, Combined and Revised, ed. Ole Lando and Hugh Beale, Kluwer Law International, 2000, Article 5:101, Comment B, p. 288.

12. Secretariat Commentary on Art. 7 of the 1978 Draft, Official Records, p. 18, paragraph 3;

13. Principles of European Contract Law, op .cit., Art. 5:101, Comment A, p. 287.

14. Secretariat Commentary on Art. 7 of the 1978 Draft, Official Records, p. 18, paragraph 1.

15. "Even if in his inmost mind a party had no intention to be legally bound, most of the laws will hold that he is bound if the other party to whom the statement or other conduct was addressed had reason to assume that the first party intended to be bound. Whether this is the case is to be decided under the rules of interpretation, see notes to chapter 5." Principles of European Contract Law, op. cit. Art. 2:102, Notes, p. 145.

16. J. Honnold, op. cit., p. 163.

17. Principles of European Contract Law, op. cit. Survey of Chapters 1-9, p xxxiv.

18. This formula was criticized as such by Great Britain during the drafting procedure. See J. Vilus, op. cit., p. 25.

19. Principles of European Contract Law, op. cit., Art. 5:102, Comment, p. 291

20. For a detailed comparative commentary on the role of good faith in the three instruments -- the CISG, the PECL and the UNIDROIT Principles -- see Guide to Article 7 CISG, editorial remarks by J. Felemegas and U. Magnus, available online at the Pace Institute website at <http://www.cisg.law.pace.edu/cisg/text/e-text-07.html>.

21. See, for example: R. Herber, in P. Schlechtriem, ed., Commentary on the UN Convention on the International Sale of Goods (CISG), C.H. Beck, München, 1998, p. 63.

22. J. Honnold, op. cit., p. 171; Comparative guide to Art. 8, editorial remarks by J.M. Perillo, item g) <http://www.cisg.law.pace.edu/cisg/principles/uni8.html#edrem>. See MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino, S.p.A. , U.S. Court of Appeals (Eleventh Circuit), 29 June 1998, CLOUT Case no. 222, also available at <http://cisgw3.law.pace.edu/cases/980629u1.html>.

See apparently contra, Beijing Metals & Minerals Import/Export Corporation v. American Business Center, Inc., U.S. Court of Appeals (Fifth Circuit), 15 June 1993, CLOUT Case no. 24, also available at <http://cisgw3.law.pace.edu/cases/930615u1.html>.

However, in Mitchell Aircraft Spares v. European Aircraft Service, U.S. District Court [Illinois], 27 October 1998, CLOUT no. 419, the court confirmed the growing body of U.S. jurisprudence to the effect that, in a case governed by the Convention, Article 8 CISG displaces the U.S. parol evidence rule. See <http://cisgw3.law.pace.edu/cases/981027u1.html>.

[See also, Calzaturificio Claudia v. Olivieri Footwear, 6 April 1998 U.S. District Court [New York], CLOUT case no. 413, also at <http://cisgw3.law.pace.edu/cases/980406u1.html>; Filanto S.p.A. v. Chilewich International Corp., 14 April 1992 U.S. Dist. Ct., CLOUT case no. 23, also at <http://cisgw3.law.pace.edu/cases/920414u1.html>.]

The court in Mitchell Aircraft also disagreed with the possible holding to the contrary in Beijing Metals & Minerals; see A.H.Kritzer's editorial comments in the Mitchell Aircraft case presentation online, id.

23. J. Honnold, op. cit. p. 171. "The search for common intention is compatible with rules which forbid the proof of matters in addition or contrary to a writing, for example if the parties have negotiated a merger clause to the effect that writing contains all the terms of the contract (see Art. 2:105: Merger Clause), as it refers to external elements only to clarify the meaning of a clause, not to contradict it." Principles of European Contract Law, op .cit., Art. 5:101 Comment, B, p. 288.

24. Principles of European Contract Law, op .cit. Art. 5:102, Comment, pp. 291-292.

25. E.g., the provision in art. 8(2) CISG has been described as rooted in the contra proferentem rule by J. Honnold, op.cit. p. 165.


Comment and notes on PECL 2:102 and 5:101 through 5:107

Like the commentary to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, these comments and notes are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000)143-146, 287-298.


COMMENT AND NOTES: PECL Article 2:102: Intention

The intention of a party to be legally bound by contract is to be determined from the party's statements or conduct as they were reasonably understood by the other party.

Comment

A. Intention

As provided in Article 2:101(1)(a) a contract is only concluded if the parties to it indicate an intention to be legally bound. Parties often make preliminary statements which precede the conclusion of a contract but which do not indicate any intention to be morally or legally bound at that stage.

Sometimes the person who makes a statement intends only to be morally but not legally bound. Depending on the words used and the circumstances, letters of intent and letters of comfort may be regarded as statements which are morally binding only. [page 143]

Illustration 1: When subsidiary company asked the plaintiff bank to grant it a loan of 8 million Euros, the plaintiff asked the defendant parent company to guarantee the loan. The defendant refused, but gave a letter of comfort instead. This read: “It is our policy to ensure that the business of (the subsidiary) is at all times in a position to meet its liabilities to you under the loan facility arrangement”. The letter also stated that the defendant would not reduce their financial interests in the subsidiary company until the loan had been repaid. When during the negotiations the plaintiff learned that a letter of comfort would be issued rather than a guarantee, its response was that it would probably have to charge a higher rate of interest. When later the subsidiary company went into liquidation without having paid, the plaintiff brought an action against the defendant to recover the amount owing. The action failed since the defendant had not made a legally binding promise to pay the subsidiary’s debt.

