CONSTRUCTION OF CONTRACTUAL TERMS

‘There’s a sign on the wall. But she wants to be sure’Cause you know sometimes words have two meanings’.

- Led Zeppelin, Stairway to Heaven(from the LP Led Zeppelin IV, 1971)

‘Words are chameleons, which reflectthe color of their environment.’

Learned Hand J,Commissioner v National Carbide Corp, 167 F 2d 304, 306 (1948)

INTRODUCTION

This paper will examine the principles used by courts in interpreting the words used in a contract. This is usually referred to as the construction of terms of the contract. The principles of construction involve two things: (i) the meaning of the terms of the contract; and (ii) the legal effects or significance of the document’s terms.1

This paper will examine the principles of construction of terms of a contract in relation to the meaning of the terms of a contract. The importance of this topic cannot be overstated. A large proportion of cases in contract law have as a component - often the major component - the construction of the terms of the contract. The conclusion reached by the court on the construction issue usually has significant consequences in relation to the outcome of the case before the court. It can be noted at this stage that the principles of construction of contractual terms apply with equal force to contracts with governments and2 deeds.3 They also apply to trust documents,4 one of the reasons for this being that ‘[t]he contractual relationship provides one of the most common bases for the establishment or implication and for the definition of a trust’.5

In determining the meaning of the words used in a contract, a significant source of the problems faced by the courts is the richness of the English language. This point was well made by Lord Simon of Glaisdale in Stock v Frank Jones (Tipton) Ltd6 where his Lordship said:1 Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78.2 Kidd v The State of Western Australia [2014] WASC 99 at [120].3 Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 240 CLR 45 at 52; 186 ALR 289 at 292-3; Commissioner of State Revenue (Vic) v Snowy Hydro Ltd [2012] VSCA 145 at [83]; The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd (2015) 298 FLR 147 at 163; 323 ALR 570 225 at 585; Mercanti v Mercanti [2016] WASCA 206 at [72].4 Byrnes v Kendle (2011) 243 CLR 253 at 286; 279 ALR 212 at 238.5 Gosper v Sawyer (1985) 160 CLR 548 at 568-9; 58 ALR 13 at 26.6 [1978] 1 All ER 948 at 953.

Words and phrases of the English language have an extraordinary range of meaning. This has been a rich resource in English poetry (which makes fruitful use of the resonances, overtones and ambiguities) but it has a concomitant disadvantage in English law (which seeks unambiguous precision, with the aim that every citizen shall know as exactly as possible, where he stands under the law).

CONSTRUCTION OF TERMS IN PRACTICE

Justice Kenneth Martin,7 based upon his experiences as a Supreme Court judge offers the following reflections that are relevant to the issue of construction of contract:

As a trial judge running a busy commercial list which includes many contractual interpretation cases, I have to say that I sometimes detect a rather clear felling approach by advisers who, in embarking on pre-trial discovery quests, seek supposedly helpful documents relating to surrounding circumstances. These pre-trial quests are usually pursued on the basis that a hopeful rummage through every employee’s corporate email box, or in metadata repositories, may possibly bring to light a document revealing a mutually known circumstance prior to contracting that may, somehow, howsoever slightly, advance the construction argument they are seeking to run over the disputed meaning of words in a document.

Frequently that interlocutory searcher, like Christopher Columbus, seems not to know what they hope to find, how they will get there, or indeed what they have found when they find it. But a trawling exercise, however long, costly or burdensome, must, it is put, always be undertaken. At the end of the day, someone is paying for all this and a real question arises as to whether such expense is warranted.

After the dust of a search has settled in the wake of these expensive quests there is, I humbly suggest, an essential need for the party who wants to argue there is a significant mutually known surrounding fact(s) or circumstance(s) that existed at the time of contracting, to do at least two things. First, it should explicitly plead out the fact to openly identify it. It needs to do this so the opposition can be both:

(i) apprised of what that alleged fact or circumstance is before trial;(ii) have a fair opportunity to indicate whether or not it accepts the existence of the

fact or circumstance.

Identification can avoid diverting excursions into side issues over facts which, at the end of the day, may either be uncontested or even accepted.

The second requirement is for the party advancing a supposedly relevant surrounding fact or circumstance, having identified it, to then go on to clearly explain at some point in the trial process how and why the fact or circumstance assists in advancing its construction position.

In my experience, the second requirement, which I call the ‘causative impact’ of the supposedly helpful surrounding fact or circumstance, is usually either globally glossed over, or just ignored. A typical glossing scenario as to causative impact is like an overflowing potpourri of multiple diverse alleged surrounding facts and circumstances. These are then addressed in a closing submission delivered in a style akin to the advocacy

7 Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the Ambiguity Gateway’ (2013) 37 Australian Bar Review 118, pp 138-9.

of shabby solicitor Dennis Denuto during his desperate, now infamous invocation of ‘the Vibe’ in the movie The Castle.

Each different surrounding fact may indeed carry some unique causative impact in the interpolation process that should be explained. But I would humbly both suggest and request that the causative impact of each background fact relied on be clearly spelled out.

THE IMPORTANCE OF INTENTION

In ascertaining the meaning of the terms of a contract the court is primarily concerned with objectively determining the intention of the parties.8 This fundamental point was reaffirmed in Byrnes v Kendle9 where Heydon and Crennan JJ said:

Contractual construction depends on finding the meaning of the language of the contract – the intention which the parties expressed, not the subjective intentions which they may have had, but did not express. A contract means what a reasonable person having all the background knowledge of the ‘surrounding circumstances’ available to the parties would have understood them to be using the language in the contract to mean.

The basic approach in determining the intention of the parties was set out in Chartbrook Ltd v Persimmon Homes Ltd10 where Lord Hoffmann said:

When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties … is no reason for not giving effect to what they appear to have meant.

Thus, as was stated by Jonathan Sumption QC in submissions in Wasa International Insurance Co Ltd v Lexington Insurance Co,11 ‘[a]ny judicial interpretation of a contract involves retrospectively attaching to it a meaning which hypothetical persons in the position of the parties are assumed to have intended at the time when it was made, but which may have been unclear or unknown to those particular parties’.

In this process of construction it is not the role of the court to improve the contract. Thus, in Arnold v Britton12 Lord Hodge said:

The [court] is not there to re-write the parties' agreement because it was unwise to gamble on future economic circumstances in a long term contract or because subsequent events have shown that the natural meaning of the words has produced a bad bargain for

8 Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99 at 109.9 (2011) 243 CLR 253 at 284; 279 ALR 212 at 236-7.10 [2009] 1 AC 1101 at 1113-4; [2009] 4 All ER 677 at 688.11 [2010] AC 180 at 186 -referred to with approval in HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [145].12 [2015] AC 1619 at 1640; [2016] 1 All ER 1 at 18-9.

one side. The question for the court is not whether a reasonable and properly informed [party] would enter into such an undertaking. That would involve the possibility of re-writing the parties' bargain in the name of commercial good sense.

In relation to words used in a document same word more than once in a carefully drafted document, a rebuttable presumption arises to the effect that they intended that the word to mean the same thing throughout the entire document.13 Thus, it may be that the same words have different meanings, even if in the same document.14

When construing terms of a contract, a court must have regard to all its words used to ensure the congruent operation of its various components as a whole.15 Thus, in Chapmans Ltd v Australian Stock Exchange Ltd16 Lockhart and Hill JJ said:

It is an elementary proposition that a contract will be read as a whole giving weight to all clauses of it, where possible, in an endeavour to give effect to the intention of the parties as reflected in the language which they have used. A court will strain against interpreting a contract so that a particular clause in it is nugatory or ineffective, particularly if a meaning can be given to it consonant with other provisions in a contract. Likewise where there are general provisions in a contract and specific provisions, both will be given effect, the specific provisions being applicable to the circumstances which fall within them.

To similar effect, in Re Strand Music Hall Co Ltd,17 Lord Romilly said:

The proper mode of construing any written instrument is, to give effect to every part of it, if this be possible, and not to strike out or nullify one clause in a deed, unless it be impossible to reconcile it with another and more express clause in the same deed.

