CONSTRUCTION OF CONTRACTUAL TERMS
‘There’s a sign on the wall. But she wants to be sure
’Cause you know sometimes words have two meanings’.
- Led Zeppelin, Stairway to Heaven
(from the LP Led Zeppelin IV, 1971)
‘Words are chameleons, which reflect
the color of their environment.’
Learned Hand J,
Commissioner v National Carbide Corp, 167 F 2d 304, 306 (1948)
INTRODUCTION
This paper will examine the principles used by courts in interpreting the words used
in a contract. This is usually referred to as the construction of terms of the contract.
The principles of construction involve two things: (i) the meaning of the terms of the
contract; and (ii) the legal effects or significance of the document’s terms.1
This paper will examine the principles of construction of terms of a contract in
relation to the meaning of the terms of a contract. The importance of this topic
cannot be overstated. A large proportion of cases in contract law have as a
component - often the major component - the construction of the terms of the
contract. The conclusion reached by the court on the construction issue usually has
significant consequences in relation to the outcome of the case before the court. It
can be noted at this stage that the principles of construction of contractual terms
apply with equal force to contracts with governments and2 deeds.3 They also apply
to trust documents,4 one of the reasons for this being that ‘[t]he contractual
relationship provides one of the most common bases for the establishment or
implication and for the definition of a trust’.5
In determining the meaning of the words used in a contract, a significant source of
the problems faced by the courts is the richness of the English language. This point
was well made by Lord Simon of Glaisdale in Stock v Frank Jones (Tipton) Ltd6 where
his Lordship said:
1
Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78.
Kidd v The State of Western Australia [2014] WASC 99 at [120].
3
Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 240 CLR 45 at 52; 186 ALR
289 at 292-3; Commissioner of State Revenue (Vic) v Snowy Hydro Ltd [2012] VSCA 145 at [83]; The
Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd (2015) 298 FLR 147 at
163; 323 ALR 570 225 at 585; Mercanti v Mercanti [2016] WASCA 206 at [72].
4
Byrnes v Kendle (2011) 243 CLR 253 at 286; 279 ALR 212 at 238.
5
Gosper v Sawyer (1985) 160 CLR 548 at 568-9; 58 ALR 13 at 26.
6
[1978] 1 All ER 948 at 953.
2
Words and phrases of the English language have an extraordinary range of meaning. This
has been a rich resource in English poetry (which makes fruitful use of the resonances,
overtones and ambiguities) but it has a concomitant disadvantage in English law (which
seeks unambiguous precision, with the aim that every citizen shall know as exactly as
possible, where he stands under the law).
CONSTRUCTION OF TERMS IN PRACTICE
Justice Kenneth Martin,7 based upon his experiences as a Supreme Court judge
offers the following reflections that are relevant to the issue of construction of
contract:
As a trial judge running a busy commercial list which includes many contractual
interpretation cases, I have to say that I sometimes detect a rather clear felling approach
by advisers who, in embarking on pre-trial discovery quests, seek supposedly helpful
documents relating to surrounding circumstances. These pre-trial quests are usually
pursued on the basis that a hopeful rummage through every employee’s corporate email
box, or in metadata repositories, may possibly bring to light a document revealing a
mutually known circumstance prior to contracting that may, somehow, howsoever slightly,
advance the construction argument they are seeking to run over the disputed meaning of
words in a document.
Frequently that interlocutory searcher, like Christopher Columbus, seems not to know
what they hope to find, how they will get there, or indeed what they have found when
they find it. But a trawling exercise, however long, costly or burdensome, must, it is put,
always be undertaken. At the end of the day, someone is paying for all this and a real
question arises as to whether such expense is warranted.
After the dust of a search has settled in the wake of these expensive quests there is, I
humbly suggest, an essential need for the party who wants to argue there is a significant
mutually known surrounding fact(s) or circumstance(s) that existed at the time of
contracting, to do at least two things. First, it should explicitly plead out the fact to openly
identify it. It needs to do this so the opposition can be both:
(i) apprised of what that alleged fact or circumstance is before trial;
(ii) have a fair opportunity to indicate whether or not it accepts the existence of the
fact or circumstance.
Identification can avoid diverting excursions into side issues over facts which, at the end of
the day, may either be uncontested or even accepted.
The second requirement is for the party advancing a supposedly relevant surrounding fact
or circumstance, having identified it, to then go on to clearly explain at some point in the
trial process how and why the fact or circumstance assists in advancing its construction
position.
In my experience, the second requirement, which I call the ‘causative impact’ of the
supposedly helpful surrounding fact or circumstance, is usually either globally glossed
over, or just ignored. A typical glossing scenario as to causative impact is like an
overflowing potpourri of multiple diverse alleged surrounding facts and circumstances.
These are then addressed in a closing submission delivered in a style akin to the advocacy
7
Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the
Ambiguity Gateway’ (2013) 37 Australian Bar Review 118, pp 138-9.
of shabby solicitor Dennis Denuto during his desperate, now infamous invocation of ‘the
Vibe’ in the movie The Castle.
Each different surrounding fact may indeed carry some unique causative impact in the
interpolation process that should be explained. But I would humbly both suggest and
request that the causative impact of each background fact relied on be clearly spelled out.
THE IMPORTANCE OF INTENTION
In ascertaining the meaning of the terms of a contract the court is primarily
concerned with objectively determining the intention of the parties. 8 This
fundamental point was reaffirmed in Byrnes v Kendle9 where Heydon and Crennan
JJ said:
Contractual construction depends on finding the meaning of the language of the contract
– the intention which the parties expressed, not the subjective intentions which they may
have had, but did not express. A contract means what a reasonable person having all the
background knowledge of the ‘surrounding circumstances’ available to the parties would
have understood them to be using the language in the contract to mean.
The basic approach in determining the intention of the parties was set out in
Chartbrook Ltd v Persimmon Homes Ltd10 where Lord Hoffmann said:
When the language used in an instrument gives rise to difficulties of construction, the
process of interpretation does not require one to formulate some alternative form of
words which approximates as closely as possible to that of the parties. It is to decide what
a reasonable person would have understood the parties to have meant by using the
language which they did. The fact that the court might have to express that meaning in
language quite different from that used by the parties … is no reason for not giving effect
to what they appear to have meant.
Thus, as was stated by Jonathan Sumption QC in submissions in Wasa International
Insurance Co Ltd v Lexington Insurance Co, 11 ‘[a]ny judicial interpretation of a
contract involves retrospectively attaching to it a meaning which hypothetical
persons in the position of the parties are assumed to have intended at the time
when it was made, but which may have been unclear or unknown to those particular
parties’.
In this process of construction it is not the role of the court to improve the contract.
Thus, in Arnold v Britton12 Lord Hodge said:
The [court] is not there to re-write the parties' agreement because it was unwise to
gamble on future economic circumstances in a long term contract or because subsequent
events have shown that the natural meaning of the words has produced a bad bargain for
8
Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973)
129 CLR 99 at 109.
9
(2011) 243 CLR 253 at 284; 279 ALR 212 at 236-7.
10
[2009] 1 AC 1101 at 1113-4; [2009] 4 All ER 677 at 688.
11
[2010] AC 180 at 186 -referred to with approval in HP Mercantile Pty Ltd v Hartnett [2016] NSWCA
342 at [145].
12
[2015] AC 1619 at 1640; [2016] 1 All ER 1 at 18-9.
one side. The question for the court is not whether a reasonable and properly informed
[party] would enter into such an undertaking. That would involve the possibility of rewriting the parties' bargain in the name of commercial good sense.
In relation to words used in a document same word more than once in a carefully
drafted document, a rebuttable presumption arises to the effect that they intended
that the word to mean the same thing throughout the entire document.13 Thus, it
may be that the same words have different meanings, even if in the same
document.14
When construing terms of a contract, a court must have regard to all its words used
to ensure the congruent operation of its various components as a whole. 15 Thus, in
Chapmans Ltd v Australian Stock Exchange Ltd16 Lockhart and Hill JJ said:
It is an elementary proposition that a contract will be read as a whole giving weight to all
clauses of it, where possible, in an endeavour to give effect to the intention of the parties
as reflected in the language which they have used. A court will strain against interpreting a
contract so that a particular clause in it is nugatory or ineffective, particularly if a meaning
can be given to it consonant with other provisions in a contract. Likewise where there are
general provisions in a contract and specific provisions, both will be given effect, the
specific provisions being applicable to the circumstances which fall within them.
To similar effect, in Re Strand Music Hall Co Ltd,17 Lord Romilly said:
The proper mode of construing any written instrument is, to give effect to every part of it,
if this be possible, and not to strike out or nullify one clause in a deed, unless it be
impossible to reconcile it with another and more express clause in the same deed.
Furthermore, in construing contractual terms, a court will seek to adopt a
construction that will preserve the validity of the contract and in that regard will
strive to avoid holding agreements, in particular commercial agreements, void for
uncertainty. 18 Thus, a court should construe a commercial contract ‘fairly and
broadly, without being too astute or subtle in finding defects’. 19
In the process of construction it is clear that no hard and fast rules apply. The
‘construction [of contractual terms] is a composite exercise, neither uncompromisingly
13
Prestcold (Central) Ltd v Minister of Labour [1969] 1 All ER 69 at 75; Dura (Australia) Constructions
Pty Ltd v Hue Boutique Living Pty Ltd (2013) 41 VR 636 at 646; Healthcare Australia Pty Ltd v
Randstad Pty Ltd [2016] NSWSC 1407 at [19].
14
Robbins v Federal Commissioner of Taxation (1974) 129 CLR 332 at 339; Fitness First Australia Pty
Ltd v Fenshaw Pty Ltd [2016] NSWCA 207 at [43]; HP Mercantile Pty Ltd v Hartnett [2016] NSWCA
342 at [161].
15
Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529; 214 ALR 410 at 413; Durham v BAI (Run
Off) Ltd (in scheme of arrangement); Re Employers’ Liability Policy ‘Trigger’ Litigation [2012] 3 All ER
1161 at 1176; Mercanti v Mercanti [2016] WASCA 206 at [70]; Black Box Control Pty Ltd v
Terravision [2016] WASCA 219 at [42]; HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [134].
16
(1996) 67 FCR 402 at 411; 137 ALR 433 at 442.
17
(1865) 55 ER 853 at 856.
18
Meehan v Jones (1982) 149 CLR 571 at 589; 42 ALR 463 at 475.