However under certain circumstances the person may incur liability when it has acted contrary to good faith, see Article 2:301.

Letters of intent and letters of comfort may also be couched in terms which show an intention to be legally bound.

Illustration 2: Parent company M declares to a bank which lends money to its subsidiary company D that M is aware of D’s engagement towards the bank, that by all appropriate means it will see to it that D is able to meet its obligations towards the bank, and that it will give notice to the bank if it wishes to change this policy. Before M has given such notice to the bank D goes bankrupt.

M’s letter of comfort is to be considered as a guarantee which obliges M to pay D’s debt.

See also Illustration 2 of Comments to Article 2:107.

A party’s statement is sometimes an invitation to one or more other parties to make an offer. Such an invitation is not meant to bind the party which makes it. It may, however, produce effects later if it has provoked an offer and acceptance which refer to the terms and conditions stated in the invitation. See also Article 6:101.

B. The appearance of intention

Article 2:102 lays down a general principle on the effects of a party’s statement or other conduct. They are to be determined as they reasonably appear to the other party. If the party’s true intention is actually understood by the other party, the former is bound. The way in which it expressed its intention does not matter. This is in accordance with the rule of interpretation provided in Article 5:101(1) that the common intention of the parties prevails even if this departs from the literal meaning of the words used. In other cases the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the circumstances, see Article 5:101(2).

Other rules of interpretation such as arts. 5:102, 5:103(a) and (c-f) and 5:104 may also be applied to determine the offer. [page 144]

C. Silence or inactivity

Silence or inactivity will generally not bind a person, see Article 2:204(2). However, exceptions from this rule are provided in several articles of these principles, see for example articles 2:209, 2:210 and 3:208.

Silence and inactivity may also cause a party to lose a right, see for example Articles 4:113, 8:102(3) and 8:303.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Social engagements, engagements involving patrimonial interests, moral engagements

In all the legal systems, a party's intention to be legally bound is a condition of the formation of a contract. Promises given as a joke do not bind. A party is not bound if the other party to whom it makes a statement knows or ought to know that the first party does not intend to be bound.

In all the systems an intention to be legally bound is presumed when the transaction involves a patrimonial interest for the parties, but not when it is only a social engagement, such as a dinner appointment. Friends and family members often offer to help each other, and such offers are not legally enforceable, the help given is not to be paid for, see Kötz, European Contract l18 who cites the ENGLISH case Balfour v Balfour [1919] 2 KB 571, C.A., FRENCH Cass. 19 March 1974 Bull. Cass. I no. 117, and the GERMAN BGH 22 June 1956 BGHZ 21, 102. See also for DENMARK Gomard, Kontraktsret 30 and for IRELAND, Friel 78.

Even in business relations, parties make undertakings which only oblige them morally, not legally. It may follow from the language of an undertaking or be implied from the circumstances that the promisor, or the parties, assumed only a moral obligation, for example if the agreement provides, ‘this agreement shall be binding in honour only’, as in the English case of Rose & Frank. v JR Crompton & Bros Ltd. [1925] AC 445, H.L.), see further Cheshire, Fifoot & Furmston 111 f. and 116 f. and, for Ireland, Cadbury Ireland Ltd v Kerry Co-operative Creameries Ltd [1982] ILRM 77, HC. See also notes to Article 2:107 below.

In ENGLAND collective labour agreements are presumed not to be intended to create legal relations: Ford Motor Co Ltd v AUEFW [1969] 2 Q.B. 303, Q.B. In IRELAND statements made obiter in several cases suggest that they are, see Goulding Chemicals Ltd v Bolger [1977] IR 211, SC and Ardmore Studios v Lynch [ 1965] IR 1, HC.

2. Real or apparent intention?

(a) Party bound by apparent intention

Even if in his inmost mind a party had no intention to be legally bound, most of the laws will hold that he is bound if the other party to whom the statement or other conduct was addressed had reason to assume that the first party intended to be bound. Whether this is the case is to be decided under the rules of interpretation, see notes to chapter 5.

The rule is provided in the DUTCH BW art 3:35: a person’s absence of intention cannot be invoked against another person to whom his declaration or conduct was addressed and who gave it a meaning which was reasonable in the circumstances. In AUSTRIA, a similar rule is inferred from ABGB §§ 861 and 863, see Schwimann (-Apathy) § 863 comments 1-4 and § 863 comments 1-2, where the author uses the term “normativer Konsens”. In NORDIC LAW, the rule is based on an interpretation e contrario of the Contracts Acts § 32, according to which an error in expression does not bind the promisor if the promisee knew or should have known of the mistake, see for DENMARK Dahl (-Møgelvang) 231 and Gomard, Kontraktsret 56; for SWEDEN, Ramberg, Avtalsrätt 34. In GREECE the rule is based on CC art. 200, which provides that contracts are to be interpreted in accordance with good faith, see AP l340/l977, NoB l978.l053; see also for GERMANY, Larenz/Wolf § 28 Rdnr. 16 ff. In ITALY and PORTUGAL the rules on interpretation apply to ascertain the intention of the parties; good faith and reasonableness play an important part, see on Italy: Bianca, Il contratto 397-402 and on Portugal Almeida, Negocio juridico 719 ff. However, the statement is not binding if the party who made it was convinced that the other party would realize that his statement was not serious or where he was not conscious of having made a statement, see CC arts. 245 and 246.