Furthermore, in construing contractual terms, a court will seek to adopt a construction that will preserve the validity of the contract and in that regard will strive to avoid holding agreements, in particular commercial agreements, void for uncertainty.18 Thus, a court should construe a commercial contract ‘fairly and broadly, without being too astute or subtle in finding defects’.19

In the process of construction it is clear that no hard and fast rules apply. The ‘construction [of contractual terms] is a composite exercise, neither uncompromisingly 13 Prestcold (Central) Ltd v Minister of Labour [1969] 1 All ER 69 at 75; Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (2013) 41 VR 636 at 646; Healthcare Australia Pty Ltd v Randstad Pty Ltd [2016] NSWSC 1407 at [19].14 Robbins v Federal Commissioner of Taxation (1974) 129 CLR 332 at 339; Fitness First Australia Pty Ltd v Fenshaw Pty Ltd [2016] NSWCA 207 at [43]; HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [161].15 Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529; 214 ALR 410 at 413; Durham v BAI (Run Off) Ltd (in scheme of arrangement); Re Employers’ Liability Policy ‘Trigger’ Litigation [2012] 3 All ER 1161 at 1176; Mercanti v Mercanti [2016] WASCA 206 at [70]; Black Box Control Pty Ltd v Terravision [2016] WASCA 219 at [42]; HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [134].16 (1996) 67 FCR 402 at 411; 137 ALR 433 at 442.17 (1865) 55 ER 853 at 856.18 Meehan v Jones (1982) 149 CLR 571 at 589; 42 ALR 463 at 475.19 Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99 at 109.

literal nor unswervingly purposive’,20 although in more recent times there has been a move away from literal methods of construction towards a more commercial approach.21

Where technical words or phrases are incorporated into a contract there is a rebuttable presumption that they are used with that technical meaning in mind. 22 This presumption is not easily displaced.23 In relation to the presumption, in Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council24 Campbell JA said the following:

There has long been a principle of construction concerning words or phrases that have a specialised or technical meaning in the law whereby: ‘[w]hen technical words or phrases are made use of, the strong presumption is, that the party intended to use them according to their correct technical meaning’ ... In Sydall v Castings Ltd25 Diplock LJ explained the principle:

Documents which are intended to give rise to legally enforceable rights and duties contemplate enforcement by due process of law, which involves their being interpreted by courts composed of judges, each one of whom has his personal idiosyncracies of sentiment and upbringing, not to speak of age. Such documents would fail in their object if the rights and duties which could be enforced depended on the personal idiosyncracies of the individual judge or judges on whom the task of construing them chanced to fall. It is to avoid this that lawyers, whose profession it is to draft and to construe such documents, have been compelled to evolve an English language, of which the constituent words and phrases are more precise in their meaning than they are in the language of Shakespeare or of any of the passengers on the Clapham omnibus this morning. These words and phrases to which a more precise meaning is so ascribed are called by lawyers ‘terms of art’, but are in popular parlance known as ‘legal jargon’. We lawyers must not allow this denigratory description to obscure the social justification for the use of ‘terms of art’ in legal documents. It is essential to the effective operation of the rule of law. The phrase ‘legal jargon’, however, does contain a reminder that non-lawyers are unfamiliar with the meanings which lawyers attach to particular ‘terms of art’, and that where a word or phrase which is a ‘term of art’ is used by an author who is not a lawyer, particularly in a document which he does not anticipate may have to be construed by a lawyer, he may have meant by it something different from its meaning when used by a lawyer as a term of art ....

If the document in question is drawn by a lawyer, is manifestly intended to effect a legal transaction, and uses an expression that is not an expression in common use but that has a meaning in an area of legal discourse that is relevant to the document in question, that in itself provides a basis for the reasonable reader concluding that that expression is used in its special legal sense, unless there are other factors present that show it is not used in

20 International Fina Services AG v Katrina Shipping Ltd (The Fina Samco) [1995] 2 Lloyd’s Rep 344 at 350.21 Sirius International Insurance Company (Publ) v FAI General Insurance Limited [2005] 1 All ER 191 at 200.22 Marquis of Cholmondeley v Lord Clinton (1820) 37 ER 527 at 559.23 Brett v Barr Smith (1918) 26 CLR 87 at 93; Sydney Attractions Group Pty Ltd v Schulman [2013] NSWSC 858 at [66].24 [2010] NSWCA 64 at [167]-[170].25 [1967] 1 QB 302 at 313-4.

that special legal sense. So understood, the presumption is consistent with the current approach to construction.

Finally, it can be noted that the impact of the contract upon third parties is relevant to determining the objective intention of the parties. In Kidd v The State of Western Australia26 Beech J observed:

That is not to say that any consequences, or potential consequences, for third parties, of a particular construction are to be ignored. To the extent that they may be an indication of the objective common intention of the parties to the contract, such consequences are among the matters to be considered in the construction process. Similarly, the nature and effect of a particular provision is to be borne in mind in its proper construction. These matters are part of what informs the proper construction of any contract.

THE OBJECTIVE DETERMINATION OF INTENTION

As a matter of policy, the law has always required the interpretation of a contract to be determined on an objective basis. This point has been repeatedly stressed by the High Court.27 The justification for this objective approach was explained by Tipping J in Vector Gas Limited v Bay of Plenty Energy Limited28 as follows:

The objective approach is regarded as having two principal advantages. These are greater certainty and the saving of time and cost: greater certainty, because the subjective approach is apt to undermine the security of the written words by means of which the parties recorded their consensus; and saving time and cost, because a subjective approach is generally thought to require a fuller search for and examination of extrinsic evidence. A lesser, but still significant, perceived advantage is avoiding the effect a subjective approach might have on third parties who may have relied on what the words of the document appeared objectively to mean. But, despite its eschewing a subjective approach, the common law does not require the court, through the objective method, to ascribe to the parties an intention that a properly informed and reasonable person would not ascribe to them when aware of all the circumstances in which the contract was made.

In the United Kingdom, the leading formulation of the objective test of interpretation is set out in Lord Hoffmann’s speech in Investors Compensation Scheme Ltd v West Bromwich Building Society29 where his Lordship said that the interpretation of a written contract involved:

… the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

26 [2014] WASC 99 at [121].27 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; 211 ALR 342 at 352; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 174; 242 ALR 47 at 63; Byrnes v Kendle (2011) 243 CLR 253 at 284; 279 ALR 212 at 236-7; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656; 306 ALR 25 at 33; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116; 325 ALR 188 at 197; Simic v New South Wales Land and Housing Corporation [2016] HCA 47 at [78].28 [2010] 2 NZLR 444 at 458.29 [1998] 1 All ER 98 at 114.

Significantly, in his statement of principle, Lord Hoffmann did not restrict a court from referring to the surrounding circumstances to cases where contractual terms are written in ambiguous language. In the light of considerable debate over the impact of this case, in Chartbrook Ltd v Persimmon Homes Ltd30 Lord Hoffmann made the following comment:

The only points [Investors Compensation Scheme Ltd v West Bromwich Building Society31] decided that might have been thought in the least controversial were, first, that it was not necessary to find an ‘ambiguity’ before one could have any regard to background and, secondly, that the meaning which the parties would reasonably be taken to have intended could be given effect despite the fact that it was not, according to conventional usage, an ‘available’ meaning of the words or syntax which they had actually used.

On the other hand, in the leading Australian High Court decision on construction of contracts of Codelfa Construction Pty Limited v State Rail Authority of New South Wales32 Mason J said:

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.

In the wake of these two statements of principle considerable debate was generated as to whether there was a difference of approach between them and if so which was binding on Australian courts. What was seen by many as the essential difference between the two approach was that the Mason J’s statement meant that evidence of surrounding circumstances could only be used as an aid to the construction of a term if it was ambiguous or susceptible to more than one meaning. On the other hand, Lord Hoffman’s approach meant that such evidence could be used, whether or not there was any ambiguity in the term.

In 2002, in Royal Botanic Gardens and Domain Trust v South Sydney Council,33 the High Court, left open for a future time the question as to whether Lord Hoffmann’s approach was broader or preferable to that of Mason J, 34 and demanded that, in the meantime, other Australian courts should construed contractual terms in accordance with Mason J’s statement of principle in Codelfa Construction Pty Limited v State Rail Authority of New South Wales.35 The binding nature of Mason J’s statement of principle has been subsequently reaffirmed by the High Court on a number of occasions.36 Thus, in Mount Bruce Mining Pty Limited v Wright

30 [2009] 1 AC 1101 at 1119; [2009] 4 All ER 677 at 693.31 [1998] 1 All ER 98.32 (1982) 149 CLR 337 at 352; 41 ALR 367 at 374.33 (2002) 240 CLR 451 at 62-3; 186 ALR 289 at 301.34 In a footnote to their judgment in Byrnes v Kendle (2011) 243 CLR 253 at 285; 279 ALR 212 at 23, Heydon and Crennan JJ noted that the High Court had not pronounced on the issue of whether there was an inconsistency between the approaches of Lord Hoffmann and Mason J.35 (1982) 149 CLR 337 at 352; 41 ALR 367 at 374.36 Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604 at 605; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 116, 134; 325 ALR 188 at

Prospecting Pty Limited37 French CJ, Nettle and Gordon JJ echoed the views of Mason J when they said:

Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.

To the same effect, Kiefel and Keane JJ38 said:

[I]t is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and the object of the transaction.

On the basis that evidence of surrounding circumstances can only be admitted where, in the words of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,39 the ‘language used is ambiguous or susceptible of more than one meaning’, the following two questions arise:

(i) When is language ‘ambiguous or susceptible of more than one meaning’?(ii) What is meant by ‘evidence of surrounding circumstances’?

