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CONSTRUCTION OF PRIVATE LEGAL DOCUMENTS
Professor Peter Radan
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)
INTRODUCTION
This paper deals with the construction or interpretation of private law documents, such
as contracts and trust documents. The importance of this topic cannot be overstated. A
large proportion of cases in contract law and the law of trusts have as a component, and
often the major component, the construction of some document relevant to the parties
in the dispute. The conclusion reached by the court on the construction of the relevant
document usually has significant consequences in relation to the outcome of the case
before the court.
It should be noted from the outset that the issue of construction is one of law. In FBHS
(Aust) Pty Ltd v Stone Homes Pty Ltd [2014] NSWCA 312 at [20], Leeming JA said:
[I]f it had not long ago been determined that the unique meaning of a contract was a question
of law, there would have been no certainty in the construction of standard commercial
documents.
The case law on this issue is dominated by contract cases and, in the discussion to
follow, reference will usually be made to the construction of contracts. The principles
that are discussed apply with equal force to contracts between private individuals and
contracts between governments and individuals. As was reaffirmed by Beech J in Kidd v
The State of Western Australia [2014] WASC 99 at [120], [t]here are no special rules for
construction of government agreements’. Furthermore, the principles of construction of
contracts apply with equal force trust documents: Byrnes v Kendle (2011) 243 CLR 253
at 286; 279 ALR 212 at 238; 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] NSWCA 225 at [68]. One of the reasons for this is that ‘[t]he
contractual relationship provides one of the most common bases for the establishment
or implication and for the definition of a trust’: Gosper v Sawyer (1985) 160 CLR 548 at
568-9; 58 ALR 13 at 26. Finally, as was pointed out by the Supreme Court of the United
Kingdom in Marley v Rawlings [2014] 1 All ER 807 at 815-6, subject to any legislative
provisions to the contrary, these principles also apply to the interpretation of wills. In
New South Wales, such legislative provisions are found in ss 29-46 of the Succession Act
2006. In relation to the general principles relating the construction of wills, in Gordon
Salier v Robert Angius [2015] NSWSC 853 at [26]-[32], Ball J said the following:
The general principles applicable to the construction of wills are not in dispute. The task of the
court is to give effect to the ‘expressed intentions’ of the testator, which requires the court to
give to the language of the will the meaning that, according to the terms of the will and the
circumstances in which it was made, the testator can be said to have intended. The court is
not concerned with ‘what the testator intended in some general sense, but what he intended
by the words in his will’.
It is some times said that the court is to put itself in the ‘armchair of the deceased’ and in
doing so to construe the words in the will knowing what the deceased knew.
The will must be construed as a whole. In applying that principle, courts have often sought to
identify ‘the basic scheme which the deceased had conceived for dealing with his estate and
then, so to construe the will as, if it be possible, to give effect to the scheme’. The relative
importance of the overall scheme of the will is greater where the ‘language [of the will] is
obscure or the effects of the literal reading and the reasoning impliedly underlying it are
startlingly unlikely’. Conversely, ‘where the terms of the will are perfectly clear search for the
scheme would be of little use’.
These principles are illustrated by the decision of the High Court in Hendry v The Perpetual
Executors and Trustees Association of Australia Ltd (1961) 106 CLR. In that case, the testator
was a partner in a partnership that owned both land and livestock. By his will he left ‘all my
livestock’ to a nephew. He described the balance of his estate as ‘all my real estate’ and ‘the
residue of my personal estate’. He left the proceeds of the conversion of the former to the
sons of a cousin in equal shares and the proceeds of conversion of the latter to his sister. The
question in the case was how the testator’s estate was to be distributed given that he owned
neither livestock nor real estate. In answering that question the High Court said (at 266-7):
[T]he enquiry is not what rights did the plaintiff have by virtue of the partnership
upon the death of the testator nor even what were the testator’s rights as a
partner but what did he mean when in his will he used the words ‘my livestock’ and
‘my real estate’ when he had none of his own but he was a member of a
partnership which had both livestock and real estate. This question is not to be
answered by any strict legal analysis of the rights of the testator as a partner during
his life and certainly not by considering the rights of his personal representative
after his death. What has to be done is to determine what the testator meant by
his words in his will and when the will is looked at in the light of the circumstances
as they existed immediately before his death the conclusion is inevitable that he
was dividing what he had into three parts, and that he was disposing separately of
whatever interest he had in livestock (which could only be his partnership interest),
of the net proceeds of whatever interest he had in land (which, again, could only be
his partnership interest), and of the net proceeds of whatever interest he had in
personalty other than livestock.
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The court may also take into account the intentions of the testator if the will is ambiguous in
the light of the surrounding circumstances. Section 32 of the Succession Act 2006 (NSW)
provides:
32 Use of extrinsic evidence to construe wills
(1) In proceedings to construe a will, evidence (including evidence of the testator’s
intention) is admissible to assist in the interpretation of the language used in the
will if the language makes the will or any part of the will:
(a) meaningless, or
(b) ambiguous on the face of the will, or
(c) ambiguous in the light of the surrounding circumstances.
(2) Despite subsection (1), evidence of the testator’s intention is not admissible to
establish any of the circumstances mentioned in subsection (1) (c).
(3) Despite subsection (2), nothing in this section prevents evidence that is
otherwise admissible at law from being admissible in proceedings to construe a
will.
The court should seek to adopt a construction of the will that avoids intestacy. That general
rule of construction is supplemented by s 42 of the Succession Act, which provides:
42 Construction of residuary dispositions
(1) A disposition of all, or the residue, of the estate of a testator that refers only to
the real estate of the testator, or only to the personal estate of the testator, is to
be construed to include both the real and personal estate of the testator.
(2) If a part of a disposition in fractional parts of all, or the residue, of the testator’s
estate fails, the part that fails passes to the part that does not fail, and, if there is
more than one part that does not fail, to all those parts proportionally.
(3) This section does not apply if a contrary intention appears in the will.
Similarly, the court should adopt a construction which preserves the validity of a gift rather
than destroys it.
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: Life Insurance
Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78. Our concern here is with the first of
these two things. In relation to the legal effects or significance of the document’s terms,
you will have already covered this question in other subjects. For example, in Contracts
this question raised the important issue of the classification of terms of a contract as
being conditions, warranties or intermediate terms. This issue is of profound importance
in relation to whether an innocent party to a breach of contract is entitled to terminate
the contract as a result of the breach.
A preliminary point that can be made about determining the meaning of the words used
is that the richness of the English language often presents the courts with significant
problems when construing a contract or other legal document. This point was well made
by Lord Simon of Glaisdale in Stock v Frank Jones (Tipton) Ltd [1978] 1 All ER 948 at 953,
where his Lordship said:
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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,1 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 of shabby solicitor Dennis Denuto
1
Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the Ambiguity
Gateway’ (2013) 37 Australian Bar Review 118, pp 138-9.
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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: Australian
Broadcasting Commission v Australasian Performing Rights Association Limited (1973)
129 CLR 99 at 109.
This fundamental point was reaffirmed in Byrnes v Kendle (2011) at CLR 284; ALR 236-7,
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 also set out in
Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at 1113-4; [2009] 4 All ER 677
at 688, 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.
In this process of construction it is not the role of the court to improve the contract. In
Arnold v Britton [2013] EWCA Civ 902 at [36], Davis LJ said:
[I]t is not ordinarily enough that the parties simply have failed to provide for or anticipate a
particular circumstance … [T]he court is not permitted to improve upon an instrument which it
is required to construe: its task is to discover what the instrument, read as a whole and set in
its surrounding circumstances.
