A step in the right direction - Courts are going further to establish intention when interpreting contracts

10 Nov 2014 3 min read Dispute Resolution Matters Article

"The goal of a legal draftsman is, by the nature of his [or her] craft, utilitarian rather than literary, but legal prose should be polished as diligently and refined as fully as though the goal were solely aesthetic." These words were written by Sidney F Parham Jnr in 1966, but the subject of good draftsmanship remains a pressing issue for attorneys and their clients. The practical importance of it was illustrated by a recent decision of the Supreme Court of Appeal (SCA).

In Air Traffic and Navigation Services v Esterhuizen (668/2013) [2014] ZASCA 138 (25 September 2014), the appellant (ATNS) had introduced an incentive scheme to attempt to retain its highly trained air traffic controllers. Esterhuizen had elected to participate in the scheme, which stipulated that he would receive monthly retention payments in addition to his normal remuneration.

He agreed to remain in the ATNS’s employ for a fixed term and his employment contract was amended to reflect the terms of the agreement. More particularly, the notice period would be substituted with a clause preventing the termination of employment by either party during the fixed term. The agreement also provided for consequences that would follow upon a breach of its terms.

When Esterhuizen resigned, ATNS considered it a breach of the agreement and claimed R427,843, being the monthly incentive amounts it would have paid to Esterhuizen, but for his resignation.

The interpretation of the incentive agreement became the issue in dispute. The court noted that the intention of the parties, as it emerges from the language they have used, is the determining factor in problems of contractual interpretation. The nature, character and purpose of the contract must be ascertained from the language used, read in its contextual setting and in the light of any admissible evidence. The court considered the clauses of the contract and found that the agreement was poorly drafted and contained conflicting provisions. However, after an examination of the contract as a whole and having regard to its purpose, the SCA held that the agreement did yield a clear meaning.

Since the High Court's interpretation of the contract had rendered certain clauses meaningless, the SCA favoured an interpretation that gave greater effect to the contract's perceived purpose. Consequently, Esterhuizen was ordered to pay the full R427,843.

This decision follows on from the earlier Bothma-Batho Transport decision where Wallis JA pointed out that "[a] sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document".

These decisions are a crisp reminder that contracts should be clear regarding the intention of the parties. While it is helpful that courts will consider background circumstances to establish what the intention was, it is a double edged sword as parties can no longer just stand by the plain wording of the contract. Where necessary, the court will have regard to the parties' negotiations, drafts or preliminary discussions in order to interpret unclear provisions of the contract and the results of such an exercise may not necessarily always be desirable.

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