Ambiguity

The meaning of language that is, in the words of Mason J, ‘ambiguous or susceptible of more than one meaning’, has drawn a number of comments by later Australian courts. Thus, in Ritter v Keatley Real Estate Pty Ltd Trading as Mt Gambier First National40 Stanley J said:

The concept of ambiguity referred to by Mason J … is not without its difficulties. The disjunctive reference to language which is ambiguous or susceptible to more than one meaning suggests that the concept of ambiguity is broader than the concept of a word or phrase susceptible of more than one meaning. This may reflect an intention to include concepts of patent, latent and inherent ambiguity. The dictionary definition of ‘ambiguous’ includes the following meanings: ‘open to various interpretations’, ‘equivocal’, ‘doubtful’, ‘uncertain’, ‘having a double meaning’, ‘obscure’, ‘indistinct’, and ‘lacking clarity’. In Gardiner v Agricultural and Rural Finance Pty Ltd,41 Spigelman CJ said that ambiguity ‘extend[s] to any situation in which the scope and applicability of the formulation [is], for whatever reason, doubtful’. In my view, the Mason J formulation … is directed to circumstances in which an exclusively textual analysis of the language of a contract produces uncertainty as to the meaning of the contractual provision.

In Bisognin v Hera Project Pty Ltd42 Sloss J said that, at the very least ambiguity

198, 211.37 (2015) 256 CLR 104 at 116; 325 ALR 188 at 198.38 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 132; 325 ALR 188 at 210.39 (1982) 149 CLR 337 at 352; 41 ALR 367 at 374.40 (2013) SASR 53 at [53].41 [2007] NSWCA 235 at [12].42 [2016] VSC 75 at [156]. To similar effect see South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 at [35].

‘extends at least to the situation where a textual analysis of the language used in the contract reveals or gives rise to uncertainty as to the meaning of a provision, or apprehension that the wording of the contract might not reflect the presumed intention of the parties’. His Honour43 went on the express his support for a broader view of ambiguity, exemplified in the following three decisions from the Supreme Court of Western Australia. First, in McCourt v Cranston44 Pullin JA said:

Usually, the meaning of ‘ambiguous’ is taken to include ‘open to various interpretations’ … but by using the phrase ‘ambiguous or susceptible of more than one meaning’ perhaps Mason J wished to emphasise that not only a contract open to more than one meaning would allow in evidence of surrounding circumstances but also one where the contract is merely ‘difficult to understand’.

Second, in Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd45 Owen J said:

I think the proper approach is to look first to the instrument itself to see whether there is some reasonable basis for the apprehension that the wording of the contract might not necessarily reflect the presumed intention of the parties. The English language being what it is, such a reasonable apprehension will generally be apparent ‘in many, if not most, cases’.46 It may come from a patent and obvious confusion in the words themselves. But it may also come from a reading of the instrument as a whole. The law has long recognised that ambiguity can be latent, as well as patent.

Third, in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd47 McClure P said:

For the purposes of the gateway requirement ‘ambiguity’ means any situation in which the scope or applicability of a contract is, for whatever reason, doubtful. It is not confined to lexical, grammatical or syntactical ambiguity. The fact that adversaries can formulate and advance materially different constructions of the language of a contract does not itself satisfy the gateway requirement. Having regard to the language of the contract as a whole and what can be gleaned from that source as to the contractual purpose, competing constructions must be reasonably arguable.

In Manufacturers Mutual Insurance Ltd v Withers48 McHugh JA said:

[F]ew, if any, English words are unambiguous or not susceptible of more than one meaning or have a plain meaning. Until a word, phrase or sentence is understood in the light of the surrounding circumstances, it is rarely possible to know what it means.

This approach was endorsed by the Court of Appeal in Mainteck Services Pty Ltd v Stein Heurtey SA49 where Leeming JA said:

43 Bisognin v Hera Project Pty Ltd [2016] VSC 75 at [157].44 [2012] WASCA 60 at [24].45 (1999) 21 WAR 425 at 436.46 Trawl Industries of Australia Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326 at 358.47 (2014) 48 WAR 261 at 274. 48 (1988) 5 ANZ Ins Cases 75,336 at 75,343.49 (2014) 89 NSWLR 633 at 654-5; 310 ALR 113 at 132.

[T]o say that a legal text is ‘clear’ reflects the outcome of that process of interpretation. It means that there is nothing in the context which detracts from the ordinary literal meaning … [W]hether contractual language has a ‘plain meaning’ is (a) a conclusion and (b) a conclusion which cannot be reached until one has had regard to the context … Mason J was indicating that there are very real limits to the extent to which grammatical meaning can be displaced by contextual considerations. However, in order to determine whether more than one meaning is available, it may be necessary first to turn to the context.

In coming to this conclusion, Leeming JA referred to and relied upon the High Court decision in Electricity Generation Corporation v Woodside Energy Ltd50 where French CJ, Hayne, Crennan and Kiefel JJ, said:

The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar … [I]t will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’51 … A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.52

Leeming JA53 then concluded as follows:

To the extent that what was said in Jireh54 supports a proposition that ‘ambiguity’ can be evaluated without regard to surrounding circumstances and commercial purpose or objects, it is clear that it is inconsistent with what was said in Woodside.55 The judgment confirms that not only will the language used ‘require consideration’ but so too will the surrounding circumstances and the commercial purpose or objects.

The views of Leeming JA were echoed in WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd56 where Barrett AJA, speaking for a unanimous Court of Appeal, said:

A potential tension that inheres in this proposition is that to recognise words as bearing a ‘plain meaning’ is merely to state a conclusion arrived at by some process of interpretation which cannot, as a matter of logic, exclude context. As Leeming JA noted in Mainteck Services Pty Ltd v Stein Heurtey SA,57 to state that a legal text is ‘clear’ does no more than recognise that ‘there is nothing in the context which detracts from the ordinary literal meaning’. It therefore becomes clear that the notion that it may first be necessary to consider context when construing a contract is not inconsistent with Mason J’s ‘true rule’. On this footing, it does not follow that the task of assessing whether a phrase or expression is ambiguous or susceptible of more than one meaning must be undertaken

50 (2014) 251 CLR 640 at 656-7; 306 ALR 25 at 33-4.51 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR at 360; 41 ALR 367 at 373-374, citing Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-6.52 Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at 559; 211 ALR 159 at 180.53 Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633 at 63; 310 ALR 113 at 130.54 Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604.55 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25.56 [2016] NSWCA 297 at [59].57 (2014) 89 NSWLR 633 at 654; 310 ALR 113 at 132.

without regard to evidence of surrounding circumstances. This position corresponds with the approach of the High Court in Victoria v Tatts Group Ltd58 where the relevant contract was construed by reference to its text, context and purpose without any anterior finding of ambiguity as a precondition to a consideration of surrounding circumstances as an aid to discovering or elucidating context and purpose.

Similarly, in Todd v Alterra at Lloyd’s Ltd59 Beach J, in referring with approval to the views of Leeming JA, said:

[G]enerally, textual analysis is to be given primacy. Nevertheless, words cannot be construed in a vacuum. The meaning of words cannot be divorced from their context. To proceed by only analysing the text with the aid of dictionary meanings is sterile and productive of error. One does not need the assistance of modern philosophy including Ludwig Wittgenstein’s model of language games to recognise as much. Words and their use must be construed in context. Moreover, uncertainty or ambiguity in the words used may only be ascertainable once context is first appreciated. Extra-textual context may reveal uncertainty or ambiguity that is not otherwise apparent from the text. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd60 recognises, at least implicitly, that the approach of Mason J (as he then was) in Codelfa Construction Pty Ltd v State Rail Authority of New South61 may not rule out an approach which first uses context to ascertain otherwise latent textual uncertainty or ambiguity. Mason J’s approach is not inconsistent with the notion that it may first be necessary to consider context. Mason J stated that:

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. (My emphasis.)

But ‘plain meaning’ is a conclusion. How is such a conclusion to be reached? Mason J’s approach would not deny the proposition that before reaching such a conclusion you can consider context. By first considering context, you may conclude that there is no one plain meaning. Context can therefore be used to perform two functions. It can enable you to assess whether there is a plain meaning. And if one concludes that there is no plain meaning, it can assist in resolving the latent textual imprecision.

The significance of the decision in Mainteck Services Pty Ltd v Stein Heurtey SA62 is that it appears to adopt an approach to interpretation that is consistent with the approach of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society.63 In this respect, it was endorsed in Stratton Finance Pty Limited v Webb64 where the Full Court of the Federal Court said:

58 (2016) 328 ALR 564.59 (2016) 239 FCR 12 at 28-9; 330 ALR 454 at 470-1.60 (2015) 256 CLR 104; 325 ALR 188.61 (1982) 149 CLR 337 at 352; 41 ALR 367 at 374.62 (2014) 89 NSWLR 633; 310 ALR 113.63 [1998] 1 All ER 98. See B Michael & D Wong, ‘Recourse to Contractual Context Reaffirmed’ (2015) 89 Australian Law Journal 181, p 187.64 (2014) 314 ALR 166 at 174.