The same rule applies in the COMMON LAW law. ENGLISH contract law is concerned with objective appearance rather than with the actual fact of agreement. The classic statement of the principle is that of Blackburn J. in Smith v. Hughes (187l) L.R. 6 Q.B. 597, 607: [page 145]

“If, whatever, a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that the other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.” See also The Hannah Blumental, [1983] 1 A.C. 854 (H.L.) and Treitel, Contract 1; for IRISH law, see Friel 78 ff. In SCOTLAND the majority view is to the same effect. In Muirhead & Turnbull v. Dickson [1905] 7 S.C. 686, 694, Lord Dunedin said: “... commercial contracts cannot be be arranged by what people think in their inmost minds. Commercial contracts are made by what people say.” See also McBryde, Contract 51-54 and 1992 Juridical Review 274; cf. Stewart, 1991 Juridical Review 216 and 1993 Juridical Review 83.

(b) Subjective intention governs

In contrast to most other laws, FRENCH law will only hold a person bound in contract if it is his real intention to be bound, see Malaurie & Aynès, Obligations nos. 347 ff. However, a party alleging that, contrary to his statement, he had no intention to be bound must make this allegation plausible. If he succeeds he is not contractually bound, but may be held liable in damages in tort if he has acted negligently, see Terré, Simler et Lequette, Obligations no. 87, no. 131. The same rules apply in LUXEMBOURG. PORTUGUESE CC arts. 245 and 246 impose liability on a person who acted negligently when making a statement which he did not mean seriously or when making a statement unconsciously, see (a) above.

(c) Divided opinion

In BELGIUM there is one school which sticks to the traditional FRENCH "doctrine of the intention", see e.g. Verougstraete 1195-96, and another school which will apply the same rule as the one in Article 2:102, see van Ommeslaghe, R.D.I.D.C. 1983 144 and M.E. Storme, Tijdschrift voor belgisch burgerlijk recht 1993, 336. The rule in Article 2:102 has been applied by the Cour de Cassation in a decision of 20 June 1988, Pas. 1988 I 1256, where it was held that a principal was bound by an act done by the agent when the third party had reason to rely on the agent’s apparent authority; see also Court of Appeal of Brussels 26 May 1996, Tijdschrift voor belgisch burgerlijk recht 1996, 333 where the rule was also applied. [page 146]

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COMMENT AND NOTES: PECL Article 5:101: General Rules of Interpretation

(1) A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words.

(2) If it is established that one party intended the contract to have a particular meaning, and at the time of the conclusion of the contract the other party could not have been unaware of the first party's intention, the contract is to be interpreted in the way intended by the first party.

(3) If an intention cannot be established according to (1) or (2), the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.

Comment

A. General

Contracts are interpreted in order to determine their contents. This is particularly the case when the contract contains a clause which is ambiguous, obscure or vague; that is, when one cannot immediately see the exact meaning. But interpretation will also be necessary if clauses which seem clear enough in themselves contradict each other, or cease to be clear when the general setting of the contract is taken into account.

When a contract contains lacunae which need to be filled, the process is sometimes referred to as completive interpretation (ergänzande Auslegung). In this situation the Principles resort to implied obligations, for example those referred to in Article 6:102 below.

Determining the exact meaning of the contract may be necessary before it can be determined whether the contract is valid or whether there has been a non-performance. For example, it may be necessary to decide whether the debtor's obligation was one to produce a particular result (obligation de résultat) or only one to use reasonable care and skill (obligation de moyens).

Any kind of contract may need interpretation, even a formal contract such as one made in the presence of a notary. Similarly, the rules of interpretation apply to contracts made on general conditions or standard forms. In fact some of the rules apply [page 287] particularly to these types of contract (Articles 5:103 and 5:104). Interpretation may be needed for the whole or part of a contract.

Moreover, the provisions of this Chapter [Articles 5:101 through 5:107] may be applied, with appropriate adjustments, to agreements sometimes classified as other than contracts, such as agreements to change the terms of an existing contract, and to unilateral declarations of will (Articles 5:103 and 5:104).

B. The search for common intention (first paragraph)

Following the majority of laws of EU Member States, the general rules on interpretation combine the subjective method, according to which pre-eminence is given to the common intention of the parties, and the objective method which takes an external view by reference to objective criteria such as reasonableness, good faith etc. The judge is thus encouraged to start by looking to see what was the parties' common intention at the time the contract was made. This is normal because the contract is primarily the creation of the parties and the judge should respect their intentions, expressed or implicit, even if their will was expressed obscurely or ambiguously.

In seeking this common intention the judge should pay particular attention to the relevant circumstances as set out in Article 5:102.

It should be noted that there may be a common intention of the parties even in the case of a contract of adhesion, in so far as the party who was not responsible for drafting the contract had a sufficient knowledge of the clauses and adhered to them.

The search for common intention is compatible with rules which forbid the proof of matters in addition or contrary to a writing, for example if the parties have negotiated a merger clause to the effect that the writing contains all the terms of the contract (see Article 2:105: Merger Clause), as it refers to external elements only to clarify the meaning of a clause, not to contradict it.

Article 5:101 states another important point: the judge should give effect to the common intention of the parties over the letter of the contract. This means that in case of conflict between the words written and the common intention, it is the latter which must prevail. Thus if a document is described as a loan but its content indicates that it is really a lease, the judge should not attach importance to the description in the document.

Illustration 1: The owner of a large building employs a painting firm to repaint the “Exterior window frames”. The painters repaint the outside of the frames of the exterior windows and claim that they have finished the job; the owner claims that the inside surfaces of the frames to exterior windows should also have been painted. It is proved by the preliminary documents that the representatives of the owner and of the painting firm who negotiated the contract had clearly contemplated both surfaces being done. Although the normal interpretation might suggest that only the outside surfaces were within the contract, since exterior and interior decoration are usually done separately, the parties’ common intention should prevail.