19
Australian Broadcasting Commission v Australasian Performing Rights Association Limited
(1973) 129 CLR 99 at 109.
literal nor unswervingly purposive’,20 although in more recent times there has been a
move away from literal methods of construction towards a more commercial
approach.21
Where technical words or phrases are incorporated into a contract there is a
rebuttable presumption that they are used with that technical meaning in mind. 22
This presumption is not easily displaced. 23 In relation to the presumption, in Phoenix
Commercial Enterprises Pty Ltd v City of Canada Bay Council24 Campbell JA said the
following:
There has long been a principle of construction concerning words or phrases that have a
specialised or technical meaning in the law whereby: ‘[w]hen technical words or phrases
are made use of, the strong presumption is, that the party intended to use them according
to their correct technical meaning’ ... In Sydall v Castings Ltd25 Diplock LJ explained the
principle:
Documents which are intended to give rise to legally enforceable rights and
duties contemplate enforcement by due process of law, which involves their
being interpreted by courts composed of judges, each one of whom has his
personal idiosyncracies of sentiment and upbringing, not to speak of age. Such
documents would fail in their object if the rights and duties which could be
enforced depended on the personal idiosyncracies of the individual judge or
judges on whom the task of construing them chanced to fall. It is to avoid this
that lawyers, whose profession it is to draft and to construe such documents,
have been compelled to evolve an English language, of which the constituent
words and phrases are more precise in their meaning than they are in the
language of Shakespeare or of any of the passengers on the Clapham omnibus
this morning. These words and phrases to which a more precise meaning is so
ascribed are called by lawyers ‘terms of art’, but are in popular parlance known
as ‘legal jargon’. We lawyers must not allow this denigratory description to
obscure the social justification for the use of ‘terms of art’ in legal documents.
It is essential to the effective operation of the rule of law. The phrase ‘legal
jargon’, however, does contain a reminder that non-lawyers are unfamiliar with
the meanings which lawyers attach to particular ‘terms of art’, and that where
a word or phrase which is a ‘term of art’ is used by an author who is not a
lawyer, particularly in a document which he does not anticipate may have to be
construed by a lawyer, he may have meant by it something different from its
meaning when used by a lawyer as a term of art ....
If the document in question is drawn by a lawyer, is manifestly intended to effect a legal
transaction, and uses an expression that is not an expression in common use but that has a
meaning in an area of legal discourse that is relevant to the document in question, that in
itself provides a basis for the reasonable reader concluding that that expression is used in
its special legal sense, unless there are other factors present that show it is not used in
that special legal sense. So understood, the presumption is consistent with the current
20
International Fina Services AG v Katrina Shipping Ltd (The Fina Samco) [1995] 2 Lloyd’s Rep 344 at
350.
21
Sirius International Insurance Company (Publ) v FAI General Insurance Limited [2005] 1 All ER 191 at
200.
22
Marquis of Cholmondeley v Lord Clinton (1820) 37 ER 527 at 559.
23
Brett v Barr Smith (1918) 26 CLR 87 at 93; Sydney Attractions Group Pty Ltd v Schulman [2013]
NSWSC 858 at [66].
24
[2010] NSWCA 64 at [167]-[170].
25
[1967] 1 QB 302 at 313-4.
approach to construction.
Finally, it can be noted that the impact of the contract upon third parties is relevant
to determining the objective intention of the parties. In Kidd v The State of Western
Australia26 Beech J observed:
That is not to say that any consequences, or potential consequences, for third parties, of a
particular construction are to be ignored. To the extent that they may be an indication of
the objective common intention of the parties to the contract, such consequences are
among the matters to be considered in the construction process. Similarly, the nature and
effect of a particular provision is to be borne in mind in its proper construction. These
matters are part of what informs the proper construction of any contract.
THE OBJECTIVE DETERMINATION OF INTENTION
As a matter of policy, the law has always required the interpretation of a contract to
be determined on an objective basis. This point has been repeatedly stressed by the
High Court.27 The justification for this objective approach was explained by Tipping J
in Vector Gas Limited v Bay of Plenty Energy Limited28 as follows:
The objective approach is regarded as having two principal advantages. These are greater
certainty and the saving of time and cost: greater certainty, because the subjective
approach is apt to undermine the security of the written words by means of which the
parties recorded their consensus; and saving time and cost, because a subjective approach
is generally thought to require a fuller search for and examination of extrinsic evidence. A
lesser, but still significant, perceived advantage is avoiding the effect a subjective approach
might have on third parties who may have relied on what the words of the document
appeared objectively to mean. But, despite its eschewing a subjective approach, the
common law does not require the court, through the objective method, to ascribe to the
parties an intention that a properly informed and reasonable person would not ascribe to
them when aware of all the circumstances in which the contract was made.
In the United Kingdom, the leading formulation of the objective test of
interpretation is set out in Lord Hoffmann’s speech in Investors Compensation
Scheme Ltd v West Bromwich Building Society29 where his Lordship said that the
interpretation of a written contract involved:
… the ascertainment of the meaning which the document would convey to a reasonable
person having all the background knowledge which would reasonably have been available
to the parties in the situation in which they were at the time of the contract.
26
[2014] WASC 99 at [121].
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; 211 ALR 342 at 352;
International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 174; 242
ALR 47 at 63; Byrnes v Kendle (2011) 243 CLR 253 at 284; 279 ALR 212 at 236-7; Electricity
Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656; 306 ALR 25 at 33; Mount
Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116; 325 ALR 188 at 197;
Simic v New South Wales Land and Housing Corporation [2016] HCA 47 at [78].
28
[2010] 2 NZLR 444 at 458.
29
[1998] 1 All ER 98 at 114.
27
Significantly, in his statement of principle, Lord Hoffmann did not restrict a court
from referring to the surrounding circumstances to cases where contractual terms
are written in ambiguous language. In the light of considerable debate over the
impact of this case, in Chartbrook Ltd v Persimmon Homes Ltd30 Lord Hoffmann
made the following comment:
The only points [Investors Compensation Scheme Ltd v West Bromwich Building Society 31]
decided that might have been thought in the least controversial were, first, that it was not
necessary to find an ‘ambiguity’ before one could have any regard to background and,
secondly, that the meaning which the parties would reasonably be taken to have intended
could be given effect despite the fact that it was not, according to conventional usage, an
‘available’ meaning of the words or syntax which they had actually used.
On the other hand, in the leading Australian High Court decision on construction of
contracts of Codelfa Construction Pty Limited v State Rail Authority of New South
Wales32 Mason J said:
The true rule is that evidence of surrounding circumstances is admissible to assist in the
interpretation of the contract if the language is ambiguous or susceptible of more than
one meaning. But it is not admissible to contradict the language of the contract when it
has a plain meaning.
In the wake of these two statements of principle considerable debate was generated
as to whether there was a difference of approach between them and if so which was
binding on Australian courts. What was seen by many as the essential difference
between the two approach was that the Mason J’s statement meant that evidence
of surrounding circumstances could only be used as an aid to the construction of a
term if it was ambiguous or susceptible to more than one meaning. On the other
hand, Lord Hoffman’s approach meant that such evidence could be used, whether or
not there was any ambiguity in the term.
In 2002, in Royal Botanic Gardens and Domain Trust v South Sydney Council,33 the
High Court, left open for a future time the question as to whether Lord Hoffmann’s
approach was broader or preferable to that of Mason J, 34 and demanded that, in
the meantime, other Australian courts should construed contractual terms in
accordance with Mason J’s statement of principle in Codelfa Construction Pty
Limited v State Rail Authority of New South Wales.35 The binding nature of Mason J’s
statement of principle has been subsequently reaffirmed by the High Court on a
number of occasions. 36 Thus, in Mount Bruce Mining Pty Limited v Wright
30
[2009] 1 AC 1101 at 1119; [2009] 4 All ER 677 at 693.
[1998] 1 All ER 98.
32
(1982) 149 CLR 337 at 352; 41 ALR 367 at 374.
33
(2002) 240 CLR 451 at 62-3; 186 ALR 289 at 301.
34
In a footnote to their judgment in Byrnes v Kendle (2011) 243 CLR 253 at 285; 279 ALR 212 at 23,
Heydon and Crennan JJ noted that the High Court had not pronounced on the issue of whether there
was an inconsistency between the approaches of Lord Hoffmann and Mason J.
35
(1982) 149 CLR 337 at 352; 41 ALR 367 at 374.
36
Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604 at 605; Mount Bruce
Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 116, 134; 325 ALR 188 at
198, 211.
31
Prospecting Pty Limited37 French CJ, Nettle and Gordon JJ echoed the views of
Mason J when they said:
Ordinarily, this process of construction is possible by reference to the contract alone.
Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning,
evidence of surrounding circumstances (events, circumstances and things external to the
contract) cannot be adduced to contradict its plain meaning.
To the same effect, Kiefel and Keane JJ38 said:
[I]t is essential to identify ambiguity in the language of the contract before the court may
have regard to the surrounding circumstances and the object of the transaction.
On the basis that evidence of surrounding circumstances can only be admitted
where, in the words of Mason J in Codelfa Construction Pty Ltd v State Rail
Authority of New South Wales,39 the ‘language used is ambiguous or susceptible of
more than one meaning’, the following two questions arise:
(i) When is language ‘ambiguous or susceptible of more than one meaning’?
(ii) What is meant by ‘evidence of surrounding circumstances’?
Ambiguity
The meaning of language that is, in the words of Mason J, ‘ambiguous or susceptible
of more than one meaning’, has drawn a number of comments by later Australian
courts. Thus, in Ritter v Keatley Real Estate Pty Ltd Trading as Mt Gambier First
National40 Stanley J said:
The concept of ambiguity referred to by Mason J … is not without its difficulties. The
disjunctive reference to language which is ambiguous or susceptible to more than one
meaning suggests that the concept of ambiguity is broader than the concept of a word or
phrase susceptible of more than one meaning. This may reflect an intention to include
concepts of patent, latent and inherent ambiguity. The dictionary definition of ‘ambiguous’
includes the following meanings: ‘open to various interpretations’, ‘equivocal’, ‘doubtful’,
‘uncertain’, ‘having a double meaning’, ‘obscure’, ‘indistinct’, and ‘lacking clarity’. In
Gardiner v Agricultural and Rural Finance Pty Ltd,41 Spigelman CJ said that ambiguity
‘extend[s] to any situation in which the scope and applicability of the formulation [is], for
whatever reason, doubtful’. In my view, the Mason J formulation … is directed to
circumstances in which an exclusively textual analysis of the language of a contract
produces uncertainty as to the meaning of the contractual provision.
