First Principles of Business Law

2. Interpreting the terms of a contract

2.1. Why 'interpretation' of a contract may be necessary

The agreed terms of a contract will be expressed in words.  This is so regardless of whether the terms of the contract are written down or agreed to only orally. It is the words used by the parties that convey the meaning of what they promised each other.

Unfortunately, words can often be understood in more than one way. This is why, even when the parties have expressed, in particular words, what they have agreed to give or do, they might still argue over what these words mean, or were intended to mean.

Deciding what the terms of a contract mean is called 'interpretation' or 'construction' of the contract. On the following pages, one example is used four times to illustrate what sort of arguments might be made when construing a contract, and what rules are applied to resolve disputes over the meaning of the terms of a contract.