When a contract has many interpretations: Perspectives from warehouse lease disputes

In trade disputes, what gives rise to disagreements is not always one party failing to deliver on its commitments. In many cases, the parties invoke the contract itself to protect themselves, but read the same clause in completely different interpretations. The difference in interpretation not only determines when the contract ends, but also entails many other unpredictable consequences.

The difference in interpretation not only determines when the contract ends, but also entails many other unpredictable consequences.

One year or five years?

Appellate Judgment No. 26/2024/KDTM-PT[1] dated 9-9-2024 of the People's Court of Da Nang City on disputes over property lease contracts. Accordingly, in 2020, Company A signed a contract to lease warehouses, yards, offices and auxiliary items of Company B in Da Nang. The contract states that the validity period is 12 months, from 1-12-2020 to the end of 30-11-2021. However, immediately after this regulation, the contract states that at the end of the above period, the two parties will sign an addendum to extend each year for the next four years, with the adjusted rent increasing by 6% per year.

After the first year, the two parties signed an addendum to extend for one more year, until November 30, 2022. About a month before the appendix expired, Company A announced that it would not continue to lease and proposed to hand over the warehouse. According to Company A's understanding, the lease term is only one year; The extension depends on the new agreement of the two sides. Therefore, not signing an addendum for the next year is merely to let the contract expire, not to unilaterally terminate it before the deadline.

Company B sees it differently. According to the lessor, the two parties have agreed on a five-year continuous lease program, in which the term of each year is established by an appendix to adjust the rental price. The termination of the lease by Company A after the second year is therefore considered to be the termination of the contract ahead of time. By giving only 30 days' notice instead of six months as stipulated in the contract, Company A was found to have breached the notice obligation and lost the right to request a refund of the deposit.

Both interpretations are based on the provisions in the Contract. The phrase "the validity period is 12 months" supports the lessee's argument. Meanwhile, the commitment to "sign an addendum to renew each year for the next four years", along with clauses that mention that the contract has been in place for a full five years, reinforce the lessor's position.

This is a typical situation where dispute resolution cannot stop at reading a sentence alone.

Two levels of trial, two ways of looking at the same contract

The court of first instance accepted the request of Company A. Accordingly, the contract was determined to have expired after the one-year extension period; Company A is not considered to be unilaterally terminated against the agreement. Company B was forced to repay VND 1,116,960,000 as a deposit and VND 158,516,515 in late payment interest. However, the appellate level reversed the result.

The appellate trial panel did not separate the clause stipulating the 12-month validity period, but placed it in relation to the entire contractual structure. Accordingly, the agreement to renew each year for the next four years is not only a possibility for the parties to consider after each year, but also reflects the commitment to implement the lease relationship for a total period of five years.

The court also paid attention to other provisions. The contract stipulates that Company A is given priority to continue leasing after the contract has been performed for a full five years. Another clause stipulates that in case the contract has been performed for five years but the parties do not renew it, the termination is considered not at fault. These regulations are difficult to reasonably explain if the commitment period is actually limited to each independent year. From there, the appellate level concluded that Company A had arbitrarily terminated the contract ahead of time, and at the same time violated the obligation to notify six months in advance. According to the terms of the consequences of termination due to the lessee's fault, Company A loses the right to reclaim the deposit. Since Company B has no counterclaim for penalties or other compensation, the Court does not further consider the damages presented by the lessor. Company A's request to recover the deposit and interest was therefore rejected.

The difference between the two levels of adjudication reveals a noteworthy fact: the same document, the outcome of the settlement can vary significantly depending on the method of interpretation chosen.

It is not possible to explain the contract in an individual sentence

The 2015 Civil Code in Article 404 sets out the principle that when a clause can be interpreted in multiple senses, the interpretation must be based on the common will of the parties when entering into it. The content of the contract must be considered in relation to the entire document, the purpose of the transaction, the process of establishing and performing the contract and the customs between the parties.

Although the appellate judgment does not directly invoke Article 404 of the Civil Code in the decision, the method used by the Court is essentially the method of interpreting the contract as a whole. Instead of just looking at the 12-month term, the Court contrasted this provision with the four-year extension mechanism, the way the rent is adjusted, the termination conditions and the right to lease priority after five years.

That approach has a basis. A contract is a unified whole, not a collection of discrete words. If a provision is interpreted in a way that renders the rest of the provisions meaningless or contradictory, that interpretation should be reconsidered.

In this case, if each annex depends entirely on the parties' right to free choice after each year, it becomes difficult to explain that the contract prescribes the obligation to sign the addendum for the next four years and establishes the price mechanism for the entire period. Conversely, if the deadline has been fixed for five years, it is also confusing to record the initial validity period of only 12 months and continue to require the signing of an annual addendum.

