Date of publication: 16 October 2024
Vyacheslav Sytyi, Attorney at Law, Counsel
Source: Yurydycna Gazeta
The contract serves as a universal regulator of private relations, and disputes arising from contracts are among the most common cases heard by courts.
A frequent cause of such disputes is the ambiguous wording of contract terms, leading to differing interpretations by the parties involved.
Interpreting a contract involves clarifying its content when the text alone does not clearly express the true intent of the parties. This need arises when the parties have different understandings of the contract. This is particularly when the literal meaning of words, concepts, or terms is unclear or ambiguous.
In accordance with Article 637 of the Civil Code of Ukraine, contract terms are interpreted in line with Article 213 of the same Code. When interpreting a contract, standard terms (standard contracts) may also be considered, even if the contract itself does not explicitly reference them.
Approaches to contract terms interpretation
Parts 3 and 4 of Article 213 of the Civil Code of Ukraine outline the general methods used in contract interpretation. These methods are applied at three levels.
The first level of interpretation involves understanding the meanings of words and concepts used consistently throughout the contract. In addition, it involves understanding the meanings of terms generally accepted in the relevant relations field.
The second level of interpretation (if the first approach does not clarify the content of the contract) involves comparing different sections of the contract with each other, as well as with the overall content of the agreement. This also includes considering the intentions of the parties, as expressed at the time of entering into the contract and during its execution.
The third level of interpretation (after the first two methods fail) involves considering the following factors:
a) the purpose of the transaction;
b) the content of preliminary negotiations;
c) the established practice of relations between the parties (if they have previously been in legal relations);
d) customary business practices;
e) the subsequent conduct of the parties;
f) the text of any relevant standard contract;
g) other circumstances of significant importance.
Therefore, the content of the contract or any part of it is interpreted in accordance with the rules set out in Article 213 of the Civil Code of Ukraine.
The European Court of Human Rights has noted that national courts must select appropriate methods for such interpretation, which typically include legislative acts, established judicial practice, scholarly opinions, and other relevant sources (Volovik v. Ukraine, No. 15123/03, §45, ECHR, December 6, 2007).
Supreme Court’s position
As noted by the Supreme Court, the basis for a court’s interpretation of a contract is the existence of a dispute between the parties concerning its content. In addition, there is ambiguity or uncertainty about the literal meaning of the words, concepts, and terms within the contract or part of it. This ambiguity makes it difficult to ascertain the true content of the agreement or the intent of the parties involved. Importantly, this interpretation does not create new terms, but clarifies existing ones.
In this context, the Supreme Court continues, the court, upon the request of one or both parties, may issue a ruling to interpret the contract’s content without altering its terms.
At the same time, considering that the purpose of interpreting a contract is to clarify its content or specific parts, which define the rights and obligations of the parties, interpretation should be seen as a means of enabling the parties to fulfil the contract’s terms. Therefore, contract interpretation can occur even before the parties implement its conditions. In light of this, the content of the contract or its parts may be interpreted in the manner prescribed by Article 213 of the Civil Code of Ukraine. In other words, interpretation involves determining the contract’s meaning in line with the parties’ intent at its conclusion. This involves resolving ambiguities and contradictions in its provisions. When addressing contract interpretation, courts must first establish the existence of a dispute between the parties, and then verify and determine whether the plaintiff’s rights have been violated and whether the circumstances cited by the plaintiff provide sufficient grounds for applying Article 213 of the Civil Code of Ukraine.
In my practice, there have been instances where a single misplaced comma in a contract created ambiguity in its terms. This prompted the court to apply the contra proferentem rule, which negatively impacted my client’s legal position. In other cases, however, the court accepted our arguments and rejected the opposing party’s request for contract interpretation, as the provisions, clearly and unambiguously drafted by the client, required no further clarification.
Contra proferentem rule
If Article 213 of the Civil Code of Ukraine do not allow the determination of the true meaning of a contract term, courts apply the contra proferentem rule.
Contra proferentem (Latin: verba chartarum fortius accipiuntur contra proferentem) means that the words of a contract are interpreted against the party that drafted them. The party thatincludesd a particular term in the contract assumes the risk associated with any ambiguity in that term. This rule applies not only when a party independently drafts a provision, but also when it uses a standard term developed by a third party. Furthermore, this rule is applicable not only to terms that “were not individually agreed upon” but also to terms that, although negotiated, were included in the contract under the predominant influence of one of the parties.
Contra proferentem is intended to disadvantage the party responsible for the ambiguity, as that party created the uncertainty. This rule aims to protect the reasonable expectations of the party that had no influence over the choice of language or terms when the contract was concluded. Contra proferentem applies when it is evident that only one party participated in selecting the wording or drafting specific conditions of the contract. This is even when the party uses a standard term developed by a third party.
In cases of ambiguity, the interpretation of the contract should favor the counterparty of the party that drafted the contract or proposed the wording of the disputed condition. It is presumed, unless proven otherwise, that the drafting party is a professional in the relevant field, possessing the necessary specialized knowledge.
What to pay attention to?
Many contractual disputes arise due to a party’s improper fulfillment of its obligations. It is essential that the terms of the contract are drafted clearly and transparently for all parties involved. When the terms are clear, it reduces the likelihood of parties attempting to manipulate or interpret them in a way that benefits their own position in any given situation.
When drafting a contract, it is crucial to avoid vague or ambiguous language, as this can later be exploited by the opposing party to serve their own interests.
During the preparation stage, it is essential to ensure that all parties fully understand the content of the contract. Moreover, it is important to confirm that all parties have a shared understanding of its terms. This can be achieved, for example, by exchanging emails between the counterparties to clarify any potential ambiguities.
Well-drafted contract terms serve as a safeguard against potential conflicts and facilitate the successful resolution of disputes, should they arise.