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: Wilkie v Gordian
Runoff Limited (2005) 221 CLR 522 at 529; 214 ALR 410 at 413. Thus, in Chapmans Ltd v
Australian Stock Exchange Ltd (1996) 67 FCR 402 at 411, Lockhart and Hill JJ said:
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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.
Similarly, in Durham v BAI (Run Off) Ltd (in scheme of arrangement) and other cases; Re
Employers’ Liability Policy ‘Trigger’ Litigation [2012] 3 All ER 1161 at 1176, Lord Mance
said:
To resolve these questions it is necessary to avoid over-concentration on the meaning of single
words or phrases viewed in isolation, and to look at the insurance contracts more broadly. As
Lord Mustill observed in Charter Reinsurance Co Ltd v Fagan [1977] AC 313 at 384, all such
words ‘must be set in the landscape of the instrument as a whole’ and ([1977] AC 313 at 381)
any ‘instinctive response’ to their meaning ‘must be verified by studying the other terms of the
contract, placed in the context of the factual and commercial background of the transaction’.
The present case has given rise to considerable argument about what constitutes and is
admissible as part of the commercial background to the insurances, which may shape their
meaning. But in my opinion, considerable insight into the scope, purpose and proper
interpretation of each of these insurances is to be gained from a study of its language, read in
its entirety. So, for the moment, I concentrate on the assistance to be gained in that
connection.
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:
Meehan v Jones (1982) 149 CLR 571 at 589; 42 ALR 463 at 475; Wentworth Shire Council
v Bemax Resources Limited [2013] NSWSC 1047 at [50]. Thus, a court should construe a
commercial contract ‘fairly and broadly, without being too astute or subtle in finding
defects’: Australian Broadcasting Commission v Australasian Performing Rights
Association at 109.
In Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113 at 126, speaking for
the Court of Appeal, Leeming JA said:
A court should strain to give effect to one obvious aspect of the shared and objectively
manifested intention of the parties - namely, that they had created contractual relations. It is a
signal element of the obligation of courts to approach the task of giving legal meaning to
commercial contracts with ‘business commonsense’: Antaios Compania Naviera SA v Salen
Rederierna AB [1985] AC 191 at 201. There are indubitably cases where there may be a real
contest about what amounts to business commonsense: Franklins Pty Ltd v Metcash Trading
Ltd (2009) 76 NSWLR 603 at [20], but the fact that the parties had, by executing pages
described as a contract, entered into contractual relations with one another is not one of
them. As was said by Ormiston JA in Vroon BV v Foster's Brewing Group Ltd [1994] 2 VR 32 at
68 … :
Where parties have deliberately written the terms upon which they wish to bargain
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but have omitted ... a term which might in other circumstances have been expressly
... stated, the courts will endeavour to give effect to the fact that the parties did not
see the absence or deficiency of such a term as preventing them from reaching
agreement.
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
literal nor unswervingly purposive’: International Fina Services AG v Katrina Shipping Ltd
(The Fina Samco) [1995] 2 Lloyd’s Rep 344 at 350. Indeed, ‘[t]here has been a shift from
literal methods of interpretation towards a more commercial approach’: Sirius
International Insurance Company (Publ) v FAI General Insurance Limited [2005] 1 All ER 191
at 200.
In relation to giving the words of the contract their natural and ordinary meaning, in
Ravennavi SpA v New Century Shipbuilding Co Ltd [2007] 2 Lloyd’s Rep 24 at 27, MooreBick LJ said:
Unless the dispute concerns a detailed document of a complex nature that can properly be
assumed to have been carefully drafted to ensure that its provisions dovetail neatly, detailed
linguistic analysis is unlikely to yield a reliable answer. It is far preferable, in my view, to read
the words in question fairly as a whole in the context of the document as a whole and in the
light of the commercial and factual background known to both parties, in order to ascertain
what they were intending to achieve.
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. Thus, in Marquis
of Cholmondeley v Lord Clinton (1820) 37 ER 527 at 559, Plumer MR said:
When 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; but this is not conclusive
evidence that this was his real meaning. If the technical meaning is found, in the particular
case, to be an erroneous guide to the real one, leading to a meaning contrary to what the
party intended to convey by it, it ceases to answer its purpose.
In Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA
64 at [167]-[170], Campbell JA said:
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 Ltd [1967] 1 QB 302 at 313-4, 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
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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 approach to
construction.
The presumption that words with a technical meaning should be given that technical
meaning is ‘not easily displaced’: Sydney Attractions Group Pty Ltd v Schulman [2013]
NSWSC 858 at [66]. Thus, in Brett v Barr Smith (1918) 26 CLR 87 at 93, Isaacs J said:
It is a cardinal rule of interpretation that technical words must have their legal effect unless
the contrary is made perfectly clear.
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
Australia [2014] WASC 99 at [121] 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: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; 211 ALR 342
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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 at CLR 284; ALR 236-7.
The justification for this objective approach was explained by Tipping J in Vector Gas
Limited v Bay of Plenty Energy Limited [2010] 2 NZLR 444 at 458, 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.
A formulation of the objective test of interpretation is set out in Lord Hoffmann’s
speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998]
1 All ER 98 at 114, 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.
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 v Persimmon Homes at AC 1119; All ER 693, Lord Hoffmann made the
following comment:
The only points [Investors Compensation Scheme Ltd v West Bromwich Building Society]
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 Wales
(1982) 149 CLR 337; 41 ALR 367, Mason J in the High Court observed that, in a
commercial contract, if words are ambiguous or susceptible of more than one meaning,
a court, having regard to the origins of the transaction, its context and the market in
which the parties are operating, should ascertain the contract’s commercial purpose in
order to give the contract a sensible commercial operation. His Honour, at CLR 352; ALR
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374, 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.
The question that has generated considerable debate in the wake of these cases is
whether there is a difference between the views of Lord Hoffmann and Mason J. It
appears to be the case that in Codelfa Construction v State Rail Authority, Mason J
confined the use of surrounding circumstances in the construction of a contract to cases
where the words used are ambiguous, whereas Lord Hoffmann’s approach in Investors
Compensation Scheme v West Bromwich Building Society is not so confined. A further
question that arises is, if there is a difference between the two approaches, which is the
proper approach to be adopted by a court engaged in construing a contract.
What can be said in response to these questions is that subsequent decisions of
Australia’s High Court have been far from helpful. Thus, in Royal Botanic Gardens and
Domain Trust v South Sydney Council (2002) 240 CLR 451at 62-3; 86 ALR 289 at 301,
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, and demanded that, in the
meantime, other Australian courts ‘should continue to follow Codelfa’ if they
discerned any inconsistency between the two approaches. This position was restated
by the High Court, in a special leave application, in Western Export Services Inc v Jireh
International Pty Ltd (2011) 282 ALR 604 at 605. The binding nature of Mason J’s
statement in Codelfa was also confirmed by the High Court recently in Mount Bruce
Mining Pty Limited v Wright Prospecting Pty Limited (2015) 325 ALR 188 at 198, 211. In
that case Bell and Gageler JJ, at 211, said the following:
These appeals do not raise an important question on which intermediate courts of appeal are
currently divided. That question is whether ambiguity must be shown before a court
interpreting a written contract can have regard to background circumstances. Until that
question is squarely raised in and determined by this Court, the question remains for other
Australian courts to determine on the basis that Codelfa Construction Pty Ltd v State Rail
Authority of New South Wales remains binding authority.