Recently, in Mainteck Services Pty Ltd v Stein Heurtey SA65 the New South Wales Court of Appeal … expressed the view that … Woodside66 was inconsistent with Jireh. We agree with that conclusion.

However, in Gladstone Area Water Board v A J Lucas Operations Pty Ltd67 Jackson J came to the conclusion that Woodside68 was not inconsistent with Jireh69 and that the Court of Appeal in Mainteck Services Pty Ltd v Stein Heurtey SA70 was wrong to conclude that Woodside71 had impliedly overruled Jireh.72 Similar sentiments were expressed by the Court of Appeal in Western Australia in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd.73 In Apple and Pear Australia Ltd v Pink Lady America LLC74 the Court of Appeal in Victoria, after a lengthy analysis of the cases, concluded as follows:

[T]here has been controversy, reflected in the judgments of many intermediate appellate courts, about when, and in what manner, surrounding circumstances can be relied upon in the construction of commercial contracts, the questions surrounding the extent to which surrounding circumstances can be relied upon in the construction of commercial contracts raise large issues and their fate remains to be resolved by the High Court on another day.

Surrounding Circumstances

Notwithstanding the question of what is meant by ambiguity and when it may arise, the fact of the matter is that, as a matter of practice, courts are not reluctant to find the existence of ambiguity. However, as Leeming JA said in Zhang v ROC Services (NSW) Pty Ltd,75 ‘[w]here there is more than one legal meaning, a court looks at the text, context and purpose, with a view to determining which potential meaning best accords with those considerations.evidence of surrounding circumstances can be admitted to aid in the construction of the term’. The question that then arises is, what falls within the description of ‘text, context and purpose’ or what may also be described as ‘evidence of surrounding circumstances’.

In Bank of Credit and Commerce International SA v Ali76 Lord Hoffmann said that admissible background or surrounding circumstances included ‘anything which a reasonable man would have regarded as relevant’, and that ‘there is no conceptual limit to what can be regarded as background’. This statement of principle was cited with approval by Campbell JA in Franklins Pty Ltd v Metcash Trading Ltd77 who then

65 (2014) 89 NSWLR 633; 310 ALR 113.66 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25.67 [2014] QSC 311 at [153]-[168].68 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 2569 Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604.70 (2014) 89 NSWLR 633; 310 ALR 113.71 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25.72 Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604.73 (2014) 48 WAR 261 at 270-1. 74 [2016] VSCA 280 at [138].75 [2016] NSWCA 370 at [86].76 [2002] 1 AC 251 at 269; [2001] 1 All ER 961 at 975.77 (2009) 76 NSWLR 603 at 678.

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 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales78 Mason J said:

Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although … if the facts are notorious knowledge of them will be presumed.

In a similar vein, in Newey v Westpac Banking Corporation79 Gleeson JA said:

The scope of the legitimate surrounding circumstances, knowledge of which is to be attributed to a reasonable person in the position of the contracting parties, is to be understood by reference to what the parties knew in the context of their mutual dealings. Whilst it does not involve a species of constructive notice, ‘the reasonable person may be taken to know of things that go beyond those that the parties thought to be important or those to which there was actual subjective advertence by the parties’: QBE Insurance Australia Ltd v Vasic [2010] NSWCA 166 at [35].

Finally, in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited80 French CJ, Nettle and Gordon JJ said the following as to what constituted ‘surrounding circumstances’:

What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.

It should also be noted that facts and circumstances that would otherwise be admitted as an aid to the construction of a contract, will be available for that purpose even if they were communicated between the parties on a ‘without prejudice’ basis.81

Where evidence of surrounding circumstances is admissible, it is clear that there are limits on what a court can do with that evidence when construing the contract. Thus, in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd82 Neuberger LJ said:

78 (1982) 149 CLR 337 at 352; 41 ALR 367 at 374-5.79 [2014] NSWCA 319 at [110].80 (2015) 256 CLR 104 117; 325 ALR 188 at 198. 81 Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2011] 1 AC 662 at 679-83; [2010] 4 All ER 1011 at 1024-7.82 [2006] EWCA Civ 1732 at [21]-[22]. See also McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315 at [17]; Kidd v The State of Western Australia [2014] WASC WASC 99 at [126].

[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.

In Sattva Capital Corporation v Creston Moly Corporation83 the Supreme Court of Canada said the following in relation to the use of surrounding circumstances:

While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement. The nature of the evidence that can be relied upon under the rubric of ‘surrounding circumstances’ will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting … [T]his includes, in the words of Lord Hoffmann, ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’84. Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact.

The Supreme Court85 also noted that ‘the parol evidence rule does not apply to preclude evidence of surrounding circumstances when interpreting the words of a written contract’.

Finally, it must be kept in mind that the practical effect of the decision in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales86 ‘is that surrounding circumstances cannot be relied on to give rise to an ambiguity that does not otherwise emerge from a consideration of the text of the document as a whole, including whatever can be gleaned from that source as to the purpose or object of the contract’.87

PRINCIPLES OF CONSTRUCTION

As already noted, in determining the objective intention of the parties to the contract no hard and fast rules apply. Rather the court applies what are best described as ‘principles’ of construction.88 A number of these principles are discussed

83 [2014] 2 SCR 633 at 661-2.84 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114.85 Sattva Capital Corporation v Creston Moly Corporation [2014] 2 SCR 633 at 663.86 (1982) 149 CLR at 352; 41 ALR 367.87 Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29 at 50; 294 ALR 550 at 566.88 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 55.

below. However, it must be kept in mind that these principles are not binding rules and will not apply in the face of facts to the contrary.

Presumption that unreasonable results are not intended

It is presumed that parties to written contracts do not intend the terms of their contract to operate unreasonably. Thus, the more unreasonable the result a particular construction of the terms would produce, the less likely it is that such an interpretation reflects the parties’ intentions. However, if the parties intend to produce an unreasonable result, such an intention must be abundantly clear from the words used.89

However, this principle relating to the reasonableness or otherwise of the contract cannot be taken too far. In Chartbrook Ltd v Persimmon Homes Ltd90 Lord Hoffmann observed:

[T]he fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says. The reasonable addressee of the instrument has not been privy to the negotiations and cannot tell whether a provision favourable to one side was not an exchange for some concession elsewhere, or simply a bad bargain.

Whether a court gives effect to an unreasonable interpretation depends upon the circumstances of the case. If the language used is open to two constructions, preference is to be given to the one that avoids an unreasonable result.91 Where the words of a contract are unambiguous and give rise to a capricious or unreasonable result, the court will give effect to them, even if one could reasonably surmise that the parties did not intend such a result.92

However, even in cases where there is no ambiguity, a court may decline to apply the plain meaning of the words used if:

(i) it would lead to an irrational result;93

(ii) if it would lead to a meaning that is repugnant to the objectively determined intention of the parties;94

(iii) if it makes no commercial sense.95 In such cases the plain meaning must be

89 L Schuler AG v Wickman Machine Tool Sales Limited [1974] AC 235 at 251; [1973] 2 All ER 39 at 45.90 [2009] 1 AC 1101 at 1113; [2009] 4 All ER 677 at 687. See also Bisognin v Hera Project Pty Ltd [2016] VSC 75 at [146].91 Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99 at 109-10.92 State Lotteries Office v Burgin [1993] NSWCA 254 at [4]; New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski (2011) 195 FCR 234 at 244.93 Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 at [19]-[20].94 Dainford Ltd v Smith (1985) 155 CLR 342 at 364; 58 ALR 285 at 301; Dodds v Kennedy (No 2) (2011) 42 WAR 16 at 26, 31.95 McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315 at [17]; Gloria Jean’s Coffee v Western Export Services Inc [2011] NSWCA 137 at [55].

manifestly absurd - mere unreasonableness is not enough.96 As was pointed out by Ward JA in International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea97 ‘[t]he Court has no mandate to rewrite agreements merely to give them a more commercial operation’. Establishing absurdity is not easily achieved.98 In relation to what is meant by absurdity, in National Australia Bank Ltd v Clowes99 Leeming JA said:

In my opinion this is a clear case where the literal meaning of the contractual words is an absurdity, and it is self-evident what the objective intention is to be taken to have been. Where both those elements are present … ordinary processes of contractual construction displace an absurd literal meaning by a meaningful legal meaning … [T]he principle is premised upon absurdity, not ambiguity, and is available even where … the language is unambiguous.