In Bisognin v Hera Project Pty Ltd42 Sloss J said that, at the very least ambiguity
‘extends at least to the situation where a textual analysis of the language used in the
37
(2015) 256 CLR 104 at 116; 325 ALR 188 at 198.
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 132; 325 ALR 188 at
210.
39
(1982) 149 CLR 337 at 352; 41 ALR 367 at 374.
40
(2013) SASR 53 at [53].
41
[2007] NSWCA 235 at [12].
42
[2016] VSC 75 at [156]. To similar effect see South Sydney Council v Royal Botanic Gardens [1999]
NSWCA 478 at [35].
38
contract reveals or gives rise to uncertainty as to the meaning of a provision, or
apprehension that the wording of the contract might not reflect the presumed
intention of the parties’. His Honour43 went on the express his support for a broader
view of ambiguity, exemplified in the following three decisions from the Supreme
Court of Western Australia. First, in McCourt v Cranston44 Pullin JA said:
Usually, the meaning of ‘ambiguous’ is taken to include ‘open to various interpretations’ …
but by using the phrase ‘ambiguous or susceptible of more than one meaning’ perhaps
Mason J wished to emphasise that not only a contract open to more than one meaning
would allow in evidence of surrounding circumstances but also one where the contract is
merely ‘difficult to understand’.
Second, in Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd45 Owen J
said:
I think the proper approach is to look first to the instrument itself to see whether there is
some reasonable basis for the apprehension that the wording of the contract might not
necessarily reflect the presumed intention of the parties. The English language being what
it is, such a reasonable apprehension will generally be apparent ‘in many, if not most,
cases’.46 It may come from a patent and obvious confusion in the words themselves. But it
may also come from a reading of the instrument as a whole. The law has long recognised
that ambiguity can be latent, as well as patent.
Third, in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty
Ltd47 McClure P said:
For the purposes of the gateway requirement ‘ambiguity’ means any situation in which the
scope or applicability of a contract is, for whatever reason, doubtful. It is not confined to
lexical, grammatical or syntactical ambiguity. The fact that adversaries can formulate and
advance materially different constructions of the language of a contract does not itself
satisfy the gateway requirement. Having regard to the language of the contract as a whole
and what can be gleaned from that source as to the contractual purpose, competing
constructions must be reasonably arguable.
In Manufacturers Mutual Insurance Ltd v Withers 48 McHugh JA said:
[F]ew, if any, English words are unambiguous or not susceptible of more than one meaning
or have a plain meaning. Until a word, phrase or sentence is understood in the light of the
surrounding circumstances, it is rarely possible to know what it means.
This approach was endorsed by the Court of Appeal in Mainteck Services Pty Ltd v
Stein Heurtey SA49 where Leeming JA said:
[T]o say that a legal text is ‘clear’ reflects the outcome of that process of interpretation. It
43
Bisognin v Hera Project Pty Ltd [2016] VSC 75 at [157].
[2012] WASCA 60 at [24].
45
(1999) 21 WAR 425 at 436.
46
Trawl Industries of Australia Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326 at 358.
47
(2014) 48 WAR 261 at 274.
48
(1988) 5 ANZ Ins Cases 75,336 at 75,343.
49
(2014) 89 NSWLR 633 at 654-5; 310 ALR 113 at 132.
44
means that there is nothing in the context which detracts from the ordinary literal
meaning … [W]hether contractual language has a ‘plain meaning’ is (a) a conclusion and
(b) a conclusion which cannot be reached until one has had regard to the context … Mason
J was indicating that there are very real limits to the extent to which grammatical meaning
can be displaced by contextual considerations. However, in order to determine whether
more than one meaning is available, it may be necessary first to turn to the context.
In coming to this conclusion, Leeming JA referred to and relied upon the High Court
decision in Electricity Generation Corporation v Woodside Energy Ltd50 where French
CJ, Hayne, Crennan and Kiefel JJ, said:
The meaning of the terms of a commercial contract is to be determined by what a
reasonable businessperson would have understood those terms to mean. That approach is
not unfamiliar … [I]t will require consideration of the language used by the parties, the
surrounding circumstances known to them and the commercial purpose or objects to be
secured by the contract. Appreciation of the commercial purpose or objects is facilitated
by an understanding ‘of the genesis of the transaction, the background, the context [and]
the market in which the parties are operating’ 51 … A commercial contract is to be
construed so as to avoid it ‘making commercial nonsense or working commercial
inconvenience’.52
Leeming JA53 then concluded as follows:
To the extent that what was said in Jireh54 supports a proposition that ‘ambiguity’ can be
evaluated without regard to surrounding circumstances and commercial purpose or
objects, it is clear that it is inconsistent with what was said in Woodside.55 The judgment
confirms that not only will the language used ‘require consideration’ but so too will the
surrounding circumstances and the commercial purpose or objects.
The views of Leeming JA were echoed in WIN Corporation Pty Ltd v Nine Network
Australia Pty Ltd56 where Barrett AJA, speaking for a unanimous Court of Appeal,
said:
A potential tension that inheres in this proposition is that to recognise words as bearing a
‘plain meaning’ is merely to state a conclusion arrived at by some process of interpretation
which cannot, as a matter of logic, exclude context. As Leeming JA noted in Mainteck
Services Pty Ltd v Stein Heurtey SA,57 to state that a legal text is ‘clear’ does no more than
recognise that ‘there is nothing in the context which detracts from the ordinary literal
meaning’. It therefore becomes clear that the notion that it may first be necessary to
consider context when construing a contract is not inconsistent with Mason J’s ‘true rule’.
On this footing, it does not follow that the task of assessing whether a phrase or
expression is ambiguous or susceptible of more than one meaning must be undertaken
without regard to evidence of surrounding circumstances. This position corresponds with
50
(2014) 251 CLR 640 at 656-7; 306 ALR 25 at 33-4.
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR at 360; 41 ALR 367 at
373-374, citing Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-6.
52
Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at 559; 211 ALR 159 at 180.
53
Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633 at 63; 310 ALR 113 at 130.
54
Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604.
55
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25.
56
[2016] NSWCA 297 at [59].
57
(2014) 89 NSWLR 633 at 654; 310 ALR 113 at 132.
51
the approach of the High Court in Victoria v Tatts Group Ltd58 where the relevant contract
was construed by reference to its text, context and purpose without any anterior finding
of ambiguity as a precondition to a consideration of surrounding circumstances as an aid
to discovering or elucidating context and purpose.
Similarly, in Todd v Alterra at Lloyd’s Ltd59 Beach J, in referring with approval to the
views of Leeming JA, said:
[G]enerally, textual analysis is to be given primacy. Nevertheless, words cannot be
construed in a vacuum. The meaning of words cannot be divorced from their context. To
proceed by only analysing the text with the aid of dictionary meanings is sterile and
productive of error. One does not need the assistance of modern philosophy including
Ludwig Wittgenstein’s model of language games to recognise as much. Words and their
use must be construed in context. Moreover, uncertainty or ambiguity in the words used
may only be ascertainable once context is first appreciated. Extra-textual context may
reveal uncertainty or ambiguity that is not otherwise apparent from the text. Mount Bruce
Mining Pty Ltd v Wright Prospecting Pty Ltd 60 recognises, at least implicitly, that the
approach of Mason J (as he then was) in Codelfa Construction Pty Ltd v State Rail Authority
of New South61 may not rule out an approach which first uses context to ascertain
otherwise latent textual uncertainty or ambiguity. Mason J’s approach is not inconsistent
with the notion that it may first be necessary to consider context. Mason J stated that:
The true rule is that evidence of surrounding circumstances is admissible to
assist in the interpretation of the contract if the language is ambiguous or
susceptible of more than one meaning. But it is not admissible to contradict the
language of the contract when it has a plain meaning. (My emphasis.)
But ‘plain meaning’ is a conclusion. How is such a conclusion to be reached? Mason J’s
approach would not deny the proposition that before reaching such a conclusion you can
consider context. By first considering context, you may conclude that there is no one plain
meaning. Context can therefore be used to perform two functions. It can enable you to
assess whether there is a plain meaning. And if one concludes that there is no plain
meaning, it can assist in resolving the latent textual imprecision.
The significance of the decision in Mainteck Services Pty Ltd v Stein Heurtey SA 62 is
that it appears to adopt an approach to interpretation that is consistent with the
approach of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich
Building Society.63 In this respect, it was endorsed in Stratton Finance Pty Limited v
Webb64 where the Full Court of the Federal Court said:
Recently, in Mainteck Services Pty Ltd v Stein Heurtey SA 65 the New South Wales Court of
Appeal … expressed the view that … Woodside66 was inconsistent with Jireh. We agree
with that conclusion.
58
(2016) 328 ALR 564.
(2016) 239 FCR 12 at 28-9; 330 ALR 454 at 470-1.
60
(2015) 256 CLR 104; 325 ALR 188.
61
(1982) 149 CLR 337 at 352; 41 ALR 367 at 374.
62
(2014) 89 NSWLR 633; 310 ALR 113.
63
[1998] 1 All ER 98. See B Michael & D Wong, ‘Recourse to Contractual Context Reaffirmed’ (2015)
89 Australian Law Journal 181, p 187.
64
(2014) 314 ALR 166 at 174.
65
(2014) 89 NSWLR 633; 310 ALR 113.
66
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25.
59
However, in Gladstone Area Water Board v A J Lucas Operations Pty Ltd67 Jackson J
came to the conclusion that Woodside68 was not inconsistent with Jireh69 and that
the Court of Appeal in Mainteck Services Pty Ltd v Stein Heurtey SA70 was wrong to
conclude that Woodside71 had impliedly overruled Jireh.72 Similar sentiments were
expressed by the Court of Appeal in Western Australia in Technomin Australia Pty Ltd
v Xstrata Nickel Australasia Operations Pty Ltd.73 In Apple and Pear Australia Ltd v
Pink Lady America LLC74 the Court of Appeal in Victoria, after a lengthy analysis of
the cases, concluded as follows:
[T]here has been controversy, reflected in the judgments of many intermediate appellate
courts, about when, and in what manner, surrounding circumstances can be relied upon in
the construction of commercial contracts, the questions surrounding the extent to which
surrounding circumstances can be relied upon in the construction of commercial contracts
raise large issues and their fate remains to be resolved by the High Court on another day.
Surrounding Circumstances
Notwithstanding the question of what is meant by ambiguity and when it may
arise, the fact of the matter is that, as a matter of practice, courts are not reluctant
to find the existence of ambiguity. However, as Leeming JA said in Zhang v ROC
Services (NSW) Pty Ltd,75 ‘[w]here there is more than one legal meaning, a court
looks at the text, context and purpose, with a view to determining which potential
meaning best accords with those considerations.evidence of surrounding
circumstances can be admitted to aid in the construction of the term’. The
question that then arises is, what falls within the description of ‘text, context and
purpose’ or what may also be described as ‘evidence of surrounding
circumstances’.