In relation to the question of whether the views of Mason J and Lord Hoffmann are
different, in BP Australia Pty Limited v Nyran Pty Limited (2003) 198 ALR 442 at 451–2,
Nicholson J argued that the approaches of Mason J and Lord Hoffmann are inconsistent
and that surrounding circumstances can only be taken into account in cases of
ambiguous language. Similarly, in GMA Garnet Pty Ltd v Barton International Inc (2010)
183 FCR 269 at 276, Buchanan J, after discussing the relevant cases, concluded that
‘evidence of surrounding circumstances may not be used, as part of an exercise in
construction of a contract, to contradict unambiguous contractual stipulations’.
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On the other hand, in Horton Geoscience Constructions Pty Ltd v Energy Minerals Pty Ltd
[2005] QCA 169 at [36], Fryberg J, after quoting Mason J in Codelfa Construction v State
Rail Authority, went on to say that, in his opinion, ‘subsequent High Court decisions
establish that in determining the meaning of the terms of a contractual document the
surrounding circumstances known to the parties, and the purpose and object of the
transaction, may normally be taken into account; their impact is not restricted to the
case where the language is ambiguous (whether latent or patent) or susceptible of more
than one meaning’. This passage suggests, as did Palmer J in Brooks Pty Ltd v NSW
Grains Board [2002] NSWSC 1049 at [61], that the approaches of Mason J and Lord
Hoffmann are in ‘complete sympathy’ with each other.
In relation to Fryberg J’s references to ‘subsequent High Court decisions’ the following
points can be noted. First, in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR
181 at 188; 185 ALR 152 at 155, Lord Hoffmann’s approach was explicitly referred to by
the High Court. Second, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at CLR 179; ALR 352,
the High Court adopted ‘the principle of objectivity by which the rights and liabilities of
the parties to a contract are determined’ and went on to say:
It is not the subjective beliefs or understandings of the parties about their rights and liabilities
that govern their contractual relations. What matters is what each party by words and conduct
would have led a reasonable person in the position of the other party to believe. References to
the common intention of the parties to a contract are to be understood as referring to what a
reasonable person would understand by the language in which the parties have expressed
their agreement. The meaning of the terms of a contractual document is to be determined by
what a reasonable person would have understood them to mean. That, normally, requires
consideration not only of the text, but also of the surrounding circumstances known to the
parties, and the purpose and object of the transaction.
This statement in the High Court does not confine the use of surrounding circumstances
to cases of ambiguity and was re-affirmed by the High Court in International Air
Transport Association v Ansett Australia Holdings Ltd at CLR 174; ALR 63. On the basis of
these three decisions it can be persuasively argued that the High Court has adopted the
approach of Lord Hoffmann.
Prior to the High Court’s decision in Western Export Services Inc v Jireh International Pty
Ltd, the majority of Australia’s intermediate appellate courts also expressed a
preference for the substance of Lord Hoffmann’s approach. Thus, in Franklins Pty Ltd v
Metcash Trading Ltd (2009) 76 NSWLR 603 at 616, Allsop P said:
The construction and interpretation of written contracts is to be undertaken by an
examination of the text of the document in the context of the surrounding circumstances
known to the parties, including the purpose and object of the transaction and by assessing
how a reasonable person would have understood the language in that context. There is no
place in that structure, so expressed, for a requirement to discern textual, or any other,
ambiguity in the words of the document before any resort can be made to such evidence of
surrounding circumstances.
11
Similarly, in Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Limited
[2009] NSWCA 140 at [22], the Court of Appeal observed that the trial judge in this case
was in error when he ‘appeared to adopt a principle that background or extrinsic
material can only be examined once some textual ambiguity in the contract is revealed’.
Similar sentiments can be found in Masterton Homes Pty Ltd v Palm Assets Pty Ltd
(2009) 261 ALR 382 at 385, 406-7; World Best Holdings Limited v Sarker [2010] NSWCA
24 at [17]; MBF Investments Pty Ltd v Nolan [2011] VSCA 114 at [195]-[203]; and
McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011]
NSWCA 315 at [17].
However, these views were seemingly cast aside by the High Court in Western Export
Services Inc v Jireh International Pty Ltd at 605, where Gummow, Heydon and Bell JJ
said:
The applicant in this Court refers to [Franklins Pty Ltd v Metcash Trading Ltd] … as authority
rejecting the requirement that it is essential to identify ambiguity in the language of the
contract before the court may have regard to the surrounding circumstances and object of the
transaction … Acceptance of the applicant’s submission, clearly would require reconsideration
by this Court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by
Mason J … to be the ‘true rule’ as to the admission of evidence of surrounding circumstances.
Until this Court embarks upon that exercise and disapproves or revises what was said in
Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of
primary judges, notwithstanding what may appear to have been said by intermediate
appellate courts … We do not read anything said in this Court in Pacific Carriers Ltd v BNP
Paribas; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd; Wilkie v Gordian Runoff Ltd and
International Air Transport Association v Ansett Australia Holdings Ltd as operating
inconsistently with what was said by Mason J in … Codelfa.
Similarly, in a footnote to their judgment in Byrnes v Kendle at CLR 285; ALR 237,
Heydon and Crennan JJ noted that the High Court had not pronounced on the issue of
whether there was an inconsistency between the approach of Lord Hoffmann in
Investors Compensation Scheme v West Bromwich Albion and Mason J in Codelfa
Construction v State Rail Authority.
In relation to the High Court’s statement in Western Export Services Inc v Jireh
International Pty Ltd, in Mrocki v Mountview Prestige Homes Pty Ltd [2012] VSCA 74 at
[25], Buchanan JA, speaking for the Court of Appeal said that ‘in [that case] Gummow,
Heydon and Bell JJ reiterated the position established by Codelfa Construction Pty Ltd v
State Rail Authority of NSW, that a court is not to have regard to surrounding
circumstances to construe unambiguous language’. A similar line of reasoning was
adopted by the appellate courts in New South Wales in Cordon Investments Pty Ltd v
Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52] and in Western Australia in McCourt
v Cranston [2012] WASCA 60 at [23]. From these cases it can be concluded that there is
a difference between the views of Mason J and Lord Hoffmann, and that the more
restrictive view of Mason J is to be applied by Australian judges with the result that
12
evidence of surrounding circumstances can only be admitted in relation to the
construction of ambiguous language in a contract.
Finally, in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 325
ALR 188 at 198, French CJ, Nettle and Gordon JJ endorsed this approach when they said
the following:
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.
This view was echoed in the same case by Kiefel and Keene JJ, at 210, where their
Honours 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.
The decision of the High Court in Western Export Services Inc v Jireh International Pty Ltd
has been trenchantly criticised by commentators.2 For example, Carter et al, in critiquing
a recent decision on the law of penalties (Andrews v Australian & New Zealand Banking
Group Ltd (2012) 290 ALR 595), state the following:
Andrews joins other recent contract decisions of the High Court, the methodology of which is a
source of concern … Andrews also illustrates the difficulties which intermediate appellate
courts face. Prior to Andrews, the High Court had usually stood jealous guard over its own
decisions, severely criticising lower courts, particularly the New South Wales Court of Appeal,
who sought to detect evolution in the law of contract. For example, … recently, three members
of the High Court chose the special leave application in Western Export Services Inc v Jireh
International Pty Ltd as the vehicle to voice an opinion that the New South Wales Court of
Appeal has wrongly treated the High Court’s position in relation to the use of context in
construction as having moved on since Codelfa Construction Pty Ltd v State Rail Authority of
New South Wales. They did not say why the Court of Appeal was wrong, let alone explain the
passages in its own judgments from which commentators have drawn the same conclusions as
the Court of Appeal.3
The standing of Western Export Services Inc v Jireh International Pty Ltd as binding
authority has also been questioned on the basis that reasons given in special leave
applications are not binding and are only persuasive.4 However, the fact that
2
D Wong & B Michael, ‘Western Export Services v Jireh International: Ambiguity as the Gateway to
Surrounding Circumstances?’ (2012) 86 Australian Law Journal 57; D McLauchlan & M Lees, ‘More
Construction Controversy’ (2012) 29 Journal of Contract Law 97.
