What are the two approaches used by courts for contract interpretation?

In contract interpretation within Canadian law, the two primary approaches used by courts are the literal and contextual approaches.

The literal approach focuses on the common meaning of the words used in the contract, requiring the court to interpret the terms as they would ordinarily be understood. The primary objective here is to ascertain the clear, apparent meaning of the words, and the court does not typically look beyond the text of the contract itself unless there is ambiguity or uncertainty.

On the other hand, the contextual approach involves looking at the broader context in which the contract was formed, including the intentions of the parties involved, the circumstances surrounding the agreement, and any relevant background information. This approach allows courts to consider extrinsic evidence when determining the meaning of the terms of the contract, especially in cases where the literal meaning may not fully capture the parties’ true intentions.

The focus on these two methods (literal and contextual) in contract interpretation underscores their significance in understanding and enforcing contractual agreements effectively. By utilizing both approaches, courts can ensure more equitable outcomes that align with the intentions of the parties and the practical realities of the situation.