In Bank of Credit and Commerce International SA v Ali76 Lord Hoffmann said that
admissible background or surrounding circumstances included ‘anything which a
reasonable man would have regarded as relevant’, and that ‘there is no conceptual
limit to what can be regarded as background’. This statement of principle was cited
with approval by Campbell JA in Franklins Pty Ltd v Metcash Trading Ltd77 who then
went on to say that a ‘contract should be construed bearing in mind those facts that
the parties knew, or that it can reasonably be assumed they knew, that can impact
upon the meaning of the words of the contract’.
67
[2014] QSC 311 at [153]-[168].
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25
69
Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604.
70
(2014) 89 NSWLR 633; 310 ALR 113.
71
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25.
72
Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604.
73
(2014) 48 WAR 261 at 270-1.
74
[2016] VSCA 280 at [138].
75
[2016] NSWCA 370 at [86].
76
[2002] 1 AC 251 at 269; [2001] 1 All ER 961 at 975.
77
(2009) 76 NSWLR 603 at 678.
68
In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales78 Mason J
said:
Generally speaking facts existing when the contract was made will not be receivable as
part of the surrounding circumstances as an aid to construction, unless they were known
to both parties, although … if the facts are notorious knowledge of them will be presumed.
In a similar vein, in Newey v Westpac Banking Corporation79 Gleeson JA said:
The scope of the legitimate surrounding circumstances, knowledge of which is to be
attributed to a reasonable person in the position of the contracting parties, is to be
understood by reference to what the parties knew in the context of their mutual dealings.
Whilst it does not involve a species of constructive notice, ‘the reasonable person may be
taken to know of things that go beyond those that the parties thought to be important or
those to which there was actual subjective advertence by the parties’: QBE Insurance
Australia Ltd v Vasic [2010] NSWCA 166 at [35].
Finally, in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited80 French
CJ, Nettle and Gordon JJ said the following as to what constituted ‘surrounding
circumstances’:
What may be referred to are events, circumstances and things external to the contract
which are known to the parties or which assist in identifying the purpose or object of the
transaction, which may include its history, background and context and the market in
which the parties were operating. What is inadmissible is evidence of the parties’
statements and actions reflecting their actual intentions and expectations.
It should also be noted that facts and circumstances that would otherwise be
admitted as an aid to the construction of a contract, will be available for that
purpose even if they were communicated between the parties on a ‘without
prejudice’ basis.81
Where evidence of surrounding circumstances is admissible, it is clear that there
are limits on what a court can do with that evidence when construing the contract.
Thus, in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd82 Neuberger LJ
said:
[I]t seems to me right to emphasise that the surrounding circumstances and commercial
commonsense do not represent a licence to the court to re-write a contract merely
because its terms seem somewhat unexpected, a little unreasonable, or not commercially
very wise.
78
(1982) 149 CLR 337 at 352; 41 ALR 367 at 374-5.
[2014] NSWCA 319 at [110].
80
(2015) 256 CLR 104 117; 325 ALR 188 at 198.
81
Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2011] 1 AC 662 at 679-83; [2010] 4 All ER 1011
at 1024-7.
82
[2006] EWCA Civ 1732 at [21]-[22]. See also McGrath v Sturesteps; Sturesteps v HIH Overseas
Holdings Ltd (in liquidation) [2011] NSWCA 315 at [17]; Kidd v The State of Western Australia [2014]
WASC WASC 99 at [126].
79
In Sattva Capital Corporation v Creston Moly Corporation83 the Supreme Court of
Canada said the following in relation to the use of surrounding circumstances:
While the surrounding circumstances will be considered in interpreting the terms of a
contract, they must never be allowed to overwhelm the words of that agreement. The
goal of examining such evidence is to deepen a decision-maker’s understanding of the
mutual and objective intentions of the parties as expressed in the words of the contract.
The interpretation of a written contractual provision must always be grounded in the text
and read in light of the entire contract. While the surrounding circumstances are relied
upon in the interpretive process, courts cannot use them to deviate from the text such
that the court effectively creates a new agreement. The nature of the evidence that can be
relied upon under the rubric of ‘surrounding circumstances’ will necessarily vary from case
to case. It does, however, have its limits. It should consist only of objective evidence of
the background facts at the time of the execution of the contract, that is, knowledge that
was or reasonably ought to have been within the knowledge of both parties at or before
the date of contracting … [T]his includes, in the words of Lord Hoffmann, ‘absolutely
anything which would have affected the way in which the language of the document
would have been understood by a reasonable man’ 84 . Whether something was or
reasonably ought to have been within the common knowledge of the parties at the time of
execution of the contract is a question of fact.
The Supreme Court85 also noted that ‘the parol evidence rule does not apply to
preclude evidence of surrounding circumstances when interpreting the words of a
written contract’.
Finally, it must be kept in mind that the practical effect of the decision in Codelfa
Construction Pty Ltd v State Rail Authority of New South Wales 86 ‘is that surrounding
circumstances cannot be relied on to give rise to an ambiguity that does not
otherwise emerge from a consideration of the text of the document as a whole,
including whatever can be gleaned from that source as to the purpose or object of
the contract’.87
PRINCIPLES OF CONSTRUCTION
As already noted, in determining the objective intention of the parties to the
contract no hard and fast rules apply. Rather the court applies what are best
described as ‘principles’ of construction. 88 A number of these principles are
discussed below. However, it must be kept in mind that these principles are not
binding rules and will not apply in the face of facts to the contrary.
Presumption that unreasonable results are not intended
83
[2014] 2 SCR 633 at 661-2.
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114.
85
Sattva Capital Corporation v Creston Moly Corporation [2014] 2 SCR 633 at 663.
86
(1982) 149 CLR at 352; 41 ALR 367.
87
Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29 at 50; 294 ALR 550 at
566.
88
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University
Press, Cambridge, 2013, p 55.
84
It is presumed that parties to written contracts do not intend the terms of their
contract to operate unreasonably. Thus, the more unreasonable the result a
particular construction of the terms would produce, the less likely it is that such an
interpretation reflects the parties’ intentions. However, if the parties intend to
produce an unreasonable result, such an intention must be abundantly clear from
the words used.89
However, this principle relating to the reasonableness or otherwise of the contract
cannot be taken too far. In Chartbrook Ltd v Persimmon Homes Ltd90 Lord Hoffmann
observed:
[T]he fact that a contract may appear to be unduly favourable to one of the parties is not a
sufficient reason for supposing that it does not mean what it says. The reasonable
addressee of the instrument has not been privy to the negotiations and cannot tell
whether a provision favourable to one side was not an exchange for some concession
elsewhere, or simply a bad bargain.
Whether a court gives effect to an unreasonable interpretation depends upon the
circumstances of the case. If the language used is open to two constructions,
preference is to be given to the one that avoids an unreasonable result.91 Where the
words of a contract are unambiguous and give rise to a capricious or unreasonable
result, the court will give effect to them, even if one could reasonably surmise that
the parties did not intend such a result.92
However, even in cases where there is no ambiguity, a court may decline to apply
the plain meaning of the words used if:
it would lead to an irrational result;93
if it would lead to a meaning that is repugnant to the objectively determined
intention of the parties;94
(iii) if it makes no commercial sense.95 In such cases the plain meaning must be
manifestly absurd - mere unreasonableness is not enough.96 As was pointed out
by Ward JA in International Petroleum Investment Company v Independent
Public Business Corporation of Papua New Guinea97 ‘[t]he Court has no mandate
to rewrite agreements merely to give them a more commercial operation’.
(i)
(ii)
89
L Schuler AG v Wickman Machine Tool Sales Limited [1974] AC 235 at 251; [1973] 2 All ER 39 at 45.
[2009] 1 AC 1101 at 1113; [2009] 4 All ER 677 at 687. See also Bisognin v Hera Project Pty Ltd
[2016] VSC 75 at [146].
91
Australian Broadcasting Commission v Australasian Performing Rights Association Limited
(1973) 129 CLR 99 at 109-10.
92
State Lotteries Office v Burgin [1993] NSWCA 254 at [4]; New South Wales Lotteries Corporation Pty
Ltd v Kuzmanovski (2011) 195 FCR 234 at 244.
93
Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 at [19]-[20].
94
Dainford Ltd v Smith (1985) 155 CLR 342 at 364; 58 ALR 285 at 301; Dodds v Kennedy (No 2) (2011)
42 WAR 16 at 26, 31.
95
McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315 at
[17]; Gloria Jean’s Coffee v Western Export Services Inc [2011] NSWCA 137 at [55].
96
Schwartz v Hadid [2013] NSWCA 89 at [31]; Current Images Pty Ltd v Dupack Pty Ltd [2012] NSWCA
99 at [47].
97
[2015] NSWCA 363 at [148].
90
Establishing absurdity is not easily achieved.98 In relation to what is meant by
absurdity, in National Australia Bank Ltd v Clowes 99 Leeming JA said:
In my opinion this is a clear case where the literal meaning of the contractual words
is an absurdity, and it is self-evident what the objective intention is to be taken to
have been. Where both those elements are present … ordinary processes of
contractual construction displace an absurd literal meaning by a meaningful legal
meaning … [T]he principle is premised upon absurdity, not ambiguity, and is available
even where … the language is unambiguous.
Later in his judgment, Leeming JA100 said:
The principle is not confined to linguistic errors such as ‘inconsistent’ being read as
‘consistent’ or ‘shorter’ being read as ‘longer’ [as occurred in Saxby Soft Drinks Pty
Ltd v George Saxby Beverages Pty Ltd 101 ]. The principle extends to obvious
conceptual errors, such as ‘lessor’ being read as ‘lessee’ as in McHugh Holdings Pty
Ltd v Newtown Colonial Hotel Pty Ltd,102 or [as on the facts of this case] words
denoting a mortgage of company title flat being read as a mortgage of the shares in
the company which entitle their owner to that flat. In all those cases, it is perfectly
clear what legal meaning is to be given to the literally absurd words.