3
J W Carter, W Courtney, E Peden, A Stewart & G J Tolhurst, ‘Contractual Penalties: Resurrecting the
Equitable Jurisdiction’ (2013) 30 Journal of Contract Law 99, p 130.
4
Wong & Michael, ‘Western Export Services v Jireh International’, see note 1, p 64; Hon Justice Kenneth
Martin, ‘Contractual Construction: Surrounding Circumstances and the Ambiguity Gateway’ (2013) 37
Australian Bar Review 118, p 138. In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited
13
intermediate appellate courts have followed the decision of the High Court means that
the statement of principle found there has become binding law. In this respect in
Mineralogy Pty Ltd v Sino Iron Pty Ltd [2013] WASC 194 at [123]-[124], Edelman J said:
The Defendants submitted that I should not follow the remarks made in Western Export
Services Inc … This submission raised the question of whether a pronouncement on a special
leave application should be treated as, or as akin to, seriously considered obiter dicta.
Whatever the merits of the broad approach to contractual interpretation, and whatever the
answer to the question of precedent, the submission that the broad approach currently forms
part of Australian law must be rejected. The approach taken by numerous intermediate
appellate courts, and trial judges, to the pronouncement in Western Export Services Inc, either
explicitly or implicitly, has been to follow it. In Cape Lambert Resources Ltd v MCC Australia
Sanjin Mining Pty Ltd [2013] WASCA 66 at [77], McLure P made this point explicit, saying that
the pronouncement ‘cannot be ignored’.
Justice Kenneth Martin, 5 writing extra-judicially, suggests that the issue over the
competing views of Mason J and Lord Hoffmann has not been definitively resolved and
notes as follows:
It appears that at some point a final battle will be waged over this issue in the High Court. For
the present, Australia, as I see it, follows a conceptually narrower approach to the admissibility
of surrounding circumstance evidence (although as a matter of pragmatism this is debatable
by reason of the width in implementation of the ‘gateway’ itself) than Lord Hoffmann’s
approach to interpretation in the United Kingdom.
On the basis that evidence of surrounding circumstances can only be admitted where,
in the words of Mason J in Codelfa Construction v State Rail Authority, 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 in Codelfa Construction v
State Rail Authority, ‘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 National [2013] SASC 46 at [53], Stanley J said:
The concept of ambiguity referred to by Mason J in Codelfa is not without its difficulties. The
disjunctive reference to language which is ambiguous or susceptible to more than one
(2015) 325 ALR 188 at 210, Kiefel and Keane JJ observed that ‘statements made in the course of reasons
for refusing an application for special leave create no precedent and are binding on no one’.
5
Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the Ambiguity
Gateway’ (2013) 37 Australian Bar Review 118, p 138.
14
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 [2007] NSWCA 235 at [12], 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 in Codelfa 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 McCourt v Cranston at [24], Pullin JA said:
Usually, the meaning of ‘ambiguous’ is taken to include ‘open to various interpretations’: see
Macquarie Dictionary, 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’.
In South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 at [35], Spigelman
CJ said:
[T]he word ‘ambiguity’ - ironically a word not without its own difficulties - does not refer only
to a situation in which the words used have more than one meaning. A broader concept of
ambiguity is involved: reference to surrounding circumstances is permissible whenever the
intention of the parties is, for whatever reason, doubtful.
In Kidd v The State of Western Australia [2014] WASC WASC 99 at [124] Beech J said:
Ambiguity is not confined to lexical, grammatical or syntactical ambiguity. It is enough if the
instrument is susceptible of more than one meaning or if the scope or applicability of the
contract is doubtful.
Finally, in Manufacturers Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cases
75,336 at 75,343, 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 SA at 132, where Leeming JA said:
[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 [in Codelfa] 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.
15
In coming to this conclusion, Leeming JA referred to and relied upon the recent High Court
decision in Electricity Generation Corporation v Woodside Energy Ltd (2014) 306 ALR 25
at 33-4, 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’: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149
CLR at 360, citing Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-6
… A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or
working commercial inconvenience’: Zhu v Treasurer of New South Wales (2004) 218 CLR 530
at 559.
Leeming JA, at 130, then concluded as follows:
To the extent that what was said in Jireh 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. 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 significance of the decision in Mainteck Services Pty Ltd v Stein Heurtey SA is that
it very much appears that it adopts an approach to interpretation that is consistent
with the approach of Lord Hoffmann in Investors Compensation Scheme Ltd v West
Bromwich Building Society.6 In this respect, the decision in Mainteck Services Pty Ltd v
Stein Heurtey SA was endorsed by the Full Court of the Federal Court in Stratton
Finance Pty Limited v Webb (2014) 314 ALR 166 at 174 where the Court said:
Recently, in Mainteck Services Pty Ltd v Stein Heurtey SA, the New South Wales Court of
Appeal … expressed the view that … Woodside was inconsistent with Jireh. We agree with that
conclusion.
However, in Gladstone Area Water Board v A J Lucas Operations Pty Ltd [2014] QSC 311
at [153]-[168], Jackson J came to the conclusion that Woodside is not inconsistent with
Jireh and that the court in Mainteck was wrong to conclude that Woodside had impliedly
overruled Jireh. Similar sentiments were expressed by the Court of Appeal in Western
Australia in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd
[2014] WASCA 164 at [35]-[44].7
6
B Michael & D Wong, ‘Recourse to Contractual Context Reaffirmed’ (2015) 89 Australian Law Journal
181, p 187.
7
For an analysis of these cases see Hon Justice Kenneth Martin, ‘Surrounding Circumstances Evidence:
Construing Contracts and Submissions about Proper Construction: The return of the Jedi (sic) Judii’ Paper
presented to WA Bar Association Autumn Festival of CPD, 17 March 2015, available at
<http://www.supremecourt.wa.gov.au/_files/Surrounding%20Circumstances%20Evidence%20Construing
16
Surrounding Circumstances
In any event, whatever the courts may say in relation to this issue, ambiguity, as a
matter of practice, can be readily established. Once established this gives rise to the
question of what is meant by ‘evidence of surrounding circumstances.
In relation to the meaning of ‘evidence of surrounding circumstances’, in Bank of
Credit and Commerce International SA v Ali [2002] 1 AC 251 at 269, 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 Ltd at 670. His Honour,
at 678, 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’.
In Newey v Westpac Banking Corporation [2014] NSWCA 319 at [110], 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].
In a similar vein, in Codelfa Construction v State Rail Authority at CLR 352; ALR 374-5,
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 Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 325 ALR 188
at 198, French CJ, Nettle and Gordon JJ at 198, 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.
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0the%20Jedi%20(sic)%20Judii%20Justice%20Kenneth%20Martin%2017%20Mar%202015.pdf>
17
The practical effect of the decision in Codelfa Construction v State Rail Authority ‘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’: Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 294 ALR 550
at 566.