All the same, the judge must not, under the guise of interpretation, modify the clear and precise meaning of the contract. This would be to ignore the principle of the [page 288] binding force of contract. In the case of unforeseen supervening circumstances, Article 6:111 provides a way of adjusting the contract overtly without the need to resort to tortured interpretation.

C. Party knows the real intention of the other party (second paragraph)

If one party’s words do not accurately express its intention, for instance because it expresses its intention wrongly or uses the wrong words, the other party can normally rely on the reasonable meaning of the first party’s words. But this is not the case if the second party knew or could not have been unaware of the first party’s actual intention. If it makes the contract without pointing out the problem it should be bound by the first party’s intended interpretation. The point may be made by repeating an illustration given in the Comments to Article 4:104: Inaccuracy in Communications above:

Illustration 2: A, a fur trader, offers to sell B, another fur trader, hare skins at £1.00 a kilo; this is a typing error for £1.00 a piece. In the trade skins are usually sold by the piece and, as there are about six skins to the kilo, the stated price is absurdly low. B nonetheless purports to accept. There is a contract at £1.00 per piece as A intended.

One may see in this rule also a consequence of the rule that the intention of the parties prevails over the letter of the contract.

D. Objective method

The judge should not try to discover the intentions of the parties at any price and end up deciding what they were in an arbitrary way. When a common intention cannot be discerned, the judge should apply Article 5:101(3). This refers not to fictitious intentions but to the meaning that reasonable persons placed in the same circumstances as the parties would have given to the contract.

Illustration 3: A clause in an insurance contract provides that the policy covers the theft of jewellery only if there has been “clandestine entry” into the place where the jewellery was. An individual, A, pretends to be a telephone repairman and presents himself at Madame B's home to repair her telephone. A distracts B with some pretext and takes the opportunity to steal her jewels. The insurance company refuses to pay up, on the basis that there has been no “clandestine entry”. On a reasonable interpretation entry gained by fraud is a form of “clandestine entry”.

But equally this use of objective interpretation does not empower the judge to overturn the contract under the guise of interpretation and to go against the unequivocal will of the parties. [page 289]

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. General

Some legal systems have detailed legislative provisions on interpretation: FRENCH, BELGIAN and LUXEMBOURG CCs. arts. 1156 - 1164 (see Terré, Lequette & Simler, Obligations, nos. 418-436); SPANISH CC arts. 1258 and 1281 - 1289, and see Ministerio de Justicia II, 509 ff.; ITALIAN CC arts 1362- 1371 (see Sacco(-De Nova) II 357 ff. and Bianca, Il contratto 384 ff.; also UNIDROIT arts. 4.1-4.8.

Others content themselves with statements of general principle: e.g. GERMAN BGB § 133 and 157 (see Larenz/Wolf AT § 28; Münchener Kommentar (Mayer-Maly) § 133, Rn 19, 20; Witz I nos. 194-199: AUSTRIAN ABGB §§ 914, 915; GREEK CC arts 173 and 200; PORTUGUESE CC arts. 236-238 (see Fernandes II, 343 ff).; CISG art. 8.

The DUTCH BW deliberately omits rules of interpretation as being too general and too well-known. They are to be found in the case law (Asser-Hartkamp, Verbintenissenrecht II, nos. 279 ff.). Similarly, in the NORDIC countries rules of interpretation are to be found in case law and doctrine. See for Denmark, Lynge Andersen, Madsen & Nørgaard, 344 ff. and Gomard, Kontraktsret 245 ff.; for Finland, Hemmo, Sopimusoikeus II, 12 ff. and Wilhelmsson, Standardavtal, passim; for Sweden, Adlercreutz II 31 ff. and Ramberg, Avtalsrätt 129 ff.

ENGLISH, SCOTTISH and IRISH rules of interpretation are case law and are not clearly distinct from rules of evidence and rules about mistake (for England, see McKendrick 149-150; Scotland, McBryde, Contract 420-439; see also Scottish Law Commission, Report on Interpretation, which proposes a systematisation of the rules on Interpretation, drawing on the Unidroit Principles and a draft version of these Principles.).

In FRANCE and LUXEMBOURG the rules of interpretation are sometimes considered to be mere guidelines which do not have to be followed (see for France, Cass. Req. 24 February 1868, DP 1868.1.308). The BELGIAN case law has abandoned this position (Cass. 22 March 1979, Arr. Cass 860; Cass. 27 April 1979, Arr. Cass. 1023), as has the ITALIAN doctrine and case law (see Scognamiglio 179 and, e.g., Cass. 30 January 1995, n. 1092; Cass. 17 April 1996, n. 3623).

In France, interpretation is a question of fact which is not reviewed by the Cour de cassation, unless clear and unambiguous clauses of the agreement have been “denatured” (since Cass. civ. 15 April 1872, DP 1872.1.176). The position is similar in Italy (Bianca, Il contratto 383 ff.), and generally also in Germany, see Larenz/Wolff § 28 Rdn. 124 ff.. In England, on the other hand, interpretation is a question of law, as it is in Greece (AP 1176/1997, NoB 1977.709) and Portugal (STJ 8 May 1991, BMJ 407, 487 ff).

See generally Zweigert & Kötz 400-409; Kötz, European Contract ch. 7.

