Most contractual disputes do not concern whether an agreement exists, but rather what the agreement actually means. Even well-drafted contracts can give rise to disagreements if the wording is unclear, incomplete, or fails to regulate a situation that later arises.
In such cases, the contract must be interpreted. The purpose of contract interpretation is to determine the rights and obligations that the parties have actually undertaken. In this article, we take a closer look at the key principles governing the interpretation and supplementation of contracts under Norwegian law.
When does a contract need to be interpreted?
The need for contract interpretation arises when there is uncertainty about what the parties have agreed upon. This may occur because the agreement contains ambiguous wording, conflicting provisions, or because the parties have different understandings of the meaning of particular terms.
When courts interpret a contract, they do not look solely at the contractual text itself. The circumstances surrounding the conclusion of the agreement may also be relevant. Such circumstances are commonly referred to as interpretative factors or interpretative data.
Examples of relevant interpretative factors include:
- the wording of the contract,
- the negotiations between the parties,
- correspondence exchanged prior to the conclusion of the agreement,
- the parties' subsequent conduct,
- industry practice and commercial customs.
The rules governing contract interpretation have largely been developed through case law and legal doctrine.
The parties’ common understanding is the starting point
The primary objective of contract interpretation is to identify the common understanding that existed between the parties when the agreement was concluded.
If it can be established that both parties shared the same understanding of what the agreement was intended to mean, that understanding will generally prevail. This applies even where the wording of the contract, viewed in isolation, could suggest a different interpretation.
The reason is that contract law seeks to give effect to what the parties actually intended to agree upon.
Objective interpretation where no common understanding exists
In practice, it is not always possible to establish a common understanding between the parties. For example, situations may arise where:
- one party has misunderstood a term,
- the parties have attached different meanings to the same wording,
- an issue has deliberately been left unresolved,
- or neither party considered the issue at the time the agreement was concluded.
In such circumstances, the contract must be interpreted objectively. Objective interpretation means that the starting point is how the wording of the contract would ordinarily be understood according to normal language usage. As a general rule, a party cannot rely on a special or subjective meaning of a term if the other party was unaware of that interpretation.
Accordingly, the wording of the contract will often be decisive where there is insufficient evidence of a common understanding between the parties.
When must a contract be supplemented?
Not all contracts regulate every issue that may arise during the contractual relationship. When an agreement is silent on a particular matter, there may be a need to supplement the contract.
Supplementation involves filling gaps in the agreement by applying legal rules or other norms governing the contractual relationship. Typical examples include issues concerning:
- time of delivery,
- place of delivery,
- methods of payment,
- notice and complaint periods,
- transfer of risk.
Where mandatory legal rules apply, they will prevail over conflicting contractual provisions. By contrast, where the law contains non-mandatory (default) rules, those rules may supplement the agreement where the parties have not agreed otherwise.
The importance of industry practice and commercial custom
In many commercial relationships, established practices exist that parties are expected to know and understand. Such practices are often referred to as commercial customs or trade usage.
If a particular practice is sufficiently widespread and firmly established within an industry, it may serve a function similar to that of default legal rules. Such customs may therefore supplement or influence the interpretation of a contract, unless it is clear that the parties intended a different solution.
For businesses, it is therefore important to be aware of the norms and expectations that apply within the relevant industry.
Important rules of interpretation in Norwegian contract law
Norwegian courts have developed a number of interpretative principles that are applied when contractual wording is unclear.
The contra proferentem rule
One important principle is the contra proferentem rule. Under this rule, the party relying on a particularly advantageous interpretation of a contract must ensure that such an interpretation is clearly reflected in the contractual wording.
If the wording is ambiguous, the uncertainty will often be resolved against the party seeking to rely on the more favorable interpretation.
This principle is particularly important in standard form contracts and agreements that have largely been drafted by one party.
Interpretation against the drafting party
Closely related to the contra proferentem rule is the principle that a contract will often be interpreted against the party who drafted it. The rationale is that the drafting party generally had the best opportunity to express itself clearly and avoid ambiguity.
Consequently, where uncertainty arises from unclear wording, it will often operate to the detriment of the contract's author.
Interpretation against the more sophisticated party
In certain situations, courts may also take into account which party possesses greater expertise, professional knowledge, or experience within the relevant field. The reasoning is that the more sophisticated party is generally in the best position to protect its own interests during the drafting and negotiation process.
However, this principle must be applied with caution. Norwegian law does not seek to penalize expertise, but rather to reach a reasonable outcome based on the circumstances of the particular case.
Individually negotiated terms prevail over standard terms
Where a conflict arises between standard terms and provisions that have been specifically negotiated between the parties, the individually negotiated provisions will generally prevail. The reason is that such provisions are usually the clearest expression of what the parties actually intended to agree upon.
This means, among other things, that handwritten amendments or specifically inserted clauses in a standard contract will normally take precedence over pre-printed standard wording.
Specific provisions prevail over general provisions
Another fundamental principle of interpretation is that specific provisions prevail over general provisions. Where a contract contains both a general clause and a more specific provision dealing with the same issue, the specific provision will normally take precedence.
The rationale is that the more specific provision is generally assumed to reflect a more carefully considered regulation of the issue in question.
Conclusion
The interpretation and supplementation of contracts are among the most practical and important issues in contract law. Even relatively detailed agreements may give rise to uncertainty, and the outcome of a dispute will often depend on how the contract is interpreted.
To reduce the risk of disputes, contracts should be drafted as clearly and precisely as possible. At the same time, it is important to recognize that courts will not focus solely on the contractual wording, but will also consider negotiations, the parties' assumptions, industry practices, and other relevant circumstances when determining the meaning of an agreement.