In Franklins Pty Ltd v Metcash Trading Ltd at 619, Allsop P made the following comment
on the issue of admitting evidence of surrounding circumstances:
The High Court authorities to which I have referred and in particular Pacific Carriers v BNP
Paribas and Toll (FGCT) v Alphapharm, and the recognition of the significance of the objective
theory assist in appreciating the scope of the evidence that is admissible. The evidence, to be
admissible, must be relevant to a fact in issue, probative of the surrounding circumstances
known to the parties or of the purpose or object of the transaction, including its genesis,
background, context and market in which the parties are operating. What is impermissible is
evidence, whether of negotiations, drafts or otherwise, which is probative of, or led so as to
understand, the actual intentions of the parties. Such evidence might be legitimate, however,
if directed to one of the legitimate aspects of surrounding circumstances. The distinction can
be subtle in any particular case. As Macfarlan JA and I said in Kimberley Securities Ltd v Esber
[2008] NSWCA 301 at [5]:
The possible subtlety of the distinction can be seen in Lord Wilberforce’s reasons in
Prenn v Simmonds [1971] 1 WLR 1381 at 1384-1485, and the recognition that the
objective commercial aim may, possibly, be ascertained from some aspect of what
has passed between the parties. The distinction can also be seen in what Mason J
said in Codelfa at 352 about prior negotiations and their legitimate use ‘to establish
objective background facts which were known to both parties and the subject
matter of the contract’, and their inadmissibility ‘in so far as they consist of
statements and actions of the parties which are reflective of their actual intentions
or expectations’.
In the same case, Campbell JA, at 686, said:
The sort of surrounding circumstances that can be taken into account are ones that enable the
meaning of the words used in the document in question to be ascertained as that meaning
would appear to a reasonable person who knew the facts concerning those circumstances.
Statements by contracting parties about their subjective intentions in entering the agreement
do not assist in ascertaining the meaning of the words.
Furthermore, 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 Ltd [2006]
EWCA Civ 1932 at [21]-[22], 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.
18
Similarly, in McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in
liquidation) [2011] NSWCA 315 at [17], Bathurst CJ, speaking for the Court of Appeal,
said that evidence of surrounding circumstances ‘does not permit the Court to depart
from the ordinary meaning of the words used by the parties merely because it regards
the result as inconvenient or unjust’.
Kidd v The State of Western Australia [2014] WASC WASC 99 at [126] Beech J said:
There are limits on the extent to which surrounding circumstances can influence the proper
construction of an instrument. Reliance on the surrounding circumstances must be tempered
by loyalty to the text of the instrument
On the other hand, facts, that would otherwise be admitted as an aid to the
construction of a contract, will be available for that purpose even if those facts were
communicated between the parties on a ‘without prejudice’ basis: Oceanbulk Shipping
& Trading SA v TMT Asia Ltd [2011] 1 AC 662 at 679-83; [2010] 4 All ER 1011 at 1024-7.
In Sattva Capital Corporation v Creston Moly Corporation [2014] SCC 53 at [57]-[58], 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. Subject to these requirements
and the parol evidence rule discussed below, this 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’ [Investors Compensation
Scheme Ltd v West Bromwich Building Society at 114]. 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 Court, at [61], also noted that ‘the parol evidence rule does not apply to
preclude evidence of surrounding circumstances when interpreting the words of a
written contract’.
19
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.8 A number of these principles are discussed below.
However, it must be remembered 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
It is presumed that parties to written contracts do not intend their terms 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: L Schuler AG v Wickman
Machine Tool Sales Limited [1974] AC 235 at 251; [1973] 2 All ER 39 at 45.
However, this principle relating to the reasonableness or otherwise of the contract
cannot be taken too far. In Chartbrook v Persimmon Homes at AC 1113; All ER 687, 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 which avoids an unreasonable result: Australian Broadcasting
Commission v Australasian Performing Right Association at 109–10. 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: New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski
[2011] FCAFC 106 at [56].
However, even in cases where there is no ambiguity, a court may decline to apply the
plain meaning of the words used if:
(i)
it would lead to an irrational result: Westpac Banking Corporation v Tanzone Pty
Ltd [2000] NSWCA 25 at [19]-[20];
8
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press,
Cambridge, 2013, p 55.
20
(ii)
if it would lead to a meaning that is repugnant to the objectively determined
intention of the parties: 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;
(iii) if it makes no commercial sense: McGrath v Sturesteps; Sturesteps v HIH Overseas
Holdings Ltd (in liquidation) at [17]; Gloria Jean’s Coffee v Western Export Services
Inc [2011] NSWCA 137 at [55]; Mainteck Services Pty Ltd v Stein Heurtey SA at 139.
In such cases the plain meaning must be manifestly absurd - mere
unreasonableness is not enough: Schwartz v Hadid [2013] NSWCA 89 at [31];
Current Images Pty Ltd v Dupack Pty Ltd [2012] NSWCA 99 at [47]. As was pointed
out by Ward JA in International Petroleum Investment Company v Independent
Public Business Corporation of Papua New Guinea [2015] NSWCA 363 at [148],
‘[t]he Court has no mandate to rewrite agreements merely to give them a more
commercial operation’. As to establishing the absurdity, in Miwa Pty Ltd v Siantan
Properties Pty Ltd [2011] NSWCA 297 at [18], Basten JA observed that ‘[it] is clear
from these authorities that the test of absurdity is not easily satisfied’. In National
Australia Bank Ltd v Clowes [2013] NSWCA 179 at [34], 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 JA, at [38], 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 [2009] NSWSC 1486]. 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 (2008) 73 NSWLR 53, 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 Green v AMP Life [2005] NSWSC 370 at
[171], Campbell J defined the remedy of rectification as follows:
Rectification is an equitable remedy which enables a document which sets out legal rights in a
way different to the way the parties intended, to be corrected so as to give effect to their
intention. Insofar as rectification is granted of contracts, it is only of those contracts which
were intended by the parties to be wholly expressed in writing, or of those parts of the partly
written contract which were intended to be expressed in writing.
21
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 Mayo [2013] NSWSC 1063 at [48]-[51], 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.
The ability of a court in appropriate circumstances to correct an error as a matter of
construction rather than by the equitable remedy of rectification was alluded to by Lord Millet
in Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715 at [192]. His
Lordship referred, by way of example, to the ability of courts in equity to correct errors in wills,
at a time when there was no power to rectify a will.
The case of Fitzgerald v Masters (1956) 95 CLR 420 provides an example of a court’s ability to
correct errors or resolve inconsistencies by a process of construction rather than by way of
rectification. In J W Carter, The Construction of Commercial Contracts (2013) Hart Publishing
(at [9.44]), the author refers to a number of commonly encountered mistakes in contractual
documents and observes (citing mainly English cases):
However, many such ‘mistakes’ are corrected in construction. The modern
approach to construction therefore makes rectification less important than in the
past. This ‘close relationship’ between construction and rectification also makes it
difficult to maintain the conventional view that rectification is ‘distinct from an
exercise in construction’ ... But as a matter of principle there is a difference
between mistakes which can be ‘corrected’ by construction and mistakes for
which a formal order is required. [citations omitted]
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. As also alluded to by Professor Carter (at [9.44]), 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. That would appear to be
consistent with Mason J’s comments in Codelfa Construction Pty Ltd v State Rail Authority
(NSW) (1982) 149 CLR 337 (at 352):
The object of the parole evidence rule is to exclude them, the prior oral agreement
of the parties being inadmissible in aid of construction, though admissible in an
action for rectification.
The difference between the scope of operation of correction by construction and correction by
rectification is perhaps more important in Australian than English contract law, given the
narrower Australian view as to the permissibility of extrinsic material for the purposes of
construction.