2. Principles of common intention

The most generally accepted principle, which flows from the will theory of contract (on the doctrine, see Ghestin, Jamin & Billiau, Nos. 6 ff.), is that of interpretation according to the common intention of the parties, complemented sometimes by the warning that “one should not simply take the words in their literal meaning” (FRENCH, BELGIAN and LUXEMBOURG CCs art. 1156). See also GERMAN BGB § 133; AUSTRIAN ABGB § 914; ITALIAN CC art. 1362; GREEK CC arts. 173 and 220; DUTCH BW art. 3:33 (by implication) and the case law, e.g. the Haviltex case, HR 13 March 1981, NJ 1981, 635; SPANISH law, CC art. 1281. The NORDIC laws are to the same effect, Gomard, Kontraktsret 249. See also UNIDROIT art. 4.1(1) and CISG art. 8.1.

In contrast, ENGLISH and IRISH law traditionally did not permit a search for the intentions of the parties outside the document which contains their agreement (Lovell & Christmas Ltd v. Wall (1911) 104 L.T. 85, C.A. However, if the meaning of the words is not clear, one must take into account commercial certainty and the factual matrix of the contract (Prenn v. Simmonds [1971] 1 W.L.R. 1381, H.L.) The contract must be interpreted in a way that will make commercial sense, even if that means disregarding the literal meaning of the words used; Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 W.L.R. 896 (H.L.).

In SCOTS law the contract is to be interpreted according to the common intention of the parties as expressed in the contract; McBryde, Contract 420. A Report of the Scottish Law Commission, No. 160, proposes reforms which would bring Scots law closer to the Principles.

3. One party aware of the other party's real intention (paragraph (2))

This rule is to be found in ENGLISH and IRISH law: Centrovincial Estates plc v. Merchant Investors Assurance Ltd [1983] Com. L.R. 158, C.A. (Illustration 2 is derived from Hartog v. Colin & Shields [1939] 3 All E.R. 566, Q.B.D.; though in that case it was said that the contract was void for mistake, it is thought that the mistaken party (the seller) could have held the non-mistaken party (the buyer) to a contract on the terms the seller intended: see Chitty § 5-024), and it seems that the [page 290] contract document can be rectified accordingly, cf. Commission for New Towns v. Cooper [1995] 2 W.L.R. 677, C.A. The rule in the form stated is not known in SCOTS law, however: McBryde, Contracts 434-435.

A nearly similar rule is to be found in CISG art. 8, and see also SPANISH CC art. 1258. It is also to be found in the DUTCH and AUSTRIAN jurisprudence (see respectively the Haviltex case, above, and OGBH 11 July 1985, JBl 1986 176. It is generally accepted in NORDIC law, based on Contract Acts § 32(1), see Gomard, Kontraktsret 169; Ramberg, Avtalsrätt129. GERMAN law is to the same effect: RGZ 8 June 1920, RGZ 99, 147; Münchener Kommentar (-Kramer) § 119, Rn 48.

In FRENCH, BELGIAN and LUXEMBOURG law, the rule in paragraph (2) does not appear openly in the jurisprudence, nor is it discussed in doctrine. These laws rely on general rules on interpretation (e.g. the common intention will prevail over the letter of the contract), good faith and error. It is the same in ITALIAN law.

4. Principle of objective interpretation (paragraph (3))

Interpretation according to the meaning which would be given to the words by a reasonable person in the same situation is the basic rule in some systems: PORTUGUESE CC art. 236(1) (theory of the “impression gained by the recipient”); ENGLISH law which applies the normal meaning of the words in the context in which they were used (see Lord Wilberforce’s judgments in Prenn v. Simmonds [1971] 1 W.L.R. 1381, H.L. and in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 898, H.L., especially at 995-996), unless it is clearly established that the parties shared a different intention (see The Karen Oltmann [1976] 2 Lloyd’s Rep. 708, Q.B.D.). The rule is expressly stated to apply when it is not possible to discover any common intention of the parties by CISG art. 8(2) and Unidroit art. 4.1(2); see also Austrian ABGB § 914 and NORDIC law, ((Gomard, Kontraktsret 251). More frequently, the principle of reasonable interpretation is formulated explicitly but is applied in the guise of good faith: this is the case in GERMAN law, FRENCH and BELGIAN law, DUTCH law (see Haviltex, supra), ITALIAN law (see CC art.1366 and also arts. 1367 - 1371), SPANISH law (on the latter see CC art. 1258) and GREEK law (Balis § 90). [page 291]

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COMMENT AND NOTES: PECL Article 5:102: Relevant Circumstances

In interpreting the contract, regard shall be had, in particular, to: (a) the circumstances in which it was concluded, including the preliminary negotiations; (b) the conduct of the parties, even subsequent to the conclusion of the contract; (c) the nature and purpose of the contract; (d) the interpretation which has already been given to similar clauses by the parties and the practices they have established between themselves; (e) the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received; (f) usages; and (g) good faith and fair dealing.

Comment

Article 5:102 gives the judge a non-exhaustive list of matters which may be relevant in determining either the common intention of the parties (Article 5:101(1)) or the reasonable meaning of the contract (Article 5:101(2)).

Thus the judge may consider the preliminary negotiations between the parties (letter (a)): for example, one of the parties may have defined a term in a letter and the other not have contested this interpretation when an opportunity arose. He may [page 291] do this even where the parties have agreed that the written document embodies the entirety of their contract (merger clause), unless in an individually negotiated clause the parties have agreed that anterior negotiations may not be used even for purpose of interpretation (Article 2:106).

This sort of clause may be very useful when long and complicated negotiations were necessary for the contract.

The conduct of the parties, even after the making of the contract, may also provide indications as to the meaning of the contract (letter (b)).