Leeming JA’s observations bring into focus the relationship between the process of
construction and the remedy of rectification. In relation to the issue of whether a
court corrects errors in written documents by the process of construction or by the
remedy of rectification, in W & K Holdings (NSW) Pty Ltd v Mayo103 Sackar J said the
following:
As part of the process of construction, as distinct from the remedy of rectification, the
court has power to correct obvious mistakes in the written expression of the intention of
the parties … Although there is clearly a conceptual similarity, and perhaps an overlap,
between correction by construction and the doctrine of rectification, there is a difference
in their respective scopes of application … [A] a common view is that the dividing line
between cases where correction by construction is available and where only correction by
rectification is available, is to be drawn on the basis of whether the party seeking the
correction is seeking to rely on prior negotiations between the parties, the actual or
subjective intentions of the parties or parol evidence or on whether the ‘error’ calling for
correction is so obvious simply from the face of the document.
Avoidance of inconsistencies
Where contractual terms appear to be inconsistent with each other, the court will ‘do
its best to reconcile them if that can conscientiously and fairly be done.104 The
98
Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297 at [18]; Apple and Pear Australia Ltd v
Pink Lady America LLC [2016] VSCA 280 at [152].
99
[2013] NSWCA 179 at [34].
100
National Australia Bank Ltd v Clowes [2013] NSWCA 179 at [38].
101
[2009] NSWSC 1486.
102
(2008) 73 NSWLR 53.
103
[2013] NSWSC 1063 at [48]-[50].
104
Geys v Société Générale, London Branch [2013] 1 AC 523 at 538; [2013] 1 All ER 1061 at 1076.
question of inconsistency is determined objectively.105 An inconsistency will arise
where the terms of a contract ‘cannot sensibly be read together’.106 In Re Media
Entertainment & Arts Alliance; Ex Parte Hoyts Corp Pty Ltd (No 1)107 Mason CJ,
Brennan, Dawson, Toohey, Gaudron and McHugh JJ said:
A conflict ... involving apparently inconsistent provisions in the one instrument, is to be
resolved, if at all possible on the basis that one provision qualifies the other and, hence,
that both have meaning and effect. That rule is an aspect of the general rule that an
instrument must be read as a whole.
In Metropolitan Gas Co v Federated Gas Employees’ Industrial Union 108 Isaacs and
Rich JJ said the following about the need to construe an instrument as a whole:
It is a received canon of interpretation that every passage in a document must be read, not
as if it were entirely divorced from its context, but as part of the whole instrument: Ex
antecedentibus et consequentibus fit optima interpretatio. In construing an instrument
‘every part of it should be brought into action, in order to collect from the whole one
uniform and consistent sense, if that may be done; or, in other words, the construction
must be made upon the entire instrument, and not merely upon disjointed parts of it; the
whole context must be considered, in endeavouring to collect the intention of the parties,
although the immediate object of inquiry be the meaning of an isolated clause’.
More recently, in AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd109 Ball J said:
The general principle is that the words of a contract should be interpreted in a way
which gives them an effect rather than a way in which makes them redundant. That
principle does not operate as an invariable rule. In some cases, it may be appropriate
to interpret words in a way that makes them redundant. That may be appropriate
where the alternative construction of the words is inconsistent with other provisions
of the contract or where the alternative construction is inconsistent with the
commercial purpose of the contract or where it appears that the words have been
included out of abundant caution.
Thus, in order to avoid inconsistencies it may be necessary to depart from the
ordinary meaning of the words approach to construction.110
However, in cases where parties contract on the basis of a standard form contract
(the primary contractual document) and incorporate further terms that they have
negotiated (the incorporated document), if an inconsistency arises between the two
documents, a court will ‘almost always’ give effect to the terms set out in the
105
Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565 at 574; Alexander v West
Bromwich Mortgage Company [2016] EWCA Civ 496 at [33]-[35].
106
Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565 at 578.
107
(1993) 178 CLR 379 at 386-7; 115 ALR 321 at 326.
108
(1925) 35 CLR 449 at 455.
109
[2010] NSWSC 985 at [13]. See also North v Marina [2003] NSWSC 64 at [43]-[46].
110
Australian Broadcasting Commission v Australasian Performing Rights Association Limited
(1973) 129 CLR 99 at 109.
incorporated document:111 In Homburg Houtimport BV v Agrosin Private Ltd (The
Starsin)112 Lord Bingham of Cornhill said:
[I]t is common sense that greater weight should attach to terms which the particular
contracting parties have chosen to include in the contract than to pre-printed terms
probably devised to cover very many situations to which the particular contracting parties
have never addressed their minds.
Of course, there is the preliminary question of whether an inconsistency has arisen.
On this issue, in Pagnan SpA v Tradax Ocean Transportation SA113 Dillon LJ said:
What is meant by inconsistency? Obviously there is inconsistency where two clauses cannot
sensibly be read together, but can it really be said that there is inconsistency wherever one
clause in a document qualifies another clause? A force majeure clause, or a strike and lock
out clause, almost invariably does qualify the apparently absolute obligations undertaken
by the parties under other clauses in the contract; so equally with an extension of time
clause, for instance in a building agreement. So equally, with a lease, the re-entry clause
qualifies the apparently unconditional demise for a term of years absolute, but no one
would say they were inconsistent.
An illustration of the application of the principle that contracts should be construed
as a whole is the case of Howe v Botwood.114 In that case a lease imposed an
obligation upon the tenant to ‘pay and discharge all rates, taxes, assessments,
charges, and outgoings whatsoever which now are or during the said term shall be
imposed or charged on the premises or the landlord or tenant in respect thereof
(land tax and landlord’s property tax only excepted)’. The landlord had an obligation
to ‘keep the exterior of the said dwelling-house and buildings in repair’. A relevant
public authority served a notice that required a drain to be replaced. The issue
before the court was whether the cost of so doing fell upon the tenant or upon the
landlord. In ruling that the landlord was liable for the cost of the work, Channell J115
said:
The expense of executing the work would under this covenant fall on the [landlord]. If
therefore that covenant by the [landlord] had stood alone without the covenant by the
[tenant], that is how I should construe it. That covenant, however, has to be read with the
earlier covenant by the tenant to pay and discharge all outgoings. There are thus two
covenants, one placing the burden on the tenant and the other placing it on the landlord.
We must construe the lease as a whole so as to make it consistent in both its parts. In my
opinion the covenant by the tenant must be read as if it contained the words ‘except such
as are by this lease imposed upon the landlord’. By reading that exception into the
covenant by the tenant the two covenants can be read together.
111
Bedroff Pty Ltd v Rennie [2002] NSWSC 928 at ]59]; Leonie’s Travel Pty Limited v International Air
Transport Association (2009) 255 ALR 89 at 106; Macdonald v Kavshan Pty Ltd; Villarica v Kavshan Pty
Ltd [2016] NSWSC 731 at [30]-[31].
112
[2004] 1 AC 715 at 737; [2003] 2 All ER 785 at 794, cited with approval in Al Achrafi v Topic [2016]
NSWSC 1807 at [33].
113
[1987] 3 All ER 565 at 578.
114
[1913] 2 KB 387.
115
Howe v Botwood [1913] 2 KB 387 at 391.
Presumption in favour of business common sense
Where a detailed semantic and syntactical analysis of a written contract leads to a
conclusion that is inconsistent with business common sense, the contract must be
made to yield to business commonsense.116 In this respect, in International Air
Transport Association v Ansett Australia Holdings Ltd117 Gleeson CJ said:
In giving a commercial contract a businesslike interpretation, it is necessary to consider the
language used by the parties, the circumstances addressed by the contract, and the
objects which it is intended to secure. An appreciation of the commercial purpose of a
contract calls for an understanding of the genesis of the transaction, the background, and
the market.
In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited118 French CJ,
Nettle and Gordon JJ said:
Unless a contrary intention is indicated in the contract, a court is entitled to approach the
task of giving a commercial contract an interpretation on the assumption ‘that the parties
… intended to produce a commercial result’: Electricity Generation Corporation v
Woodside Energy Ltd.119 Put another way, a commercial contract should be construed so
as to avoid it ‘making commercial nonsense or working commercial inconvenience’.
The justification for this approach to the construction of commercial agreements was
explained in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd120 where
Lord Steyn said:
In determining the meaning of the language of commercial contracts … the law therefore
generally favours a commercially sensible construction. The reason for this approach is
that a commercial construction is more likely to give effect to the intention of the parties.
Words are therefore interpreted in the way in which a reasonable commercial person
would construe them. And the standard of the reasonable commercial person is hostile to
technical interpretations and undue emphasis on niceties of language.
When a court looks at commercial common sense it does so by looking at the facts
and circumstances that existed at the time of the contract. In this respect in Arnold v
Britton121 Lord Neuberger said:
[C]ommercial common sense is not to be invoked retrospectively. The mere fact that a
contractual arrangement, if interpreted according to its natural language, has worked out
badly, or even disastrously, for one of the parties is not a reason for departing from the
natural language. Commercial common sense is only relevant to the extent of how matters
116
Maggbury Pty Ltd v Hafele Australia Pty Ltd at CLR 198; ALR 163; Antaios Compania Naviera SA v
Salen Rederierna AB [1985] AC 191 at 201; [1984] 3 All ER 229 at 233; Rainy Sky SA v Kookmin Bank
[2012] 1 All ER 1137 at 1149; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251
CLR 640 at 656; 306 ALR 25 at 33-4; Zhang v ROC Services (NSW) Pty Ltd [2016] NSWCA 370 at [95][97].
117
(2008) 234 CLR 151 at 160; 242 ALR 47 at 51-2.
118
(2015) 256 CLR 104 at 117; 325 ALR 188 at 198.
119
(2014) 251 CLR 640 at 657; 306 ALR 25 at 34.
120
[1997] AC 749 at 770–1; [1997] 3 All ER 352 at 372.
121
[2015] AC 1619 at 1628; [2016] 1 All ER 1 at 7.
would or could have been perceived by the parties, or by reasonable people in the
position of the parties, as at the date that the contract was made.
On the question of whether the contract is one that flouts business common sense,
in LB Re Financing No 3 Ltd v Excalibur Funding No 1 Plc122 Briggs J said:
In this context, a distinction must be made between absurdity and irrationality on the one
hand, and apparent unfairness or one-sidedness on the other. The former may compel the
court to conclude that something must have gone wrong with the language, but it is no
part of the court’s task to mend businessmen’s bargains. Commercial absurdity may
require the court to depart even from the apparently unambiguous natural meaning of a
provision in an instrument, because ‘the law does not require judges to attribute to the
parties an intention they plainly could not have had’.123 Questions of commercial common
sense falling short of absurdity may however enable the court to choose between
genuinely alternative meanings of an ambiguous provision. The greater the ambiguity, the
more persuasive may be an argument based upon the apparently greater degree of
common sense of one version over the other.