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: Geys v Société
22
Générale, London Barnch [2013] 1 AC 523 at 538. In Re Media Entertainment & Arts
Alliance; Ex Parte Hoyts Corp Pty Ltd (No 1) (1993) 178 CLR 379 at 386-7; 115 ALR 321 at
326, 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 (1925) 35 CLR 449
at 455, 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’ (Broom’s Legal Maxims, 9th ed, pp 367368).
In North v Marina [2003] NSWSC 64 at [43]-[46] Campbell J said:
In construing a document, one seeks to ascertain the intention of the parties arising from the
document as a whole, and reading the document with such background information as was
known by all parties to it. In McEntire v Crossley Bros [1895] AC 457 , at 462-3 Lord Herschell LC
said, in words quoted with approval by Isaacs J in Australian Guarantee Corporation Ltd v
Balding (1930) 43 CLR 140 at 151
... the agreement must be regarded as a whole – its substance must be looked at.
The parties cannot, by the insertion of any mere words, defeat the effect of the
transaction as appearing from the whole of the agreement into which they have
entered. If the words in one part of it point in one direction, and the words in
another part in another direction, you must look at the agreement as a whole and
see what its substantial effect is. But there is no such thing, as seems to have been
argued here, as looking at the substance, apart from looking at the language which
the parties have used. It is only by a study of the whole of the language that the
substance can be ascertained.
In Gwyn v Neath Canal Co (1868) LR 3 Ex 209 at 215 Kelly CB said:
... when a court of law can clearly collect from the language within the four corners
of the deed or instrument in writing the real intentions of the parties, they are
bound to give effect to it by supplying anything necessary to be inferred from the
terms used, and by rejecting as superfluous whatever is repugnant to the intention
so discerned.
The court tries, if it can, to give a meaning to all parts of a contract, and will only reject one
23
clause as inconsistent if an attempt to read the contract in its entirety, and harmonise the
provisions, fails. In Yien Yieh Commercial Bank Ltd v Kwai Chung Cold Storage Co Ltd (1989) 2
HKLR 639 Lord Goff of Chievelly, delivering the advice of the Privy Council, said:
Their Lordships wish to stress that to reject one clause in a contract as inconsistent
with another involves a rewriting of the contract which can only be justified in
circumstances where the two clauses are in truth inconsistent. In point of fact, this
is likely to occur only where there has been some defect of draftsmanship. The
usual case is where a standard form is taken and then adapted for a special need, as
is frequently done in, for example, the case of standard forms of charterparty
adapted by brokers for particular contracts. From time to time it is discovered that
the typed additions cannot live with the printed form, in which event the typed
additions will be held to prevail as more likely to represent the intentions of the
parties. But where the document has been drafted as a coherent whole,
repugnancy is extremely unlikely to occur. The contract has, after all, to be read as
a whole; and the overwhelming probability is that, on examination, an apparent
inconsistency will be resolved by the ordinary processes of construction.
There is a rule of construction whereby, as a last resort, inconsistencies between two clauses
can be resolved by adopting the earlier of them. That rule (criticised and qualified as it has
been – Durbin v Perpetual Trustee Company Limited (1995) NSW ConvR ¶ 55-725 at 55,604 per
Kirby P) cannot apply to resolve inconsistencies which appear within the one drawing, as is the
case with Mr Scott’s plan.
More recently, in AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985 at
[13], 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: Australian Broadcasting Commission v
Australasian Performing Rights Association at 109.
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 incorporated document:
Leonie’s Travel Pty Limited v International Air Transport Association (2009) 255 ALR 89 at
106. In Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715 at
737; [2003] 2 All ER 785 at 794, 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
24
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 SA [1987] 3 All ER 565 at 578,
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 [1913] 2 KB 387. 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 J, at 391, 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.
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: 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. Thus, in Rainy Sky SA v Kookmin Bank [2012] 1 All ER 1137 at
1149, Lord Clarke, speaking for the United Kingdom Supreme Court, said that ‘where a
term of a contract is open to more than one interpretation, it is generally appropriate to
adopt the interpretation which is most consistent with business common sense’. In this
25
respect, in International Air Transport Association v Ansett Australia Holdings at CLR
160; ALR 51-2, 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 Electricity Generation Corporation v Woodside Energy Ltd (2014) 306 ALR 25 at 33-4,
French CJ, Hayne, Crennan and Kiefel JJ, said:
A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or
working commercial inconvenience’: Zhu v Treasurer of New South Wales (2004) 218 CLR 530
at 559.
In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 325 ALR 188
at 198, French CJ, Nettle and Gordon JJ at 198,
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 (2014) 251 CLR 640 at 647. Put another way, a commercial contract should be
construed so as to avoid it ‘making commercial nonsense or working commercial
inconvenience’.
In Fons Hf v Corporal Ltd [2014] EWCA Civ 304 at [15]-[16] Patten LJ said:
Ambiguities created by different possible meanings of the word or phrase in question will
often fall to be resolved by a resort to what is commonly referred to as business common
sense. In Rainy Sky SA v Kookmin Bank [at 1146], Lord Clarke of Stone-cum-Ebony JSC said:
The language used by the parties will often have more than one potential meaning.
I would accept the submission made on behalf of the appellants that the exercise
of construction is essentially one unitary exercise in which the court must consider
the language used and ascertain what a reasonable person, that is a person who
has 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, would
have understood the parties to have meant. In doing so, the court must have
regard to all the relevant surrounding circumstances. If there are two possible
constructions, the court is entitled to prefer the construction which is consistent
with business common sense and to reject the other.
There are, of course, dangers here. The admissible background facts may not point clearly to
one of two or more possible constructions and a resort to the criterion of business common
sense in order to identify the most commercial interpretation of the agreement may misjudge
what the parties themselves would have seen as the appropriate balance of interest and
liability. The judge in this connection referred to a passage from the judgment of Aikens LJ in
BMA Special Opportunity Hub Finance Ltd and others v African Minerals Finance Ltd [2013]
EWCA Civ 416 at [24] where he said:
26
The court’s job is to discern the intention of the parties, objectively speaking, from
the words used in the commercial document, in the relevant context and against
the factual background in which the document was created. The starting point is
the wording of the document itself and the principle that the commercial parties
who agreed the wording intended the words used to mean what they say in setting
out the parties’ respective rights and obligations. If there are two possible
constructions of the document a court is entitled to prefer the construction which
is more consistent with ‘business common sense,’ if that can be ascertained.
However, I would agree with the statements of Briggs J, in Jackson v Dear ([2012]
EWHC 2060 (Ch) at 40) first, that ‘commercial common sense’ is not to be elevated
to an overriding criterion of construction and, secondly, that the parties should not
be subjected to ‘ … the individual judge’s own notions of what might have been the
sensible solution to the parties’ conundrum’. I would add, still less should the issue
of construction be determined by what seems like ‘commercial common sense’
from the point of view of one of the parties to the contract.
In relation to the background facts and context in this situation, Lewison and Hughes, 9 in
a passage cited with approval by Sackar J in Michael Lahodiuk v Vincent Pace and Prid
Pty Ltd [2013] NSWSC 415 at [16], state the following:
[T]he relevant background consists of facts that were actually known to both (or all) parties to
the contract, or that are sufficiently notorious that it can be presumed they were so known.
Facts which were known to only one of them will not be relevant. Nor is it sufficient to prove
that facts were reasonably available, without demonstrating that their availability should lead
to an inference being drawn that they were in fact known by both parties. It is, of course, the
case that facts which were not known to either party at the date of the contract are not
relevant to the construction of the contract, for if the facts were unknown they cannot have
played any part in forming the presumed intention which is embodied in the contract.