Illustration 1: A German manufacturer of office supplies has engaged B to represent A in the north of France. The contract is for six years but it may be terminated without notice if B commits a serious non-performance of its obligations. One of these obligations is to visit each of the 20 universities in the area “every month”. Assuming that this obligation applies only to the months, in the country concerned, when the universities are open and not to the vacations, B only visits each one 11 times a year, and A knows this from the accounts which are submitted to it by B. After 4 years A purports to terminate the contract for serious non-performance. Its behaviour during the four years since the conclusion of the contract leads to the interpretation that the phrase “every month” must be interpreted as applying only to the months when universities are active.

The nature and the purpose of the contract may also be considered (letter (c)).

Illustration 2: The manager of a large real estate development makes a fixed price contract with a gardening company for the maintenance of the "green spaces". The manager later complains that A has not repaired the boundary wall. The contract cannot be interpreted as covering this as it is a contract for gardening.

The practices established between the parties (letter (d)) are often decisive.

Illustration 3: A has made a franchise contract with B. A clause provides that B shall pay for goods that he receives from A within 10 days. For a three month period B pays within 10 working days. Then A demands payment within ten days including holidays. The practice adopted by the parties indicates that this is not a correct interpretation.

The reference to interpretation which the clause may already have received is primarily to standard clauses which may have been the object of a jurisprudence. This obviously may inform the judge's decision (letter (e) in fine).

The meaning generally given to terms and expressions in a particular sector may also be useful when one is dealing with terms which have a technical meaning different to their ordinary meaning, for example the “dozen” which is understood to mean thirteen (the “baker's dozen”, which is thirteen).

Furthermore, it is normal to refer to usages as defined in Article 1:105 whether the parties may be considered to have contracted with reference to them or whether these [page 292] usages form the basis of a reasonable interpretation used to resolve an uncertainty in the meaning of the contract. They may also play a role in interpretation which is filling gaps in the contract (Article 6:102).

The Article refers in principle to usages which are current at the place the contract is made, although there may be difficulty in establishing this place.

Illustration 4: A wine merchant from Hamburg buys 2,000 barrels of Beaujolais Villages from a co-operative cellar B. In Beaujolais a barrel contains 216 litres, whereas a Burgundian barrel contains more. A cannot claim that the barrels referred to in the contract are Burgundian barrels.

Illustration 5: A film producer A and a distributor B make a distribution contract in which there is a clause providing for payment of a certain sum if the number of exclusive screenings (i.e. screenings only in a single cinema or chain of cinemas) is less than 300,000. A meant exclusive for the whole of France, B only for the Paris region. According to usages of the French film industry, exclusivity means exclusivity only in the Paris region. It is this meaning which applies.

Finally, good faith and fair dealing will often determine the intepretation of the contract, see Comments to Article 1:201, Illustration 1.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

The circumstances which are to be taken into account in discovering the common intention of the parties are indicated in some of the laws of the EU Member States. They may be found either in legislative texts or in the case law. E.g.: ITALIAN CC arts. 1362(2) (behaviour), 1368 (usage), 1369 (nature and purpose of the contract); FRENCH CC art. 1159 (usage; see Terré, Lequette & Simler no. 425 and refs. there; SPANISH CC arts. 1282 (behaviour), 1258 (nature of contract); GERMAN BGB § 157 (usage; see Larenz, AT § 19 II b); AUSTRIAN HGB § 345 (usages between merchants). PORTUGUESE doctrine and the jurisprudence look at the same indicators , see Fernandes 349 ff.; GREEK case law is to the same effect, as is DANISH law (Gomard, Kontraktsret 251 ff.); FINNISH law (Commission Report 17 ff.); and SWEDISH law, Ramberg, Avtalsrätt 90 ff. UNIDROIT art. 4.3 refers to six factors; CISG art. 8.3 to four (the negotiations, practices between the parties, usages and subsequent conduct of the parties).

ENGLISH and IRISH law are different in that they show a marked reluctance to rely on the pre-contractual negotiations as being an unreliable guide (see Prenn v. Simmonds [1971] 1 W.L.R. 1381, H.L.); and the subsequent conduct of the parties is not taken into account; James Miller & Partners v. Whitworth Street Estates (Manchester) Ltd [1970] A.C. 583, H.L. However, the circumstances in which the contract was made and its aim and purpose are considered (see references in Note 4 to Article 5:101 above and Chitty §§ 12-104 – (12-105). The elements listed under (e) (meaning given to the provision previously) and (f) (usages) are also accepted by English law, and even a usage may not be accepted if it is not consistent with the written agreement (Palgrave Brown & Sons v. SS Turid [1922] 1 A.C. 397, H.L. In contrast, SCOTTISH law uses the factors listed in Article 5:102 except for (b) (subsequent conduct). [page 293]

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COMMENT AND NOTES: PECL Article 5:103: Contra Proferentem Rule

Where there is doubt about the meaning of a contract term not individually negotiated, an interpretation of the term against the party which supplied it is to be preferred.

Comment

This rule, which is expressed by the ancient formula verba cartarum fortius accipiuntur contra proferentem (Bacon’s Maxims 3), is widely recognised both in legislation and above all in case law in the different national and international laws. It rests on the idea that the party who has drafted a clause, or the whole contract, unilaterally should normally bear the risk of any defect in the drafting. The rule applies not only against the author but also against anyone who uses pre-drafted clauses. This will be the case when the clauses have been prepared by a third party, for example the professional association to which the party employing the clauses belongs.

It applies in particular to general conditions of contract drawn up unilaterally by one party, but it may also apply to a contract of adhesion which has been drawn up for the particular occasion but which is non-negotiable.