However, a court needs to be careful in seeking an interpretation that is inconsistent
with commercial common sense. In Skanska Rashleigh Weatherfoil Ltd v Somerfield
Stores Ltd124 Neuberger LJ said:
[T]he court must be careful before departing from the natural meaning of the provisions in
the contract merely because it may conflict with its notions of commercial common sense
of what the parties may have or should have thought or intended. Judges are not always
the most commercially-minded, let alone the most commercially experienced, people, and
should … avoid arrogating to themselves over confidently the role of arbiter of commercial
reasons or likelihood. Of course, in many cases, the commercial common sense of a
particular interpretation, either because of peculiar circumstances of the case or because
of more general considerations, is clear. Furthermore, sometimes it is plainly justified to
depart from the primary meanings of words and give them what might, on the face of it,
appear to be a strange meaning, for instance where the primary meaning of the words
leads to a plainly ridiculous or unreasonable result.
A common instance of the application of this principle is where there is ambiguity. In
such cases, ‘the court is entitled to prefer the construction which is consistent with
business common sense and to reject the other’.125 However, in such cases the
courts needs to also be careful for the reasons set out in Jireh International Pty Ltd v
Western Export Services Inc126 where Macfarlan JA said:
So far as they are able, courts must of course give commercial agreements a commercial
and business-like interpretation. However, their ability to do so is constrained by the
language used by the parties. If after considering the contract as a whole and the
background circumstances known to both parties, a court concludes that the language of a
contract is unambiguous, the court must give effect to that language unless to do so would
122
[2011] EWHC 2111 (Ch) at [45]-[46].
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 115.
124
[2006] EWCA Civ 1932 at [21]-[22].
125
Rainy Sky SA v Kookmin Bank [2012] 1 All ER 1137 at 1146; BMA Special Opportunity Hub Finance
Ltd and others v African Minerals Finance Ltd [2013] EWCA Civ 416 at [24]; Fons Hf (in liquidation) v
Corporal Ltd [2014] EWCA Civ 304 at [15].
126
[2011] NSWCA 137 at [55].
123
give the contract an absurd operation. In the case of absurdity, a court is able to conclude
that the parties must have made a mistake in the language that they used and to correct
that mistake. A court is not justified in disregarding unambiguous language simply because
the contract would have a more commercial and businesslike operation if an
interpretation different to that dictated by the language were adopted.
Similarly, in Arnold v Britton127 Lord Neuberger said:
[T]he reliance placed in some cases on commercial common sense and surrounding
circumstances … should not be invoked to undervalue the importance of the language of
the provision which is to be construed. The exercise of interpreting a provision involves
identifying what the parties meant to the eyes of a reasonable reader, and, save perhaps
in a very unusual case, that meaning is most obviously to be gleaned from the language of
the provision. Unlike commercial common sense and the surrounding circumstances, the
parties have control over the language they use in a contract. And, again save perhaps in a
very unusual case, the parties must have been specifically focusing on the issue covered by
the provision when agreeing the wording of that provision … [W]hile commercial common
sense is a very important factor to take into account when interpreting a contract, a court
should be very slow to reject the natural meaning of a provision as correct simply because
it appears to be a very imprudent term for one of the parties to have agreed, even
ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify
what the parties have agreed, not what the court thinks that they should have agreed.
Experience shows that it is by no means unknown for people to enter into arrangements
which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the
function of a court when interpreting an agreement to relieve a party from the
consequences of his imprudence or poor advice. Accordingly, when interpreting a contract
a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an
astute party.
An illustration of the business common sense approach to construction is the
decision in Idya Pty Ltd v Anastasiou.128 In that case a tenant of retail premises under
a registered strata plan used them as a fast food outlet. Pursuant to Clause 19.1(a) of
the relevant strata plan documentation the ‘owners’ of the premises were not
permitted to ‘use’ them as a fast food outlet. The word ‘owners’ was defined to
mean the registered proprietors of the premises. The tenant claimed that, as it was
not the owner of the premises, the prohibition against using them as a fast food
outlet did not apply to it with the consequence that it could not be prevented from
operating its fast food outlet for the duration of the lease. The Court of Appeal
rejected this argument. Beazley JA129 said:
In my opinion, having regard to the wide meaning that the word ‘use’ bears, depending
upon its context, the proper construction of cl 19.1(a) is that it is a prohibition upon the
owners of the Retail Shops on using, including permitting to be used, the premises as a fast
food outlet. Any other construction would be commercially nonsensical. If the
construction for which the [tenant] contend was the correct one, it would mean that an
individual could be the proprietor of the Retail Shops and by the mere device of entering
into a lease or licence with a company of which the proprietor was the sole shareholder,
thereby avoid the prohibition on use. The reverse, of course, would also operate, that is, a
company could be the owner of the Retail Shops and lease or licence the premises to its
127
[2015] AC 1619 at 1628-9; [2016] 1 All ER 1 at 7. See also Lindsay v Noble Investments Limited
[2015] NZCA 588 at [16].
128
[2008] NSWCA 102.
129
Idya Pty Ltd v Anastasiou [2008] NSWCA 102 at [50].
sole shareholder. Reasonable commercial persons would readily reject that as being
available under a clause in the terms of cl 19.1(a).
THE USE OF DICTIONARIES
In ascertaining the meaning of words used in legal documents courts will often have
recourse to dictionaries. However, in using dictionaries the following points need to
be kept in mind. First, a dictionary definition of a word will often provide various
shades of meaning to a word. Second, dictionaries published in different countries
may give different meanings to words. To overcome this problem, courts will usually
use a dictionary published in the country in which the document was made. In
Australia, the ‘authorised’ dictionary is generally accepted to be the Macquarie
Dictionary. 130 Third, ‘reference to dictionaries is no substitute for judicial
determination of the meaning the parties have given a word or phrase. Dictionaries
illustrate usage in general; but the parties’ contract will have its own context … The
primary task of a court is to find, not the dictionary meaning, but the meaning as
used by the parties in the context of their particular transaction’. 131 Thus, in
Southern Equity Pty Limited v Timevale Pty Limited132 Brereton J said:
[I]n construing the term in this contract, it must be remembered that one is ascertaining …
what a reasonable person in the position of these parties would have understood the
provisions of a contract to mean, taking into consideration the purpose and object of the
transaction. This is not necessarily the same meaning as is attributed to the words used by
dictionaries or by judicial pronouncements in other cases, although those sources will
often inform the objective meaning of words used by parties.
In TAL Life Ltd v Shuetrim133 Leeming JA said:
Dictionary definitions may assist in identifying the range of possible meanings a word may
bear in various contexts, but will not assist in ascertaining the precise meaning the word
bears in a particular context. As much was recognised by a unanimous High Court … in
Thiess v Collector of Customs 134 when observing that a mature and developed
jurisprudence does not ‘make a fortress out of the dictionary’. Although the distinction
between the dictionary definition of a word and its legal meaning is not often well
understood, it is clear that dictionaries are no substitute for the interpretative process.
Parties to transactions will often include within their legal documents ‘private’
dictionaries in the form of definitions of words used in the documentation. In
relation to the interpretation of these ‘private’ dictionary definitions, in Perpetual
Custodians Pty Ltd v IOOF Investment Management Ltd135 Leeming JA (speaking for
the Court of Appeal) said:
130
John White & Sons Pty Ltd v Changleng (1985) 2 NSWLR 163 at 164-5.
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University
Press, Cambridge, 2013, p 57.
132
[2012] NSWSC 15 at [40].
133
(2016) 91 NSWLR 439 at 457-8; 332 ALR 507 at 526-7.
134
(2014) 250 CLR 664 at 672; 306 ALR 594 at 599-600.
135
(2013) 278 FLR 49 at 71; 304 ALR 436 at 456-7.
131
Lord Steyn has written extrajudicially that ‘[e]ven an agreed definition is of limited use: it
takes no account of contextual requirements’.136 … Professor McMeel137 has written that
‘even defined terms must yield to wider context or contrary intention’. Professor Carter 138
has said that ‘the absence of [words to the effect “unless the context indicates otherwise”]
does not mean that the definition necessarily applies to every usage of the term in the
document’. That must in my opinion be correct in principle. The ordinary approach to
construction insists on reading the contract as a whole and doing so harmoniously, so as to
resolve or minimise internal inconsistency. Foreign to that approach would be a slavish
rule that defined terms inevitably bear every aspect of their defined meaning. The
contestable nub of the matter is what is sufficient to constitute a displacing context or
contrary intention. Owen and Steytler JJ139 have said that ‘the deliberate use of defined
words is not to be lightly passed over, even where the definition leaves open the
possibility of another meaning for a defined phrase’, a proposition whose force I
acknowledge.
Similarly, in Black Box Control Pty Ltd v Terravision Pty Ltd140 the Court of Appeal said
that ‘[d]efinitions do not have substantive effect. A definition is not to be construed
in isolation from the operative provision(s) in which the defined term is used. Rather,
the operative provision is ordinarily to be read by inserting the definition into it’.
THE PAROL EVIDENCE RULE AND THE CONSTRUCTION OF CONTRACTS
The parol evidence rule contains two parts. The first part is concerned with the
exclusion of extrinsic evidence that would add to, subtract from or vary or qualify
the terms of a written contract. Our concern here is with the second part of the rule
which deals with the exclusion of extrinsic evidence that would otherwise assist the
court in construing the contract. In its operation relating to the construction of
contracts, the parol evidence rule excludes extrinsic evidence of a number of
matters that would otherwise be relevant in ascertaining the intention of the parties
in relation to the meaning of a written agreement.
Prior negotiations
The parol evidence rule excludes extrinsic evidence of the prior negotiations of the
parties.141 The justification for this approach was explained in Prenn v Simmonds142
where Lord Wilberforce said:
The reason for not admitting evidence of these exchanges is not a technical one or even
mainly one of convenience … It is simply that such evidence is unhelpful. By the nature of
things, where negotiations are difficult, the parties’ positions, with each passing letter, are
changing and until the final document, though converging, are still divergent. It is only the
136
Johann Steyn, ‘Pepper v Hart; A Re-Examination’ (2001) 21 Oxford Journal of Legal Studies 59, p 60.
G McMeel, The Construction of Contracts, Interpretation, Implication, and Rectification, 2nd ed,
Oxford University Press, Oxford, 2011, p 159.
138
J W Carter, The Construction of Commercial Contracts, Hart Publishing, Oxford, 2013, p 446.
139
BHP Petroleum (Australia) Pty Ltd v Sagasco South East Inc [2001] WASCA 159 at [24].