However, where a fact is known to one party and not to the other, in theory it may well have
played a part in forming the intention of the party who knew that fact. However, unless a fact
is known to both parties, it will not be admitted in evidence, because the court is seeking not
the actual intention of one party to the contract, but the presumed mutual intention of both of
them.
The justification for this approach to the construction of commercial agreements was
explained in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749
at 770–1; [1997] 3 All ER 352 at 372, 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.
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 Plc [2011] EWHC 2111 (Ch) at [45][46], Briggs J said:
9
K Lewison & D Hughes, The Interpretation of Contracts in Australia, Lawbook Co, Sydney, 2012, p 118.
27
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’: [Investors Compensation Scheme Ltd v West Bromwich
Building Society at 115]. 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 Ltd [2006] EWCA Civ 1932 at [21]-[22], 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.
In BMA Special Opportunity Hub Fund Ltd & Ors v African Minerals Finance Ltd [2013]
EWCA Civ 416 at [24], Aikens LJ said:
If there are two possible constructions of the document a court is entitled to prefer the
construction which is more consistent with ‘business common sense’, if that can be
ascertained. However, I would agree with the statements of Briggs J, in Jackson v Dear [2012]
EWHC 2060 (Ch) at [40], first, that ‘commercial common sense’ is not to be elevated to an
overriding criterion of construction and, secondly, that the parties should not be subjected to
‘… the individual judge’s own notions of what might have been the sensible solution to the
parties’ conundrum’. I would add, still less should the issue of construction be determined by
what seems like ‘commercial common sense’ from the point of view of one of the parties to
the contract.
In Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55],
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 give the
28
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.
Finally, in Lindsay v Noble Investments Limited [2015] NZCA 588 at [16], the Court of
Appeal in New Zealand said:
Although a commercially absurd interpretation may provide reason to read
the contract in a different way than the language might suggest, that does
not mean the court can conclude the contract does not mean what it seems
to say simply because the court considers it is unduly favourable to one party.
An illustration of the business common sense approach to construction is the decision in
Idya Pty Ltd v Anastasiou [2008] NSWCA 102. 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 JA, at [50], 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 sole shareholder. Reasonable commercial
persons would readily reject that as being available under a clause in the terms of cl 19.1(a).
The above discussion is based upon the premise that the court construes the words
actually used by the parties. The question that arises is to what extent, if at all, can a
court introduce words not used by the parties to ascertain the meaning of the contract.
In this respect in Amlin Corporate Member Ltd v Oriental Assurance Corporation [2014]
EWCA Civ 1135 at [44]-[45], Gloster LJ said:
In accordance with well-established principles of construction, the [contractual term] should
be construed having regard to the language actually chosen by the parties and giving those
words their ordinary natural meaning, unless the background indicates that such meaning was
not the intended meaning. Whilst in a case where the language used has more than one
potential meaning, the court is entitled to prefer the construction which is consistent with
business commonsense and to reject the other, where the parties have used unambiguous
29
language, the court must apply it even though the results may be commercially improbable …
The court is reluctant to introduce words not used in the actual contractual provisions as part
of the construction exercise, unless the court is satisfied that the words selected by the parties
are commercially nonsensical and it is clear that the parties intended some other purpose. As
Chadwick LJ said in City Alliance Ltd v Oxford Forecasting Services Ltd [2000] EWCA Civ 510 at
[13]:
It is not for a party who relies upon the words actually used to establish that those
words effect a sensible commercial purpose. It should be assumed, as a starting
point, that the parties understood the purpose which was effected by the words
they used; and that they used those words because, to them, that was a sensible
commercial purpose. Before the Court can introduce words which the parties have
not used, it is necessary to be satisfied (i) that the words actually used produce a
result which is so commercially nonsensical that the parties could not have
intended it, and (ii) that they did intend some other commercial purpose which can
be identified with confidence. If, and only if, those two conditions are satisfied, is it
open to the court to introduce words which the parties have not used in order to
construe the agreement. It is then permissible to do so because, if those conditions
are satisfied, the additional words give to the agreement or clause the meaning
which the parties must have intended.
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: John White
& Sons Pty Ltd v Changleng (1985) 2 NSWLR 163 at 164-5. 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’.10 Thus, in Southern Equity Pty Limited v Timevale Pty Limited [2012] NSWSC
15 at [40], 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.
10
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press,
Cambridge, 2013, p 57.
30
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 Ltd [2013] NSWCA 231 at [86],
Leeming JA (speaking for the Court of Appeal) said:
Lord Steyn has written extrajudicially that ‘[e]ven an agreed definition is of limited use: it takes
no account of contextual requirements’: (2001) 21 [Oxford Journal of Legal Studies] 59 at 60 …
Professor McMeel has written (The Construction of Contracts, 2nd ed (2011) Oxford University
Press, p 159) that ‘even defined terms must yield to wider context or contrary intention’.
Professor Carter 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’ (The Construction of Commercial Contracts (2013) Hart, p 446). 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 JJ
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’ BHP
Petroleum (Australia) Pty Ltd v Sagasco South East Inc [2001] WASCA 159 at [24], a proposition
whose force I acknowledge.
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 have assisted the
court in interpreting or construing the contract. This rule was stated by Lord Morris in
Bank of Australasia v Palmer [1897] AC 540 at 545, as follows:
[P]arol testimony cannot be received to contradict, vary, add to or subtract from the terms of a
written contract, or the terms in which the parties have deliberately agreed to record any part
of their 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: Australia and New Zealand Banking Group Ltd v Compagnie D’Assurances
31
Maratimes Aeriennes Et Terrestres [1996] 1 VR 561 at 565. The justification for this
approach was explained in Prenn v Simmonds [1971] 3 All ER 237 at 240–1, 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 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.
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
which were known to the parties. In this respect, in Codelfa Construction v State Rail
Authority at CLR 352; ALR 375, 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.
Furthermore, the prior negotiations rule does not preclude the introduction of prior
agreements as evidence in relation to the construction of a later contract between the
parties: Australasian Medical Insurance Ltd v CGU Insurance Ltd (2010) 271 ALR 142 at
157-8.
The appropriateness of the prior negotiations rule has been recently debated. Writing
extra-judically, Lord Nicholls of Birkenhead11 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 v Persimmon Homes subsequently rejected
11
Lord Nicholls of Birkenhead, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law
Quarterly Review 577.
32
these criticisms of the prior negotiations rule and confirmed the authority of Prenn v
Simmonds. In Byrnes v Kendle at CLR 284-5; ALR 236-7, Heydon & Crennan JJ also
confirmed the prior negotiations rule.
Spigelman CJ,12 also writing extra-judically, has provided reasons for the continuation of
the prior negotiations rule. First, its abolition would result in 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, 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 J, at 473-4, 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 Ltd (1990) 20 NSWLR 310 at 316, 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 which would lead to an increase in the length
12
Hon J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81
Australian Law Journal 3223, pp 331-6.
33
and costs of litigation. On the other hand, the possibility of clear and mutual postcontract conduct that evidences the parties’ original intentions would tend to support
the admissibility of such evidence.