The problem is not that one party misreads an obvious sentence. The problem lies in the very drafting technique that creates two layers of deadlines: the validity period of the contract and the economic term for which the parties are expected to cooperate. When these two layers of deadlines are not transparently distinguished, the dispute is almost already pre-embedded in the written agreement signed by the two parties.

Business intention is not necessarily a legal obligation

One point to distinguish is the gap between the "cooperation plan" and the "mandatory commitment".

In many warehouse leases, factories or premises, the lessor has to spend significant investment costs to renovate the property according to the tenant's own needs. Rents are usually calculated on a payback period of three to five years. Thus, the contract can be built on the commercial assumption that the lessee will remain in operation for a sufficiently long time.

However, a business assumption only becomes a legal obligation when expressed in sufficiently clear language. The fact that one party invests based on a five-year expectation does not automatically prove that the other party has committed to the full five-year lease. On the contrary, the contract dividing the term into years does not automatically give the lessee the right to withdraw after each year if the document also expresses an obligation to renew continuously.

In the case, Company A cited the negotiation process to argue that the original draft stated a five-year term, which was later amended to 12 months to suit the business needs of each period. Company B argues that the amendment only changes the way it is implemented, and the total lease period is still five years. It is the same history of negotiations that is used by the two sides to prove the two conflicting wills.

That shows that the negotiation document is only really valuable when it clearly reflects what content has been removed, what content has been retained, and the reasons for the change. An email chain that lacks a final conclusion can clarify the contract, but it can also open up a new layer of debate.

In this case, that gap becomes the focus and the most important point, determining the consequences of the entire dispute.

The act of performing the contract is also evidence

After the first year, the two parties signed an extension for the second year and adjusted the rent by 6%. Company A believes that this behavior forms a commercial habit: each year it will only continue to lease if both parties sign a new appendix. Company B considers this to be the implementation of the agreed five-year roadmap.

The act of performing the contract therefore does not speak for itself of legal significance. It must be read with the text content and the circumstances of the transaction. The signing of an annual addendum may be a condition for the incurrence of a new lease term. But it can also just be the procedure of confirming the price and duration of each phase in a long-term commitment that already exists. To avoid disputes, the contract must clearly state what consequences failure to sign the addendum will entail: the contract is automatically terminated, continues under the old conditions or is considered a breach of the renewal obligation.

In this case, that gap becomes the focus and the most important point, determining the consequences of the entire dispute.

Deposits are not only for securing payment

The deposit of more than 1.1 billion VND is a direct financial consequence of the interpretation of the contract term. If the contract expires on 30-11-2022, Company A has the right in principle to request a refund of the deposit after completing the handover obligation. If this is an early termination due to the lessee's fault, a waiver clause will apply.

Thus, the dispute over the deposit does not actually start from the deposit clause. It starts with an understanding of the lease term, the obligation to renew, and the right to terminate. This is also something that businesses often ignore. In many contracts, the deposit is stipulated by a brief sentence that the lessee will "lose the deposit if breached". But what is a violation, which violation leads to the loss of the entire deposit and whether the lessor is simultaneously required to pay fines for violations and compensation for damages is not fully regulated.

The appellate level in the case argued that Company A not only lost the right to reclaim the deposit but also may be subject to other legal liabilities under the contract. However, because Company B did not make a counterclaim, the Court did not settle these amounts. That detail shows that an interest, even if it has been recognized by the contract, is not automatically considered by the Court if the party with the right does not make an appropriate procedural request.

The lesson is not only in the sentence

This dispute should not be viewed simply as a warning that the contract must be clearly drafted. The deeper lesson is that businesses must accurately translate the economic structure of the transaction into a legal structure.

If the goal is a mandatory five-year lease, the contract should specify the lease term as five years; Annual appendices are only used to record prices, areas or operating conditions. If the goal is only to lease each year, the contract needs to confirm that the renewal is entirely dependent on the new agreement and that neither party is obliged to sign it again. If the lessor has to invest based on the payback period, the mechanism for reimbursing the undepreciated investment costs needs to be tailor-made, rather than relying entirely on a loss clause.

The contract also needs to clearly distinguish between expiration, non-renewal and unilateral termination before the expiration date. These three events are of different nature but are often used interchangeably. Each case must be associated with its own notification deadline, handover procedures and financial consequences.

The appellate judgment shows that when the contractual language is not clear enough, the Court will not necessarily choose a favorable interpretation for the party adhering to a specific sentence. The court can reconstruct the common will from the entire document, transaction history, economic purpose, and performance behavior. That helps protect the nature of the agreement, but also increases the unpredictability of the dispute. An inaccurate wording can make the legal fate of the transaction depend on how the adjudicator connects many facts after a conflict has arisen.