Later in his judgment, Leeming JA100 said:

The principle is not confined to linguistic errors such as ‘inconsistent’ being read as ‘consistent’ or ‘shorter’ being read as ‘longer’ [as occurred in Saxby Soft Drinks Pty Ltd v George Saxby Beverages Pty Ltd101]. The principle extends to obvious conceptual errors, such as ‘lessor’ being read as ‘lessee’ as in McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd,102 or [as on the facts of this case] words denoting a mortgage of company title flat being read as a mortgage of the shares in the company which entitle their owner to that flat. In all those cases, it is perfectly clear what legal meaning is to be given to the literally absurd words.

Leeming JA’s observations bring into focus the relationship between the process of construction and the remedy of rectification. In relation to the issue of whether a court corrects errors in written documents by the process of construction or by the remedy of rectification, in W & K Holdings (NSW) Pty Ltd v Mayo103 Sackar J said the following:

As part of the process of construction, as distinct from the remedy of rectification, the court has power to correct obvious mistakes in the written expression of the intention of the parties … Although there is clearly a conceptual similarity, and perhaps an overlap, between correction by construction and the doctrine of rectification, there is a difference in their respective scopes of application … [A] a common view is that the dividing line between cases where correction by construction is available and where only correction by rectification is available, is to be drawn on the basis of whether the party seeking the correction is seeking to rely on prior negotiations between the parties, the actual or subjective intentions of the parties or parol evidence or on whether the ‘error’ calling for correction is so obvious simply from the face of the document.

96 Schwartz v Hadid [2013] NSWCA 89 at [31]; Current Images Pty Ltd v Dupack Pty Ltd [2012] NSWCA 99 at [47].97 [2015] NSWCA 363 at [148].98 Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297 at [18]; Apple and Pear Australia Ltd v Pink Lady America LLC [2016] VSCA 280 at [152].99 [2013] NSWCA 179 at [34].100 National Australia Bank Ltd v Clowes [2013] NSWCA 179 at [38].101 [2009] NSWSC 1486.102 (2008) 73 NSWLR 53.103 [2013] NSWSC 1063 at [48]-[50].

Avoidance of inconsistencies

Where contractual terms appear to be inconsistent with each other, the court will ‘do its best to reconcile them if that can conscientiously and fairly be done.104 The question of inconsistency is determined objectively.105 An inconsistency will arise where the terms of a contract ‘cannot sensibly be read together’.106 In Re Media Entertainment & Arts Alliance; Ex Parte Hoyts Corp Pty Ltd (No 1)107 Mason CJ, Brennan, Dawson, Toohey, Gaudron and McHugh JJ said:

A conflict ... involving apparently inconsistent provisions in the one instrument, is to be resolved, if at all possible on the basis that one provision qualifies the other and, hence, that both have meaning and effect. That rule is an aspect of the general rule that an instrument must be read as a whole.

In Metropolitan Gas Co v Federated Gas Employees’ Industrial Union108 Isaacs and Rich JJ said the following about the need to construe an instrument as a whole:

It is a received canon of interpretation that every passage in a document must be read, not as if it were entirely divorced from its context, but as part of the whole instrument: Ex antecedentibus et consequentibus fit optima interpretatio. In construing an instrument ‘every part of it should be brought into action, in order to collect from the whole one uniform and consistent sense, if that may be done; or, in other words, the construction must be made upon the entire instrument, and not merely upon disjointed parts of it; the whole context must be considered, in endeavouring to collect the intention of the parties, although the immediate object of inquiry be the meaning of an isolated clause’.

More recently, in AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd109 Ball J said:

The general principle is that the words of a contract should be interpreted in a way which gives them an effect rather than a way in which makes them redundant. That principle does not operate as an invariable rule. In some cases, it may be appropriate to interpret words in a way that makes them redundant. That may be appropriate where the alternative construction of the words is inconsistent with other provisions of the contract or where the alternative construction is inconsistent with the commercial purpose of the contract or where it appears that the words have been included out of abundant caution.

Thus, in order to avoid inconsistencies it may be necessary to depart from the ordinary meaning of the words approach to construction.110

However, in cases where parties contract on the basis of a standard form contract

104 Geys v Société Générale, London Branch [2013] 1 AC 523 at 538; [2013] 1 All ER 1061 at 1076.105 Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565 at 574; Alexander v West Bromwich Mortgage Company [2016] EWCA Civ 496 at [33]-[35].106 Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565 at 578.107 (1993) 178 CLR 379 at 386-7; 115 ALR 321 at 326.108 (1925) 35 CLR 449 at 455.109 [2010] NSWSC 985 at [13]. See also North v Marina [2003] NSWSC 64 at [43]-[46].110 Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99 at 109.

(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:111 In Homburg Houtimport BV v Agrosin Private Ltd (The Starsin)112 Lord Bingham of Cornhill said:

[I]t is common sense that greater weight should attach to terms which the particular contracting parties have chosen to include in the contract than to pre-printed terms probably devised to cover very many situations to which the particular contracting parties have never addressed their minds.

Of course, there is the preliminary question of whether an inconsistency has arisen. On this issue, in Pagnan SpA v Tradax Ocean Transportation SA113 Dillon LJ said:

What is meant by inconsistency? Obviously there is inconsistency where two clauses cannot sensibly be read together, but can it really be said that there is inconsistency wherever one clause in a document qualifies another clause? A force majeure clause, or a strike and lock out clause, almost invariably does qualify the apparently absolute obligations undertaken by the parties under other clauses in the contract; so equally with an extension of time clause, for instance in a building agreement. So equally, with a lease, the re-entry clause qualifies the apparently unconditional demise for a term of years absolute, but no one would say they were inconsistent.

An illustration of the application of the principle that contracts should be construed as a whole is the case of Howe v Botwood.114 In that case a lease imposed an obligation upon the tenant to ‘pay and discharge all rates, taxes, assessments, charges, and outgoings whatsoever which now are or during the said term shall be imposed or charged on the premises or the landlord or tenant in respect thereof (land tax and landlord’s property tax only excepted)’. The landlord had an obligation to ‘keep the exterior of the said dwelling-house and buildings in repair’. A relevant public authority served a notice that required a drain to be replaced. The issue before the court was whether the cost of so doing fell upon the tenant or upon the landlord. In ruling that the landlord was liable for the cost of the work, Channell J115 said:

The expense of executing the work would under this covenant fall on the [landlord]. If therefore that covenant by the [landlord] had stood alone without the covenant by the [tenant], that is how I should construe it. That covenant, however, has to be read with the earlier covenant by the tenant to pay and discharge all outgoings. There are thus two covenants, one placing the burden on the tenant and the other placing it on the landlord. We must construe the lease as a whole so as to make it consistent in both its parts. In my opinion the covenant by the tenant must be read as if it contained the words ‘except such

111 Bedroff Pty Ltd v Rennie [2002] NSWSC 928 at ]59]; Leonie’s Travel Pty Limited v International Air Transport Association (2009) 255 ALR 89 at 106; Macdonald v Kavshan Pty Ltd; Villarica v Kavshan Pty Ltd [2016] NSWSC 731 at [30]-[31].112 [2004] 1 AC 715 at 737; [2003] 2 All ER 785 at 794, cited with approval in Al Achrafi v Topic [2016] NSWSC 1807 at [33].113 [1987] 3 All ER 565 at 578.114 [1913] 2 KB 387.115 Howe v Botwood [1913] 2 KB 387 at 391.

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.116 In this respect, in International Air Transport Association v Ansett Australia Holdings Ltd117 Gleeson CJ said:

In giving a commercial contract a businesslike interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract, and the objects which it is intended to secure. An appreciation of the commercial purpose of a contract calls for an understanding of the genesis of the transaction, the background, and the market.

In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited118 French CJ, Nettle and Gordon JJ said:

Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’: Electricity Generation Corporation v Woodside Energy Ltd.119 Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.

The justification for this approach to the construction of commercial agreements was explained in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd120 where Lord Steyn said:

In determining the meaning of the language of commercial contracts … the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.

When a court looks at commercial common sense it does so by looking at the facts and circumstances that existed at the time of the contract. In this respect in Arnold v Britton121 Lord Neuberger said:

[C]ommercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out

116 Maggbury Pty Ltd v Hafele Australia Pty Ltd at CLR 198; ALR 163; Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201; [1984] 3 All ER 229 at 233; Rainy Sky SA v Kookmin Bank [2012] 1 All ER 1137 at 1149; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656; 306 ALR 25 at 33-4; Zhang v ROC Services (NSW) Pty Ltd [2016] NSWCA 370 at [95]-[97].117 (2008) 234 CLR 151 at 160; 242 ALR 47 at 51-2.118 (2015) 256 CLR 104 at 117; 325 ALR 188 at 198.119 (2014) 251 CLR 640 at 657; 306 ALR 25 at 34.120 [1997] AC 749 at 770–1; [1997] 3 All ER 352 at 372.121 [2015] AC 1619 at 1628; [2016] 1 All ER 1 at 7.

badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made.