Illustration: An insurance contract contains a clause excluding losses caused by “floods”. The insurance company which drafted the contract cannot maintain that this exclusion applies to damage caused by water escaping from a burst pipe, since it has not made this clear.

It should be noted that the Article states only that the interpretation against the party who supplied the term “is to be preferred”. A judge could, in appropriate circumstances, interpret a clause which has not been individually negotiated in favour of the party who proposed it.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

The contra proferentem rule is very widely recognised, either explicitly or implicitly; it appears frequently in texts on consumer protection, particularly in those which consider the Directive 93/13 of 5 April 1993 on Unfair Terms in Consumer Contracts, art. 5 and the legislation which implements it. See for GERMANY: AGBG § 5, following earlier case law, which continues to apply to non-consumer contracts; AUSTRIA, ABGB § 915, applying to all pre-formulated contracts; ENGLAND: Hollier v. Rambler Motors (AMC) Ltd [1972] 2 Q.B. 71, C.A. (English law has sometimes applied the rule in an exaggerated way to restrict the effect of clauses limiting liability); DENMARK: Contracts Act § 38(b) and Gomard, Kontraktsret 257; FINLAND: Consumer Protection Act, chapter 4, § 3 and for other applications see Wilhelmsson, Standardavtal 91; SWEDEN: see Ramberg, Avtalsrätt 173-177; SPAIN: CC art. 1288 and Law 26/1984 of 19 July 1984 on Consumer Protection, art. 10-2; FRANCE, case law applying CC arts. 1162 (interpretation against the stipulant) and 1602 (interpretation against the seller) and Code de Consommation art. L.133-2 (Law of 1 February 1995); BELGIUM: caselaw which applies the rule if the other rules do not give a result; ITALY: CC art. 1370, which the caselaw applies only to ‘mass contracts’ (see also CC art. 1469(4), 2nd co.); THE NETHERLANDS: the rule, which has not yet been adopted legislatively, is viewed by the recent decisions of the Hoge Raad as ‘one point of view’, see HR 12 January 1996, NJ 1996, 683). In GREECE the rule is recognised directly only for consumer contracts, Law 2251/1994, arts. 2.6 and 2.7. In PORTUGAL the rule applies only to general conditions (D.L. 12446/85 of 25 October 1985, art. 11(2); in other cases the judge may, if in doubt, choose the meaning which will give better balance to the contract. See also UNIDROIT art. 4.6. [page 294]

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COMMENT AND NOTES: PECL Article 5:104: Preference to Negotiated Terms

Terms which have been individually negotiated take preference over those which have not.

Comment

If in an otherwise non-negotiable contract (standard form or otherwise) there is, exceptionally, a clause which has been negotiated, it is reasonable to suppose that this clause will represent the common intention of the parties, other indications apart. This rule complements Article 5:103.

The preference given to negotiated clauses applies also to modifications made to a printed contract, whether by hand or in any other way (e.g. typed or stamped on). One may in effect assume that these modifications were negotiated. However, it is a rebuttable presumption.

Illustration: A printed form is used for the conclusion of an option to purchase land. One of the clauses provides that the eventual buyer will deposit a cheque for 10% of the price with an intermediary until the option is either taken up or is refused. The parties agree to replace the requirement for a cheque with a bank guarantee. The intermediary writes this change on the margin of the document but omits to cross out the printed clause. The contradiction between the two clauses is to be resolved in favour of the hand-written clause.

The rule applies even if the modification was oral.

This rule must be distinguished from that in Article 2:209 Conflicting General Conditions, which, by definition, concerns contracts which were not individually negotiated.

NOTES: PECL art. 5:104: Preference to Negotiated Terms

[Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

This rule is sometimes formulated only in legislation on consumer protection or on particular contracts, for example on insurance contracts. See for AUSTRIA: Law on Protection of Consumers of 8 March 1979, § 6; SPAIN: Law 26/84 on Protection of Consumers, art. l 10.2.2; PORTUGAL: Law 446/85 of 25 October 1985, art. 10. In other laws the rule applies generally; see for GERMANY AGBG § 4; on NORDIC law see for Denmark, Gomard, Kontraktsret 254; Sweden, Ramberg, Avtalsrätt 178 and NSA 1993, 436; Finland, Hoppu 46. ENGLISH and SCOTTISH law are to the same effect, Glynn v. Margetson [1893] A.C. 351, H.L. In FRENCH and BELGIAN case law (for France see Cass.com. 7 January 1969, JCP 1969.II.16121) the same result is reached by application of the common intention test; similarly the DUTCH case law, see Asser-Hartkamp, Verbintenissenrecht II, no. 287. In ITALY the rule is formulated in CC art. 1342 in a section on “Agreement of the parties”; this is an imperative rule and not a presumption left to the appreciation of the judge (Cass. 5 April 1990, no. 2863, Foro it. Rep., Contratto in genere, no. 240). [page 295]

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COMMENT AND NOTES: PECL Article 5:105: Reference to Contract as a Whole

Terms are to be interpreted in the light of the whole contract in which they appear.

Comment

It is reasonable to assume that the parties meant to express themselves coherently. It is thus necessary to interpret the contract as a whole and not to isolate clauses from each other and read them out of context. It must be presumed that the terminology will be coherent; in principle, the same term should not be understood to have different meanings in different parts of the same contract. The contract must be interpreted in a way that gives it basic coherence, so that the clauses do not contradict each other.

There is normally no particular hierarchy between the elements of a contract, save under special circumstances: for example, particular emphasis should be given to any definition of terms or to a preamble which could have been introduced into the contract.