In High Court cases such as Farmer v Honan (1919) 26 CLR 183 at 197 and Howard Smith
& Co Ltd v Varawa (1907) 5 CLR 68 at 78, there are suggestions that post-contract
conduct is admissible in determining the meaning of the contract. On the other hand,
other High Court cases such as Maynard v Goode (1926) 37 CLR 529 at 538 and
Administration of the Territory of Papua New Guinea v Daera Guba (1973) 130 CLR 353
at 446, suggest that evidence of post-contractual 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 (2008) 238 CLR 570 at 582; 251 ALR 322 at 330 (Kirby J, at CLR 607-8; ALR 351,
and Heydon J, at CLR 625; ALR 366, disagreed with the majority’s approach).13 The High
Court majority’s view is also supported by the Courts of Appeal in New South Wales,
Victoria and Western Australia: Franklins Pty Ltd v Metcash at 678-82; Byrne v
Macquarie Group Services Australia Pty Ltd [2011] NSWCA 68 at [40]; World Best
Holdings Limited v Sarkar at [19]-[20]; County Securities Pty Ltd v Challenger Group
Holdings Pty Ltd [2008] NSWCA 193 at [161]; Ryan v Textile Clothing & Footwear Union
of Australia [1996] VR 235 at 261; Lederberger v Mediterranean Olives Financial Pty Ltd
[2012] VSCA 262 at [27]; Secure Parking (WA) Pty Ltd v Wilson (2008) 38 WAR 350 at
373.
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 [2008] 1 NZLR 277
at 283, 288–9, 294–7, 298–9, 308–11, 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 294, 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.
13
Carter et al are very critical of the High Court’s failure to provide reasons for their views: Carter et al,
‘Contractual Penalties: Resurrecting the Equitable Jurisdiction’, note 2 above, p 129.
34
Later in his judgment, Tipping J, 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.
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].
Exceptions to the parol evidence rule
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: 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]. Thus, in White v Australian and New Zealand Theatres Ltd (1943) 67 CLR
266, 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 Ltd (1937)
59 CLR 348 at 356, extrinsic evidence was not admitted to establish that a lease
of ‘electrical sound-reproduction’ equipment meant new, as opposed to secondhand equipment, on the basis that the description was clear to ‘all those who
understand the terminology used for the purpose of describing soundreproducing apparatus’.
2.
to show the intention that both parties had in relation to the meaning of a
particular ambiguous contractual term: Codelfa Construction v State Rail
Authority at CLR 248–50, 352–3; ALR 372-4, 374-6; Australasian Medical
Insurance Ltd v CGU Insurance Ltd at 156-7; Canberra Hire Pty Ltd v Koppers
Wood Products Pty Ltd [2013] ACTSC 162 at [203]-[208]. 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: Lodge Partners Pty Ltd v Pegum (2009) 255
ALR 516 at 521.
3.
to identify the parties to the contract: Damien v JKAM Investments Pty Ltd [2015]
NSWCA 368 at [28].Thus, in Edwards v Edwards (1918) 24 CLR 312, a deed
35
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 Ltd [2012] VSCA 262 at [19], the Victorian Court of Appeal said:
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: 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]. Thus, in Hopcroft & Edwards v Edmonds [2013]
SASFC 38 at [108], White J said:
[R]egard has been had to the subsequent conduct of the parties as providing evidence
that they had not concluded a contract. For example, in Howard Smith & Co Ltd v
Varawa [(1907) 5 CLR 68 at 77], Griffith CJ considered that the subsequent conduct of
the parties indicated that their previous communications were ‘not intended to have a
contractual operation at all’. Similarly, in Barrier Wharfs Ltd v W Scott Fell & Co Ltd
[(1908) 5 CLR 647 at 668], Griffith CJ considered that subsequent correspondence
could show that a concluded contract had not been formed. Issacs J [at 672] also
referred to the subsequent conduct of the parties, holding that it indicated ‘that it was
not understood that they were bound down contractually to the exact terms which
had already been set out in the letters’.
In Glendalough Holdings Pty Ltd v Militaire Pty Ltd [2013] WASC 457 at [117],
Beech J said:
Evidence of the parties’ subsequent communications is admissible for the light it casts
on their dealings from which the contract was alleged to have arisen. The statement
that there is or is not a concluded contract, if admissible, may carry significant weight or
little weight depending on the circumstances.
In Fazio v Fazio [2012] WASCA 72 at [193], 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
36
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: Bankway
Properties Ltd v Pensfold-Dunsford [2001] 1 WLR 1369 at 1380.
6.
to establish whether a term was incorporated into a contract: Great North
Eastern Railway Ltd v Avon Insurance plc [2001] 2 Lloyd’s Rep 649 at 655. Thus,
post-contractual conduct may be admissible as an admission by one party as to
the terms of a contract: Johnson v Brightstars Holding Company Pty Ltd [2014]
NSWCA 150 at [84]. 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: 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].
7.
to establish whether the remedy of rectification is available: Ryledar Pty Ltd v
Euphoric Pty Ltd (2007) 69 NSWLR 603 at 657–8.
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’: Mineralogy Pty Ltd v Sino Iron Ltd (No 6) [2015] FCA 825 at [719].
EXCLUSION CLAUSES AND EXTRINSIC EVIDENCE
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.14 Spigelman CJ15 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 [2013] NSWSC 447 at [44],
Pembroke J said the following:
Technomin
14
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.
15
Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’, note 7 above, p 336.
37
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. In this
respect Butt16 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.
Thus, in Hydrofibre Pty Ltd v Australian Prime Fibre Pty Ltd [2013] QSC 163 at [93],
where Philip McMurdo J said:
It could hardly be said that the contract is a model of legal drafting and that the interpretation
of the contract advanced by the plaintiff was plainly the only possibility.
A further example of a judicial comment on poor drafting, with particular reference to
the role of punctuation in the process of interpretation, is Mainteck Services Pty Ltd v
Stein Heurtey SA at 137, where Leeming JA said:
I acknowledge that punctuation informs meaning, and on occasion, can do so influentially.
‘Punctuation is a rational part of English composition, and is sometimes significantly
employed’, as Lord Shaw of Dunfermline noted in Houston v Burns [1918] AC 337 at 348 … The
placement of commas was significant in AMCI Investments Pty Ltd v Rio Doce Australia Pty Ltd
[2008] QCA 387 at [31]. However a prerequisite to relying on punctuation is being satisfied
that it has been used consciously and not haphazardly …
I am not satisfied, in a clause which is littered with grammatical errors and which does not pay
regard to defined terms, and which plainly was copied verbatim from the First Consortial
Agreement without regard to the vital fact that the Main Contract had now been entered into,
that the commas are a meaningful guide to its grammatical, let alone legal, meaning.
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 Kong [1986] UKPC
6 at 9, Lord Bridge said:
16
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press,
Cambridge, 2013, p 47.
38
[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 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 Ltd [2014] EWHC 2442 (Ch) at [30], 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, Butt17 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 judges18 and
legal practitioners.19 A Discussion Paper issued by the Victorian Law Reform Commission
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.20
Former High Court justice, Michael Kirby21 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:
17
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press,
Cambridge, 2013, p 1.
18
K O’Brien, ‘Judicial Attitudes to Plain Language and the Law (2009) 32 Australian Bar Review 204.
19
B McKillop, ‘What Lawyers Think About Plain Legal Language’ (1994) 32 New South Wales Law Society
Journal (May) 68.
20
Quoted in P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge
University Press, Cambridge, 2013, p 102.
21
M Kirby, ‘Ten Commandments for Plain Language in Law’ (2010) 33 Australian Bar Review 10, p 14.
39
40
Butt22 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, Butt23 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.
FURTHER READING
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge
University Press, Cambridge, 2013
J W Carter, The Construction of Commercial Contracts, Hart Publishing, Oxford, 2013
K Lewison & D Hughes, The Interpretation of Contracts in Australia, Lawbook Co, Sydney,
2012
G McMeel, The Construction of Contracts, Interpretation, Implication, and Rectification,
2nd ed, Oxford University Press, Oxford, 2011
22
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press,
Cambridge, 2013, pp 104-13.
23
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press,
Cambridge, 2013, pp 128-9.
41