140
[2016] WASCA 219 at [42].
141
Australia and New Zealand Banking Group Ltd v Compagnie D’Assurances Maratimes Aeriennes Et
Terrestres [1996] 1 VR 561 at 565; Globe Motors, Inc v TRW Lucas Varity Electric Steering Ltd [2016]
EWCA Civ 396 at [61].
142
[1971] 3 All ER 237 at 240–1.
137
final document that records a consensus … The words used may, and often do, represent a
formula which means different things to each side, yet may be accepted because that is
the only way to get ‘agreement’ and in the hope that disputes will not arise. The only
course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally,
dangerous is to admit evidence of one party’s objective — even if this is known to the
other party. However strongly pursued this may be, the other party may only be willing to
give it partial recognition, and in a world of give and take, men often have to be satisfied
with less than what they want. So, again, it would be a matter of speculation how far the
common intention was that the particular objective should be realised.
In Globe Motors, Inc v TRW Lucas Varity Electric Steering Ltd143 Beatson LJ said that
‘[t]he rationale for the general rule is said to be practical policy and the public
interest in economy and predictability in obtaining advice and adjudicating disputes’.
However, although the prior negotiations rule prevents the use of pre-contractual
negotiations as evidence of the interpretation of contractual terms, it does not
preclude the use of such evidence for the purpose of establishing relevant
background facts that were known to the parties. In this respect, in Codelfa
Construction Pty Ltd v State Rail Authority of New South Wales144 Mason J said:
It is here that a difficulty arises with respect to the evidence of prior negotiations.
Obviously the prior negotiations will tend to establish objective background facts which
were known to both parties and the subject matter of the contract. To the extent to which
they have this tendency they are admissible. But in so far as they consist of statements
and actions of the parties which are reflective of their actual intentions and expectations
they are not receivable. The point is that such statements and actions reveal the terms of
the contract which the parties intended or hoped to make. They are superseded by, and
merged in, the contract itself. The object of the parol evidence rule is to exclude them, the
prior oral agreement of the parties being inadmissible in aid of construction.
The appropriateness of the prior negotiations rule has been recently debated.
Writing extrajudicially, Lord Nicholls of Birkenhead145 has suggested that it should be
abolished on the grounds that such a move would: (i) introduce coherence into this
area of the law, (ii) make the law more transparent, (iii) conform to current
international trends, and (iv) overcome injustices that result from the application of
the rule. However, a unanimous House of Lords in Chartbrook Ltd v Persimmon
Homes Ltd146 subsequently rejected these criticisms of the prior negotiations rule
and confirmed the authority of Prenn v Simmonds.147 In Byrnes v Kendle148 Heydon &
Crennan JJ also confirmed the prior negotiations rule.
Spigelman CJ, 149 also writing extrajudicially, has provided reasons for the
continuation of the prior negotiations rule. First, its abolition would result in
143
[2016] EWCA Civ 396 at [61].
(1982) 149 CLR 337 at 352; 41 ALR 367 at 375.
145
Lord Nicholls of Birkenhead, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law
Quarterly Review 577.
146
[2009] 1 AC 1101; [2009] 4 All ER 677.
147
[1971] 3 All ER 237.
148
Byrnes v Kendle (2011) 243 CLR 253 at 284-5; 279 ALR 212 at 236-7.
149
Hon J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81
Australian Law Journal 322, pp 331-6.
144
increased costs of conducting commercial activity. Second, the abolition of the rule
would expose a third party to the contract who relies on its terms when dealing with
one of its parties to increased risk, because he or she is not aware of the prior
negotiations, and is thus unable to assess how such negotiations impact on the
meaning of the words used. Accordingly, a third party’s understanding of the
meaning of the contract is more likely to be at variance with the meaning that is
determined with the assistance of evidence of prior negotiations. This would, in his
Honour’s view, lead to increased commercial uncertainty and costly arbitration, or
judicial proceedings to resolve the inevitable disputes that would arise.
However, in the New Zealand Supreme Court decision in Vector Gas Limited v Bay of
Plenty Energy Limited,150 Tipping and Wilson JJ were in favour of abandoning it, while
Blanchard and Gault JJ were inclined to interpret the rule very liberally and to leave
it open for later consideration as to whether the rule should be abandoned. McGrath
J was the only judge in this case who was in favour of retaining the prior negotiations
rule as it was currently understood and applied in Australia and the United Kingdom.
In this context McGrath J151 observed
I see no point in New Zealand courts at this stage attempting to put a gloss on the general
approach so recently stated by the House of Lords. It is better that the common law of
New Zealand in this important field of commerce march in step with settled approaches
overseas unless and until very good reasons for departure emerge.
Post-contract conduct
The question as to whether the parol evidence rule excludes evidence of the conduct
of the parties subsequent to the entry into the contract has been one that has
attracted a divergence of judicial and academic opinions. In Hide & Skin Trading Pty
Ltd v Oceanic Meat Traders Ltd152 Kirby P canvassed various reasons in support of
the conflicting views on the admissibility of the subsequent conduct of the
contracting parties. In support of excluding evidence of subsequent conduct, his
Honour noted that, if post-contract behaviour was taken into account, it could lead a
party to tailor such behaviour in order to persuade the other party to accept his or
her understanding of the contract or to provide supporting evidence in any
subsequent court case between the parties. Furthermore, permitting such evidence
would expand the field of enquiry undertaken by a court that would lead to an
increase in the length and costs of litigation. On the other hand, the possibility of
clear and mutual post-contract conduct that evidences the parties’ original
intentions would tend to support the admissibility of such evidence.
In High Court cases such as Farmer v Honan153 and Howard Smith & Co Ltd v
Varawa 154 there are suggestions that post-contract conduct is admissible in
determining the meaning of the contract. On the other hand, other High Court cases
150
[2010] 2 NZLR 444.
Vector Gas Limited v Bay of Plenty Energy Limited [2010] 2 NZLR 444 at 473-4.
152
(1990) 20 NSWLR 310 at 316.
153
(1919) 26 CLR 183 at 197.
154
(1907) 5 CLR 68 at 78.
151
such as Maynard v Goode (1926) 37 CLR 529 at 538155 and Administration of the
Territory of Papua New Guinea v Daera Guba156 suggest that evidence of postcontractual conduct is inadmissible.
More recently, but without any discussion of the issue, the latter approach was
endorsed by a bare majority of the High Court in Agricultural and Rural Finance Ltd v
Gardiner.157 The High Court majority’s view is also supported by the Courts of Appeal
in New South Wales, Victoria and Western Australia.158
On the other hand, it can be noted that all members of the Supreme Court in New
Zealand in Gibbons Holdings Limited v Wholesale Distributors Limited, 159 after
consideration of the issue, supported the view that post-contractual conduct could
be taken into account in construing a contract. Thus, Tipping J at 294160 said:
As a matter of principle, the Court should not deprive itself of any material which may be
helpful in ascertaining the parties’ jointly intended meaning, unless there are sufficiently
strong policy reasons for the Court to limit itself in that way. I say that on the basis that
any form of material extrinsic to the document should be admissible only if capable of
shedding light on the meaning intended by both parties. Extrinsic material which bears
only on the meaning intended or understood by one party should be excluded. The need
for the extrinsic material to shed light on the shared intention of the parties applies to
both pre-contract and post-contract evidence. Provided this point is kept firmly in mind, I
consider the advantages of admitting evidence of post-contract conduct outweigh the
disadvantages. The latter comprise primarily the potential for ex post facto subversion of
earlier jointly shared intentions and the lengthening of interpretation disputes by
encouraging the parties to produce evidence which is often only tenuously relevant at
best.
Later in his judgment, Tipping J 161 at 297, said:
If the court can be confident from their subsequent conduct what both parties intended
their words to mean, and the words are capable of bearing that meaning, it would be
inappropriate to presume that they meant something else.
Exceptions to the parol evidence rule
155
(1926) 37 CLR 529 at 538.
(1973) 130 CLR 353 at 446.
157
(2008) 238 CLR 570 at 582; 251 ALR 322 at 330.
158
Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 678-82; Byrne v Macquarie Group
Services Australia Pty Ltd [2011] NSWCA 68 at [40]; World Best Holdings Limited v Sarkar [2010]
NSWCA 24 at [19]-[20]; County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA
193 at [161]; Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 at [59]; Ryan v Textile
Clothing & Footwear Union of Australia [1996] VR 235 at 261; Lederberger v Mediterranean Olives
Financial Pty Ltd (2012) 38 VR 509 at 518; Secure Parking (WA) Pty Ltd v Wilson (2008) 38 WAR 350 at
373
159
[2008] 1 NZLR 277 at 283, 288–9, 294–7, 298–9, 308–11.
160
Gibbons Holdings Limited v Wholesale Distributors Limited [2008] 1 NZLR 277 at 294.
161
Gibbons Holdings Limited v Wholesale Distributors Limited [2008] 1 NZLR 277 at 297. The approach
of Tipping J was reaffirmed by the Court of Appeal in AAI Limited v 92 Lichfield Street Limited (in
receivership and in liquidation) [2015] NZCA 559 at [47].
156
In the construction of a contract the impact of the parol evidence rule is qualified by
a number of exceptions that enable extrinsic evidence to be admitted. The major
exceptions to the rule permit the use of extrinsic evidence for the following
purposes:
1.
to identify the subject matter of the contract in circumstances where the
description of the subject matter is uncertain or ambiguous.162 For example,
in White v Australian and New Zealand Theatres Ltd163 two theatrical artists
were engaged to provide their ‘professional services’ for a theatre company.
There was no definition of ‘professional services’ in the contract. Extrinsic
evidence was admitted to establish that it included producing the
performance, as well as acting in it. It is, however, probably more difficult to
introduce extrinsic evidence if the ambiguity relates to the nature or
character of the subject matter. Thus, in Hope v RCA Photophone of Australia
Pty Ltd164 extrinsic evidence was not admitted to establish that a lease of
‘electrical sound-reproduction’ equipment meant new, as opposed to
second-hand equipment, on the basis that the description was clear to ‘all
those who understand the terminology used for the purpose of describing
sound-reproducing apparatus’.
