Application of the “Commercial Common Sense Test” in Contract Disputes
When it comes to commercial contract disputes, there is a lot that a judge will consider before making any determinations. One factor a judge will consider is whether or not the terms of the contract are clear and unambiguous.
Are the Terms Clear and UnambiguousWhile this might seem obvious, many contracts contain provisions that read in such a way as to mean something entirely different than what the contract's author intended it to mean. The judge might misinterpret the provision and make a ruling based on his or her own individual interpretation.
At Garcia & Gurney, ALC, our contract attorneys recommend outlining the reason that parties are agreeing to certain terms if the terms are unusual in any way. This will prevent any misinterpretation on the judge's part and demonstrate to the judge that there was no ambiguity when the contract was signed.
Applying the Commercial Common Sense TestWhen it comes to contract disputes, the court's job is to review the terms of the contract and determine what was meant by the words used. What this means is that the courts should establish what a reasonable person, with the background information available to the parties of the contract, would have understood the words to mean. If, even after using this approach, the courts determine that the terms are still ambiguous, the "commercial common sense test" maybe applied.
The steps of the test are as follows:
1) Where the contract terms are clear and unambiguous, they must have been included and agreed to for a reason. Therefore, even if they go against commercial common sense, they will continue to apply.
2) If there are two possible interpretations of a provision, the court is bound to rule in favor of the one that is consistent with commercial common sense.
3) The commercial common sense test can be applied even if either interpretation does not necessarily produce an irrational result.
The commercial common sense test exists to give weight to the interpretation that is consistent with business common sense, despite the niceties of the language used in the contract.