Article 5:105 may also be applied to groups of contracts. For example one can treat a frame-work (master) contract and the various contracts made under it as a whole. By the “whole contract” must be understood the “whole group of contracts”.

Illustration: Miss A, an inexperienced singer, is taken on for six months by B, the manager of a cabaret on the Champs-Elysées. The contract contains a clause authorising the manager to end the contract in the first three days of the singer starting work. Another clause allows either party to determine the contract on payment of a significant sum of money as a penalty. Miss A is fired after one day and claims payment of the sum. Her claim should fail because the penalty clause is to be read in the light of the clause allowing determination within three days, which is a trial period.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

This rule is stated in a number of texts: ITALIAN CC art. 1363; FRENCH, BELGIAN and LUXEMBOURG CCs art. 1161; SPANISH CC art. 1285; UNIDROIT art. 4.4. In PORTUGAL it is found in Law 446/1985 of 15 October 1985 and has been extended to all contracts. It is also found in NORDIC law: Swedish Supreme Court, NJA 1990, 24; for Denmark, see Lynge Andersen, 357 ff. The rule is also found in English law, see Chitty §§ 12-053 - 12-059 and refs. there, SCOTTISH, GERMAN, AUSTRIAN and GREEK law.

The illustration is inspired by French Cass. soc. 7 March 1973, B 73 V no. 145. [page 296]

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COMMENT AND NOTES: PECL Article 5:106: Terms to Be Given Effect

An interpretation which renders the terms of the contract lawful, or effective, is to be preferred to one which would not.

Comment

The parties must be treated as sensible persons who intended that their contract should be fully effective (magis ut res valeat quam pereat). Thus if a clause is ambiguous and could be interpreted in one way which would make it invalid or another which would make it valid, the latter interpretation should prevail (favor negotii).

Illustration 1: Architect A assigns his practice to architect B and undertakes not to exercise his profession for five years “in the region”. If region is interpreted to mean the administrative region which contains several departments, the clause would be invalid as too wide. If region is interpreted in a less technical and more reasonable sense (a reasonable area) the clause will be valid and fully effective.

For identical reasons, if one of two possible interpretations would lead to an absurd result the other must be taken.

Illustration 2: A grants B a licence to produce pipes by a patented method. B must pay a royalty of 500 BF per 100 metres if annual production is less than 500,000 metres and 300 BF if it is over 500,000 metres. To calculate the royalties on 600,000 metres, one can interpret the clause as fixing the price at 500 BF/m for the first 500,000 m and 300 BF/m for the remainder, or the rate of 300 BF/m could be applied to the whole quantity. The latter interpretation is not valid because it leads to an absurd result: the royalty for a production of 600,000 m. would be less than that for 400,000 m. Notes [Match -up with Continental and Common Law domestic rules, doctrine and jurisprudence]

The rule in favour of full effect is to be found in several codes: FRENCH, BELGIAN and LUXEMBOURG CCs art. 1157; ITALIAN CC art. 1367; SPANISH CC art. 1284. See also indirectly PORTUGUESE CC art. 237. It is adopted by UNIDROIT art. 4.5. It is recognised by case law in GERMANY, BGH 3 March 1971, NJW 1971, 1035; AUSTRIA, OGH 4 December 1985, JBl 1987, 378; ENGLAND, e.g. NV Handel Smits v. English Exporters Ltd [1955] 2 Lloyd’s Rep. 317, C.A.; Chitty § 12-064. IRISH and SCOTS law are similar. For DANISH law see Lynge Andersen 377 ff.; for FINLAND, Hoppu 47; for SWEDEN, Ramberg, Avtalsrätt 178.

It should be noted that for the purposes of Article 7(2), collective action, of the Directive on Unfair Terms in Consumer Contracts of 5 April 1993 (93/13/EEC), the interpretation in favour of full effect is not applied because in this case the article intends to strike down abusive clauses.

Illustration 2 is taken from Restatement of Contracts 2d, § 206, comment (c). [page 297]

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COMMENT AND NOTES: PECL Article 5:107: Linguistic Discrepancies

Where a contract is drawn up in two or more language versions none of which is stated to be authoritative, there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up.

Comment

International contracts are sometimes drafted in more than one language and there may be divergences between the different linguistic versions. The parties may provide a solution by stating that one version is to be authoritative, in which case that version will prevail. If nothing is provided and it is not possible to eliminate the divergences by other means (e.g. by correcting obvious errors of translation in one version), Article 5:107 gives a reasonable solution by providing that the original version shall be treated as the authoritative one, since it is likely to express best the common intention of the parties.

Illustration: A French business and a German business make a contract in French and in German. The contract contains an arbitration clause. The French text provides that the arbitrator "s'inspire" from the rules of the ICC, i.e. he may follow them. The German version provides "er folgt", i.e. the arbitrator must follow the ICC rules. The French version was the original and this is the one which should prevail.

If the contract provides that the different versions shall be equally authoritative, the will of the parties must be respected by observing this and resorting to the general rules of interpretation. It is not possible simply to give precedence to one version. It must be decided which version corresponds better to the common intention of the parties or, if this cannot be established, what reasonable persons would understand.

It is important to read this provision with the contra proferentem rule of Article 5:103 if the original version was drafted by one of the parties.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

The nearest provision to Article 5:107 is UNIDROIT art. 4.7, which deals only with discrepancies between versions which are stated to be equally authoritative. The national laws do not appear to contain any rules on the points covered by the Article applying specifically to contracts. [page 298]

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© Pace Law School Institute of International Commercial Law - Last updated January 5, 2007
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