On the question of whether the contract is one that flouts business common sense, in LB Re Financing No 3 Ltd v Excalibur Funding No 1 Plc122 Briggs J said:

In this context, a distinction must be made between absurdity and irrationality on the one hand, and apparent unfairness or one-sidedness on the other. The former may compel the court to conclude that something must have gone wrong with the language, but it is no part of the court’s task to mend businessmen’s bargains. Commercial absurdity may require the court to depart even from the apparently unambiguous natural meaning of a provision in an instrument, because ‘the law does not require judges to attribute to the parties an intention they plainly could not have had’.123 Questions of commercial common sense falling short of absurdity may however enable the court to choose between genuinely alternative meanings of an ambiguous provision. The greater the ambiguity, the more persuasive may be an argument based upon the apparently greater degree of common sense of one version over the other.

However, a court needs to be careful in seeking an interpretation that is inconsistent with commercial common sense. In Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd124 Neuberger LJ said:

[T]he court must be careful before departing from the natural meaning of the provisions in the contract merely because it may conflict with its notions of commercial common sense of what the parties may have or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, people, and should … avoid arrogating to themselves over confidently the role of arbiter of commercial reasons or likelihood. Of course, in many cases, the commercial common sense of a particular interpretation, either because of peculiar circumstances of the case or because of more general considerations, is clear. Furthermore, sometimes it is plainly justified to depart from the primary meanings of words and give them what might, on the face of it, appear to be a strange meaning, for instance where the primary meaning of the words leads to a plainly ridiculous or unreasonable result.

A common instance of the application of this principle is where there is ambiguity. In such cases, ‘the court is entitled to prefer the construction which is consistent with business common sense and to reject the other’.125 However, in such cases the courts needs to also be careful for the reasons set out in Jireh International Pty Ltd v Western Export Services Inc126 where Macfarlan JA said:

So far as they are able, courts must of course give commercial agreements a commercial and business-like interpretation. However, their ability to do so is constrained by the language used by the parties. If after considering the contract as a whole and the

122 [2011] EWHC 2111 (Ch) at [45]-[46].123 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 115.124 [2006] EWCA Civ 1932 at [21]-[22].125 Rainy Sky SA v Kookmin Bank [2012] 1 All ER 1137 at 1146; BMA Special Opportunity Hub Finance Ltd and others v African Minerals Finance Ltd [2013] EWCA Civ 416 at [24]; Fons Hf (in liquidation) v Corporal Ltd [2014] EWCA Civ 304 at [15].126 [2011] NSWCA 137 at [55].

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 contract an absurd operation. In the case of absurdity, a court is able to conclude that the parties must have made a mistake in the language that they used and to correct that mistake. A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted.

Similarly, in Arnold v Britton127 Lord Neuberger said:

[T]he reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant to the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focusing on the issue covered by the provision when agreeing the wording of that provision … [W]hile commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.

An illustration of the business common sense approach to construction is the decision in Idya Pty Ltd v Anastasiou.128 In that case a tenant of retail premises under a registered strata plan used them as a fast food outlet. Pursuant to Clause 19.1(a) of the relevant strata plan documentation the ‘owners’ of the premises were not permitted to ‘use’ them as a fast food outlet. The word ‘owners’ was defined to mean the registered proprietors of the premises. The tenant claimed that, as it was not the owner of the premises, the prohibition against using them as a fast food outlet did not apply to it with the consequence that it could not be prevented from operating its fast food outlet for the duration of the lease. The Court of Appeal rejected this argument. Beazley JA129 said:

In my opinion, having regard to the wide meaning that the word ‘use’ bears, depending upon its context, the proper construction of cl 19.1(a) is that it is a prohibition upon the owners of the Retail Shops on using, including permitting to be used, the premises as a fast food outlet. Any other construction would be commercially nonsensical. If the construction for which the [tenant] contend was the correct one, it would mean that an individual could be the proprietor of the Retail Shops and by the mere device of entering into a lease or licence with a company of which the proprietor was the sole shareholder, thereby avoid the prohibition on use. The reverse, of course, would also operate, that is, a company

127 [2015] AC 1619 at 1628-9; [2016] 1 All ER 1 at 7. See also Lindsay v Noble Investments Limited [2015] NZCA 588 at [16].128 [2008] NSWCA 102.129 Idya Pty Ltd v Anastasiou [2008] NSWCA 102 at [50].

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 USE OF DICTIONARIES

In ascertaining the meaning of words used in legal documents courts will often have recourse to dictionaries. However, in using dictionaries the following points need to be kept in mind. First, a dictionary definition of a word will often provide various shades of meaning to a word. Second, dictionaries published in different countries may give different meanings to words. To overcome this problem, courts will usually use a dictionary published in the country in which the document was made. In Australia, the ‘authorised’ dictionary is generally accepted to be the Macquarie Dictionary.130 Third, ‘reference to dictionaries is no substitute for judicial determination of the meaning the parties have given a word or phrase. Dictionaries illustrate usage in general; but the parties’ contract will have its own context … The primary task of a court is to find, not the dictionary meaning, but the meaning as used by the parties in the context of their particular transaction’.131 Thus, in Southern Equity Pty Limited v Timevale Pty Limited132 Brereton J said:

[I]n construing the term in this contract, it must be remembered that one is ascertaining … what a reasonable person in the position of these parties would have understood the provisions of a contract to mean, taking into consideration the purpose and object of the transaction. This is not necessarily the same meaning as is attributed to the words used by dictionaries or by judicial pronouncements in other cases, although those sources will often inform the objective meaning of words used by parties.

In TAL Life Ltd v Shuetrim133 Leeming JA said:

Dictionary definitions may assist in identifying the range of possible meanings a word may bear in various contexts, but will not assist in ascertaining the precise meaning the word bears in a particular context. As much was recognised by a unanimous High Court … in Thiess v Collector of Customs134 when observing that a mature and developed jurisprudence does not ‘make a fortress out of the dictionary’. Although the distinction between the dictionary definition of a word and its legal meaning is not often well understood, it is clear that dictionaries are no substitute for the interpretative process.

Parties to transactions will often include within their legal documents ‘private’ dictionaries in the form of definitions of words used in the documentation. In relation to the interpretation of these ‘private’ dictionary definitions, in Perpetual Custodians Pty Ltd v IOOF Investment Management Ltd135 Leeming JA (speaking for the Court of Appeal) said:

130 John White & Sons Pty Ltd v Changleng (1985) 2 NSWLR 163 at 164-5.131 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 57.132 [2012] NSWSC 15 at [40].133 (2016) 91 NSWLR 439 at 457-8; 332 ALR 507 at 526-7.134 (2014) 250 CLR 664 at 672; 306 ALR 594 at 599-600.135 (2013) 278 FLR 49 at 71; 304 ALR 436 at 456-7.

Lord Steyn has written extrajudicially that ‘[e]ven an agreed definition is of limited use: it takes no account of contextual requirements’.136 … Professor McMeel137 has written that ‘even defined terms must yield to wider context or contrary intention’. Professor Carter138 has said that ‘the absence of [words to the effect “unless the context indicates otherwise”] does not mean that the definition necessarily applies to every usage of the term in the document’. That must in my opinion be correct in principle. The ordinary approach to construction insists on reading the contract as a whole and doing so harmoniously, so as to resolve or minimise internal inconsistency. Foreign to that approach would be a slavish rule that defined terms inevitably bear every aspect of their defined meaning. The contestable nub of the matter is what is sufficient to constitute a displacing context or contrary intention. Owen and Steytler JJ139 have said that ‘the deliberate use of defined words is not to be lightly passed over, even where the definition leaves open the possibility of another meaning for a defined phrase’, a proposition whose force I acknowledge.

Similarly, in Black Box Control Pty Ltd v Terravision Pty Ltd140 the Court of Appeal said that ‘[d]efinitions do not have substantive effect. A definition is not to be construed in isolation from the operative provision(s) in which the defined term is used. Rather, the operative provision is ordinarily to be read by inserting the definition into it’.

THE PAROL EVIDENCE RULE AND THE CONSTRUCTION OF CONTRACTS

The parol evidence rule contains two parts. The first part is concerned with the exclusion of extrinsic evidence that would add to, subtract from or vary or qualify the terms of a written contract. Our concern here is with the second part of the rule which deals with the exclusion of extrinsic evidence that would otherwise assist the court in construing the contract. In its operation relating to the construction of contracts, the parol evidence rule excludes extrinsic evidence of a number of matters that would otherwise be relevant in ascertaining the intention of the parties in relation to the meaning of a written agreement.