2.
to show the intention that both parties had in relation to the meaning of a
particular ambiguous contractual term.165 Such cases are sometimes referred
to as ‘private dictionary’ cases because the parties have agreed that a word
or expression in the express terms of the contract is to have, or not have, a
particular meaning.166
3.
to identify the parties to the contract.167 Thus, in Edwards v Edwards168 a
deed provided for the transfer of property to ‘John Edwards’. There was
ambiguity as to whether that description of the transferee referred to the
transferor’s father, brother or nephew, as they were all named John
Edwards. Extrinsic evidence was admitted to establish that the transferee
was the transferor’s brother. In relation to identifying contractual parties, in
Lederberger v Mediterranean Olives Financial Pty Ltd169 the Victorian Court of
Appeal said:
162
Process Minerals International Pty Ltd v Consolidated Minerals Pty Ltd [2011] WASCA 219 at [98];
Paul Fishlock v The Campaign Palace Pty Limited [2013] NSWSC 531 at [103]-[114]; Technomin
Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) 48 WAR 261 at 290.
163
(1943) 67 CLR 266.
164
(1937) 59 CLR 348 at 356.
165
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 24850; 41 ALR 367 at 375 at 372-6; Australasian Medical Insurance Ltd v CGU Insurance Ltd (2010) 271
ALR 142 at 156-7; Canberra Hire Pty Ltd v Koppers Wood Products Pty Ltd [2013] ACTSC 162 at [203][208]
166
Lodge Partners Pty Ltd v Pegum (2009) 255 ALR 516 at 521.
167
Damien v JKAM Investments Pty Ltd [2015] NSWCA 368 at [28].
168
(1918) 24 CLR 312.
169
(2012) 38 VR 509 at 515-6.
Identification of the parties to a contract must be in accordance with the objective
theory of contract. That is the intention that a reasonable person, with the
knowledge of the words and actions of the parties communicated to each other,
and the knowledge that the parties had of the surrounding circumstances, would
conclude that the parties had. The process of construction requires consideration
not only of the text of the documents, but also the surrounding circumstances
known to the parties and the purpose and object of the transaction. This in turn
presupposes knowledge of the genesis of the transaction, the background, and
the context in which the parties are operating.
4.
to establish whether a person’s post-contractual conduct, if it constitutes
admissions adverse to his or her interests, shows that a contract, that he or
she claims to exist, was formed.170 In Fazio v Fazio171 Murphy JA said:
Where, however, an informal agreement (oral or inferred) is alleged to have
been made on or by a certain date, the conduct of the parties, including
conduct subsequent to the postulated date, may be considered in deciding
whether a contract has been concluded. Such conduct may be considered for
the purpose of inferring not only whether a binding agreement had been
reached, but also its subject matter and the identification of its necessary
terms.
5.
to establish whether a document or clause in a document is a sham.172
6.
to establish whether a term was incorporated into a contract.173 Thus, postcontractual conduct may be admissible as an admission by one party as to the
terms of a contract.174 Also if the contract is oral or party written and partly
oral evidence of subsequent conduct can be admitted to establish the terms
of the contract.175
7.
to establish whether the remedy of rectification is available.176
8.
post-contractual conduct is admissible ‘for the purpose of showing the
meaning of words in ancient documents where the meaning of those words is
now obscure’.177
EXCLUSION CLAUSES AND EXTRINSIC EVIDENCE
170
Cooper v Hobbs [2013] NSWCA 70 at [54]; Brambles Holdings Ltd v Bathurst City Council (2000–1)
53 NSWLR 153 at 164; Stirnemann v Kaza Investments Pty Ltd [2011] SASCFC 77 at [17]-[18]; Hughes v
St Barbara Ltd [2011] WASCA 234 at [106]; Hopcroft & Edwards v Edmonds (2013) 116 SASR 191 at
214; Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605 at 625-6.
171
[2012] WASCA 72 at [193].
172
Bankway Properties Ltd v Pensfold-Dunsford [2001] 1 WLR 1369 at 1380.
173
Great North Eastern Railway Ltd v Avon Insurance plc [2001] 2 Lloyd’s Rep 649 at 655.
174
Johnson v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [84].
175
Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 at [143]; Hightime Investments Pty Ltd
v Adamus Resources Ltd [2012] WASC 295 at [98]-[99].
176
Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at 657–8
177
Mineralogy Pty Ltd v Sino Iron Ltd (No 6) (2015) 329 ALR 1 at 113.
In relation to the extent to which extrinsic evidence is admissible, either as an
exception to the parol evidence rule or on the view that evidence of prior
negotiations and/or post-contract conduct should generally be admissible on
questions of the interpretation of contracts, an entire agreement clause is an
effective way of preventing such evidence from being so used. 178 Spigelman CJ179
has noted that ‘a strong argument can be made that such a clause precludes
consideration of “surrounding circumstances” external to the document, on the
basis that the parties have agreed to do just that’.
However, in Westpac Banking Corporation v Newey 180 Pembroke J said the
following:
Nor does an entire agreement clause prevent the identification and resolution of an
ambiguity. The usual purpose of such a clause is to prevent reliance on representations,
collateral promises and implied terms. If an ambiguity exists, an entire agreement clause
cannot rationally prevent resort to the context and mutually known surrounding
circumstances to resolve it. I do not accept the view that the inclusion of an entire
agreement clause is a means of ‘contracting out of contextualism’.
LEGAL DRAFTING AND THE CONSTRUCTION OF LEGAL DOCUMENTS
The importance of effective legal drafting in minimising the occurrence of cases in
which the construction of legal documents is an issue cannot be overstated. In many
cases poor legal drafting is the reason why the issue of construction arises for judicial
determination. Judges have often commented on the poor quality of drafting. 181 In
this respect Butt182 has made the following observation:
Judges have not been reluctant to criticise poorly-drafted, traditionally styled, legal
documents … Epithets have included: botched, cobbled-together, doublespeak, absurd,
archaic, incomprehensible legal gobbledegook, singularly inelegant, and mind-numbing.
Poor drafting has its impact on the construction of the document. Thus, in Lord
Bridge in Mitsu Construction Company Limited v The Attorney General of Hong
Kong183 Lord Bridge said:
[T]he poorer the quality of the drafting, the less willing the court should be to be driven by
semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if
the language used, whatever it may lack in precision, is reasonably capable of an
178
C Mitchell C, ‘Entire Agreement Clauses: Contracting out of Contexualism’ (2006) 22 Journal of
Contract Law 222; E Peden & J W Carter, ‘Entire Agreement - And Similar – Clauses’ (2006) 22 Journal
of Contract Law 1.
179
Hon J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81
Australian Law Journal 322, p 336.
180
[2013] NSWSC 447 at [44].
181
See for example Hydrofibre Pty Ltd v Australian Prime Fibre Pty Ltd [2013] QSC 163 at [93];
Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633 at 659-60; 310 ALR 113 at 137.
182
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University
Press, Cambridge, 2013, p 47.
183
[1986] UKPC 6 at 9.
interpretation which attributes to the parties an intention to make provision for
contingencies inherent in the work contracted for on a sensible and businesslike basis.
Similarly, in Cohen v Teseo Properties Ltd184 Sales J said:
If the drafting of an agreement is generally poor, it will be harder to conclude on an
objective approach that the parties really meant the literal meaning of the words they
used to govern and override clear conflicting business common sense.
Much of today’s legal drafting is in a form which is difficult for non-lawyers to
understand. In this respect, Butt185 states:
Legal English … has traditionally been a special variety of English. Mysterious in form and
expression, it is larded with law-Latin and Norman-French, heavily dependent on the past,
and unashamedly archaic. Antiquated words flourish … Habitual jargon and stilted
formalism conjure a spurious sense of precision.
However, some progress is being made towards the use of plain English in legal
drafting. This is a trend that is favoured by an overwhelming majority of Australian
judges186 and legal practitioners.187 A Discussion Paper issued by the Victorian Law
Reform Commission188 provides the following description of what is meant by ‘plain
English’:
Plain English is language that is not artificially complicated, but is clear and effective for its
intended audience. While it shuns the antiquated and inflated word and phrase, which can
readily be either omitted altogether or replaced with a more useful substitute, it does not
seek to rid documents of terms which express important distinctions. Nonetheless, plain
language documents offer non-expert readers some assistance in coping with these
technical terms. To a far larger extent, plain language is concerned with matters of
sentence and paragraph structure, with organisation and design, where so many of the
hindrances to clear expression originate.
Former High Court justice, Michael Kirby 189 propounds the following 10
commandments for plain language in law, the observance of which he suggest would
greatly improve the clarity, vigour and directness of legal writing:
184
[2014] EWHC 2442 (Ch) at [30].
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University
Press, Cambridge, 2013, p 1.
186
K O’Brien, ‘Judicial Attitudes to Plain Language and the Law (2009) 32 Australian Bar Review 204.
187
B McKillop, ‘What Lawyers Think About Plain Legal Language’ (1994) 32 New South Wales Law
Society Journal (May) 68.
188
Quoted in P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge
University Press, Cambridge, 2013, p 102.
189
M Kirby, ‘Ten Commandments for Plain Language in Law’ (2010) 33 Australian Bar Review 10, p 14.
185
Butt190 lists the following benefits of using plain English: (i) ease of understanding, (ii)
increases in the ‘efficiency’ with which readers absorb and understand legal
documents, (iii) the reduction of errors in drafting documents, (iv) the reduction of
litigation in relation to the construction of documents, and (v) the reduction of
complaints against lawyers.
It can also be noted that legislation may prescribe the use of plain language. For
example, s 184 of the National Consumer Credit Protection Act 2009 (Cth) requires
various consumer credit contracts to be ‘easily legible’ and ‘clearly expressed’.
Furthermore, the consequences of not using plain English may have significant
impact on the rights of parties under certain contracts. Thus, ‘whether a consumer
was able to understand’ relevant documents is a factor that can be taken into
account by a court in determining whether a transaction was unconscionable
pursuant to the unconscionability provisions in ss 21 and 22 of the Australian
Consumer Law 2010 (Cth). Similarly, s 9(2)(g) of the Contracts Review Act 1980
(NSW) provides that ‘the physical form of the contract, and the intelligibility of the
language in which it is expressed’ is a factor that can go towards establishing that a
contract is ‘unjust’.
In summing up the benefits of plain English in legal drafting, Butt191 writes as follows:
Legal language should not be a language of coded messages, unintelligible to ordinary
citizens. Modern, plain English can cope with the concepts and complexities of the law and
legal process. It is as capable of precision as traditional legal English. The few technical
terms that a lawyer might feel compelled to retain for convenience or necessity can be
incorporated without destroying the document’s legal integrity. The modern English of a
legal document will never read like a good novel, but it can be attractive and effective in a
clean, clear, functional style.
190
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University
Press, Cambridge, 2013, pp 104-13.
191
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University
Press, Cambridge, 2013, pp 128-9.