Prior negotiations

The parol evidence rule excludes extrinsic evidence of the prior negotiations of the parties.141 The justification for this approach was explained in Prenn v Simmonds142 where Lord Wilberforce said:

The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience … It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final document, though converging, are still divergent. It is only the

136 Johann Steyn, ‘Pepper v Hart; A Re-Examination’ (2001) 21 Oxford Journal of Legal Studies 59, p 60.137 G McMeel, The Construction of Contracts, Interpretation, Implication, and Rectification , 2nd ed, Oxford University Press, Oxford, 2011, p 159.138 J W Carter, The Construction of Commercial Contracts, Hart Publishing, Oxford, 2013, p 446.139 BHP Petroleum (Australia) Pty Ltd v Sagasco South East Inc [2001] WASCA 159 at [24].140 [2016] WASCA 219 at [42].141 Australia and New Zealand Banking Group Ltd v Compagnie D’Assurances Maratimes Aeriennes Et Terrestres [1996] 1 VR 561 at 565; Globe Motors, Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 at [61].142 [1971] 3 All ER 237 at 240–1.

final document that records a consensus … The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is to admit evidence of one party’s objective — even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than what they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.

In Globe Motors, Inc v TRW Lucas Varity Electric Steering Ltd143 Beatson LJ said that ‘[t]he rationale for the general rule is said to be practical policy and the public interest in economy and predictability in obtaining advice and adjudicating disputes’.

However, although the prior negotiations rule prevents the use of pre-contractual negotiations as evidence of the interpretation of contractual terms, it does not preclude the use of such evidence for the purpose of establishing relevant background facts that were known to the parties. In this respect, in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales144 Mason J said:

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction.

The appropriateness of the prior negotiations rule has been recently debated. Writing extrajudicially, Lord Nicholls of Birkenhead145 has suggested that it should be abolished on the grounds that such a move would: (i) introduce coherence into this area of the law, (ii) make the law more transparent, (iii) conform to current international trends, and (iv) overcome injustices that result from the application of the rule. However, a unanimous House of Lords in Chartbrook Ltd v Persimmon Homes Ltd146 subsequently rejected these criticisms of the prior negotiations rule and confirmed the authority of Prenn v Simmonds.147 In Byrnes v Kendle148 Heydon & Crennan JJ also confirmed the prior negotiations rule.

Spigelman CJ,149 also writing extrajudicially, has provided reasons for the

143 [2016] EWCA Civ 396 at [61].144 (1982) 149 CLR 337 at 352; 41 ALR 367 at 375.145 Lord Nicholls of Birkenhead, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review 577.146 [2009] 1 AC 1101; [2009] 4 All ER 677.147 [1971] 3 All ER 237.148 Byrnes v Kendle (2011) 243 CLR 253 at 284-5; 279 ALR 212 at 236-7.149 Hon J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81 Australian Law Journal 322, pp 331-6.

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 Limited,150 Tipping and Wilson JJ were in favour of abandoning it, while Blanchard and Gault JJ were inclined to interpret the rule very liberally and to leave it open for later consideration as to whether the rule should be abandoned. McGrath J was the only judge in this case who was in favour of retaining the prior negotiations rule as it was currently understood and applied in Australia and the United Kingdom. In this context McGrath J151 observed

I see no point in New Zealand courts at this stage attempting to put a gloss on the general approach so recently stated by the House of Lords. It is better that the common law of New Zealand in this important field of commerce march in step with settled approaches overseas unless and until very good reasons for departure emerge.

Post-contract conduct

The question as to whether the parol evidence rule excludes evidence of the conduct of the parties subsequent to the entry into the contract has been one that has attracted a divergence of judicial and academic opinions. In Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd152 Kirby P canvassed various reasons in support of the conflicting views on the admissibility of the subsequent conduct of the contracting parties. In support of excluding evidence of subsequent conduct, his Honour noted that, if post-contract behaviour was taken into account, it could lead a party to tailor such behaviour in order to persuade the other party to accept his or her understanding of the contract or to provide supporting evidence in any subsequent court case between the parties. Furthermore, permitting such evidence would expand the field of enquiry undertaken by a court that would lead to an increase in the length and costs of litigation. On the other hand, the possibility of clear and mutual post-contract conduct that evidences the parties’ original intentions would tend to support the admissibility of such evidence.

In High Court cases such as Farmer v Honan153 and Howard Smith & Co Ltd v Varawa154 there are suggestions that post-contract conduct is admissible in 150 [2010] 2 NZLR 444.151 Vector Gas Limited v Bay of Plenty Energy Limited [2010] 2 NZLR 444 at 473-4.152 (1990) 20 NSWLR 310 at 316.153 (1919) 26 CLR 183 at 197.154 (1907) 5 CLR 68 at 78.

determining the meaning of the contract. On the other hand, other High Court cases such as Maynard v Goode (1926) 37 CLR 529 at 538155 and Administration of the Territory of Papua New Guinea v Daera Guba156 suggest that evidence of 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.157 The High Court majority’s view is also supported by the Courts of Appeal in New South Wales, Victoria and Western Australia.158

On the other hand, it can be noted that all members of the Supreme Court in New Zealand in Gibbons Holdings Limited v Wholesale Distributors Limited,159 after consideration of the issue, supported the view that post-contractual conduct could be taken into account in construing a contract. Thus, Tipping J at 294160 said:

As a matter of principle, the Court should not deprive itself of any material which may be helpful in ascertaining the parties’ jointly intended meaning, unless there are sufficiently strong policy reasons for the Court to limit itself in that way. I say that on the basis that any form of material extrinsic to the document should be admissible only if capable of shedding light on the meaning intended by both parties. Extrinsic material which bears only on the meaning intended or understood by one party should be excluded. The need for the extrinsic material to shed light on the shared intention of the parties applies to both pre-contract and post-contract evidence. Provided this point is kept firmly in mind, I consider the advantages of admitting evidence of post-contract conduct outweigh the disadvantages. The latter comprise primarily the potential for ex post facto subversion of earlier jointly shared intentions and the lengthening of interpretation disputes by encouraging the parties to produce evidence which is often only tenuously relevant at best.

Later in his judgment, Tipping J161 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.

155 (1926) 37 CLR 529 at 538.156 (1973) 130 CLR 353 at 446.157 (2008) 238 CLR 570 at 582; 251 ALR 322 at 330.158 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 678-82; Byrne v Macquarie Group Services Australia Pty Ltd [2011] NSWCA 68 at [40]; World Best Holdings Limited v Sarkar [2010] NSWCA 24 at [19]-[20]; County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [161]; Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 at [59]; Ryan v Textile Clothing & Footwear Union of Australia [1996] VR 235 at 261; Lederberger v Mediterranean Olives Financial Pty Ltd (2012) 38 VR 509 at 518; Secure Parking (WA) Pty Ltd v Wilson (2008) 38 WAR 350 at 373159 [2008] 1 NZLR 277 at 283, 288–9, 294–7, 298–9, 308–11.160 Gibbons Holdings Limited v Wholesale Distributors Limited [2008] 1 NZLR 277 at 294.161 Gibbons Holdings Limited v Wholesale Distributors Limited [2008] 1 NZLR 277 at 297. The approach of Tipping J was reaffirmed by the Court of Appeal in AAI Limited v 92 Lichfield Street Limited (in receivership and in liquidation) [2015] NZCA 559 at [47].

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.162 For example, in White v Australian and New Zealand Theatres Ltd163 two theatrical artists were engaged to provide their ‘professional services’ for a theatre company. There was no definition of ‘professional services’ in the contract. Extrinsic evidence was admitted to establish that it included producing the performance, as well as acting in it. It is, however, probably more difficult to introduce extrinsic evidence if the ambiguity relates to the nature or character of the subject matter. Thus, in Hope v RCA Photophone of Australia Pty Ltd164 extrinsic evidence was not admitted to establish that a lease of ‘electrical sound-reproduction’ equipment meant new, as opposed to second-hand equipment, on the basis that the description was clear to ‘all those who understand the terminology used for the purpose of describing sound-reproducing apparatus’.

2. to show the intention that both parties had in relation to the meaning of a particular ambiguous contractual term.165 Such cases are sometimes referred to as ‘private dictionary’ cases because the parties have agreed that a word or expression in the express terms of the contract is to have, or not have, a particular meaning.166

3. to identify the parties to the contract.167 Thus, in Edwards v Edwards168 a deed provided for the transfer of property to ‘John Edwards’. There was ambiguity as to whether that description of the transferee referred to the transferor’s father, brother or nephew, as they were all named John Edwards. Extrinsic evidence was admitted to establish that the transferee was the transferor’s brother. In relation to identifying contractual parties, in Lederberger v Mediterranean Olives Financial Pty Ltd169 the Victorian Court of Appeal said:

162 Process Minerals International Pty Ltd v Consolidated Minerals Pty Ltd [2011] WASCA 219 at [98]; Paul Fishlock v The Campaign Palace Pty Limited [2013] NSWSC 531 at [103]-[114]; Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) 48 WAR 261 at 290.163 (1943) 67 CLR 266.164 (1937) 59 CLR 348 at 356.165 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 248-50; 41 ALR 367 at 375 at 372-6; Australasian Medical Insurance Ltd v CGU Insurance Ltd (2010) 271 ALR 142 at 156-7; Canberra Hire Pty Ltd v Koppers Wood Products Pty Ltd [2013] ACTSC 162 at [203]-[208]166 Lodge Partners Pty Ltd v Pegum (2009) 255 ALR 516 at 521.167 Damien v JKAM Investments Pty Ltd [2015] NSWCA 368 at [28].168 (1918) 24 CLR 312.169 (2012) 38 VR 509 at 515-6.

Identification of the parties to a contract must be in accordance with the objective theory of contract. That is the intention that a reasonable person, with the knowledge of the words and actions of the parties communicated to each other, and the knowledge that the parties had of the surrounding circumstances, would conclude that the parties had. The process of construction requires consideration not only of the text of the documents, but also the surrounding circumstances known to the parties and the purpose and object of the transaction. This in turn presupposes knowledge of the genesis of the transaction, the background, and the context in which the parties are operating.

4. to establish whether a person’s post-contractual conduct, if it constitutes admissions adverse to his or her interests, shows that a contract, that he or she claims to exist, was formed.170 In Fazio v Fazio171 Murphy JA said:

Where, however, an informal agreement (oral or inferred) is alleged to have been made on or by a certain date, the conduct of the parties, including conduct subsequent to the postulated date, may be considered in deciding whether a contract has been concluded. Such conduct may be considered for the purpose of inferring not only whether a binding agreement had been reached, but also its subject matter and the identification of its necessary terms.

5. to establish whether a document or clause in a document is a sham.172

6. to establish whether a term was incorporated into a contract.173 Thus, post-contractual conduct may be admissible as an admission by one party as to the terms of a contract.174 Also if the contract is oral or party written and partly oral evidence of subsequent conduct can be admitted to establish the terms of the contract.175

7. to establish whether the remedy of rectification is available.176

8. post-contractual conduct is admissible ‘for the purpose of showing the meaning of words in ancient documents where the meaning of those words is now obscure’.177

EXCLUSION CLAUSES AND EXTRINSIC EVIDENCE

170 Cooper v Hobbs [2013] NSWCA 70 at [54]; Brambles Holdings Ltd v Bathurst City Council (2000–1) 53 NSWLR 153 at 164; Stirnemann v Kaza Investments Pty Ltd [2011] SASCFC 77 at [17]-[18]; Hughes v St Barbara Ltd [2011] WASCA 234 at [106]; Hopcroft & Edwards v Edmonds (2013) 116 SASR 191 at 214; Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605 at 625-6.171 [2012] WASCA 72 at [193].172 Bankway Properties Ltd v Pensfold-Dunsford [2001] 1 WLR 1369 at 1380.173 Great North Eastern Railway Ltd v Avon Insurance plc [2001] 2 Lloyd’s Rep 649 at 655.174 Johnson v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [84].175 Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 at [143]; Hightime Investments Pty Ltd v Adamus Resources Ltd [2012] WASC 295 at [98]-[99].176 Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at 657–8177 Mineralogy Pty Ltd v Sino Iron Ltd (No 6) (2015) 329 ALR 1 at 113.

In relation to the extent to which extrinsic evidence is admissible, either as an exception to the parol evidence rule or on the view that evidence of prior negotiations and/or post-contract conduct should generally be admissible on questions of the interpretation of contracts, an entire agreement clause is an effective way of preventing such evidence from being so used.178 Spigelman CJ179 has noted that ‘a strong argument can be made that such a clause precludes consideration of “surrounding circumstances” external to the document, on the basis that the parties have agreed to do just that’.

However, in Westpac Banking Corporation v Newey180 Pembroke J said the following:

Nor does an entire agreement clause prevent the identification and resolution of an ambiguity. The usual purpose of such a clause is to prevent reliance on representations, collateral promises and implied terms. If an ambiguity exists, an entire agreement clause cannot rationally prevent resort to the context and mutually known surrounding circumstances to resolve it. I do not accept the view that the inclusion of an entire agreement clause is a means of ‘contracting out of contextualism’.

LEGAL DRAFTING AND THE CONSTRUCTION OF LEGAL DOCUMENTS

The importance of effective legal drafting in minimising the occurrence of cases in which the construction of legal documents is an issue cannot be overstated. In many cases poor legal drafting is the reason why the issue of construction arises for judicial determination. Judges have often commented on the poor quality of drafting.181 In this respect Butt182 has made the following observation:

Judges have not been reluctant to criticise poorly-drafted, traditionally styled, legal documents … Epithets have included: botched, cobbled-together, doublespeak, absurd, archaic, incomprehensible legal gobbledegook, singularly inelegant, and mind-numbing.

Poor drafting has its impact on the construction of the document. Thus, in Lord Bridge in Mitsu Construction Company Limited v The Attorney General of Hong Kong183 Lord Bridge said:

[T]he poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an

178 C Mitchell C, ‘Entire Agreement Clauses: Contracting out of Contexualism’ (2006) 22 Journal of Contract Law 222; E Peden & J W Carter, ‘Entire Agreement - And Similar – Clauses’ (2006) 22 Journal of Contract Law 1.179 Hon J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81 Australian Law Journal 322, p 336.180 [2013] NSWSC 447 at [44].181 See for example Hydrofibre Pty Ltd v Australian Prime Fibre Pty Ltd [2013] QSC 163 at [93]; Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633 at 659-60; 310 ALR 113 at 137.182 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 47.183 [1986] UKPC 6 at 9.

interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis.

Similarly, in Cohen v Teseo Properties Ltd184 Sales J said:

If the drafting of an agreement is generally poor, it will be harder to conclude on an objective approach that the parties really meant the literal meaning of the words they used to govern and override clear conflicting business common sense.

Much of today’s legal drafting is in a form which is difficult for non-lawyers to understand. In this respect, Butt185 states:

Legal English … has traditionally been a special variety of English. Mysterious in form and expression, it is larded with law-Latin and Norman-French, heavily dependent on the past, and unashamedly archaic. Antiquated words flourish … Habitual jargon and stilted formalism conjure a spurious sense of precision.

However, some progress is being made towards the use of plain English in legal drafting. This is a trend that is favoured by an overwhelming majority of Australian judges186 and legal practitioners.187 A Discussion Paper issued by the Victorian Law Reform Commission188 provides the following description of what is meant by ‘plain English’:

Plain English is language that is not artificially complicated, but is clear and effective for its intended audience. While it shuns the antiquated and inflated word and phrase, which can readily be either omitted altogether or replaced with a more useful substitute, it does not seek to rid documents of terms which express important distinctions. Nonetheless, plain language documents offer non-expert readers some assistance in coping with these technical terms. To a far larger extent, plain language is concerned with matters of sentence and paragraph structure, with organisation and design, where so many of the hindrances to clear expression originate.

Former High Court justice, Michael Kirby189 propounds the following 10 commandments for plain language in law, the observance of which he suggest would greatly improve the clarity, vigour and directness of legal writing:

184 [2014] EWHC 2442 (Ch) at [30].185 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 1.186 K O’Brien, ‘Judicial Attitudes to Plain Language and the Law (2009) 32 Australian Bar Review 204.187 B McKillop, ‘What Lawyers Think About Plain Legal Language’ (1994) 32 New South Wales Law Society Journal (May) 68.188 Quoted in P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 102.189 M Kirby, ‘Ten Commandments for Plain Language in Law’ (2010) 33 Australian Bar Review 10, p 14.

Butt190 lists the following benefits of using plain English: (i) ease of understanding, (ii) increases in the ‘efficiency’ with which readers absorb and understand legal documents, (iii) the reduction of errors in drafting documents, (iv) the reduction of litigation in relation to the construction of documents, and (v) the reduction of complaints against lawyers.

It can also be noted that legislation may prescribe the use of plain language. For example, s 184 of the National Consumer Credit Protection Act 2009 (Cth) requires various consumer credit contracts to be ‘easily legible’ and ‘clearly expressed’. Furthermore, the consequences of not using plain English may have significant impact on the rights of parties under certain contracts. Thus, ‘whether a consumer was able to understand’ relevant documents is a factor that can be taken into account by a court in determining whether a transaction was unconscionable pursuant to the unconscionability provisions in ss 21 and 22 of the Australian Consumer Law 2010 (Cth). Similarly, s 9(2)(g) of the Contracts Review Act 1980 (NSW) provides that ‘the physical form of the contract, and the intelligibility of the language in which it is expressed’ is a factor that can go towards establishing that a contract is ‘unjust’.

In summing up the benefits of plain English in legal drafting, Butt191 writes as follows:

Legal language should not be a language of coded messages, unintelligible to ordinary citizens. Modern, plain English can cope with the concepts and complexities of the law and legal process. It is as capable of precision as traditional legal English. The few technical terms that a lawyer might feel compelled to retain for convenience or necessity can be incorporated without destroying the document’s legal integrity. The modern English of a legal document will never read like a good novel, but it can be attractive and effective in a clean, clear, functional style.

190 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, pp 104-13.191 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, pp 128-9.