CONSTRUCTION OF PRIVATE LEGAL
DOCUMENTS
Professor Peter Radan
INTRODUCTION
This paper deals with the construction or interpretation of private law documents, such as
contracts and trust documents. The importance of this topic cannot be overstated. A large
proportion of cases in contract law and the law of trusts have as a component, and often
the major component, the construction of some document relevant to the parties in the
dispute. The conclusion reached by the court on the construction of the relevant
document usually has significant consequences in relation to the outcome of the case
before the court.
The case law on this issue is dominated by contract cases and, in the discussion to follow,
reference will usually be made to the construction of contracts. However, as was pointed
out in Byrnes v Kendle,1 the principles of construction of contracts apply with equal
force to other documents such a trust documents.
The principles of construction involves two things: (i) the meaning of the terms of the
contract and (ii) the legal effects or significance of the document’s terms.2 Our concern
here is with the first of these two things. In relation to the legal effects or significance of
the document’s terms, you will have already covered this question in other subjects. For
example, in Contracts this question raised the important issue of the classification of
terms of a contract as being conditions, warranties or intermediate terms. This issue is of
profound importance in relation to whether an innocent party to a breach of contract is
entitled to terminate the contract as a result of the breach.
A preliminary point that can be made about determining the meaning of the words used is
that the richness of the English language often presents the courts with significant
problems when construing a contract or other legal document. This point was well made
by Lord Simon of Glaisdale in Stock v Frank Jones (Tipton) Ltd where his Lordship said:
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
1
2
(2011) 243 CLR 253 at 286; 279 ALR 212 at 238.
Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78.
unambiguous precision, with the aim that every citizen shall know as exactly as possible, where
he stands under the law).3
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.4
This fundamental point was reaffirmed in Byrnes v Kendle 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.5
The basic approach in determining the intention of the parties was set out in Chartbrook
Ltd v Persimmon Homes Ltd 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. 6
In this process of construction it is not the role of the court to improve the contract. In
Arnold v Britton Davis LJ said:
[I]t is not ordinarily enough that the parties simply have failed to provide for or anticipate a
particular circumstance … [T]he court is not permitted to improve upon an instrument which it
is required to construe: its task is to discover what the instrument, read as a whole and set in its
surrounding circumstances’.7
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.8
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.9 Thus, a
3
Stock v Frank Jones (Tipton) Ltd [1978] 1 All ER 948 at 953.
Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99
at 109.
5 Byrnes v Kendle (2011) 243 CLR 253 at 284; 279 ALR 212 at 236-7.
6 Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at 1113-4; [2009] 4 All ER 677 at 688.
7 Arnold v Britton [2013] EWCA Civ 902 at [36].
8 Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529; 214 ALR 410 at 413.
9 Meehan v Jones (1982) 149 CLR 571 at 589; 42 ALR 463 at 475.
4
court should construe a commercial contract ‘fairly and broadly, without being too astute
or subtle in finding defects’.10
In the process of construction it is clear that no hard and fast rules apply. The
‘construction [of contractual terms] is a composite exercise, neither uncompromisingly
literal nor unswervingly purposive’.11 Indeed, ‘[t]here has been a shift from literal methods of
interpretation towards a more commercial approach’.12
In relation to giving the words of the contract their natural and ordinary meaning, in
Ravennavi SpA v New Century Shipbuilding Co Ltd Moore-Bick LJ said:
Unless the dispute concerns a detailed document of a complex nature that can properly be
assumed to have been carefully drafted to ensure that its provisions dovetail neatly, detailed
linguistic analysis is unlikely to yield a reliable answer. It is far preferable, in my view, to read
the words in question fairly as a whole in the context of the document as a whole and in the light
of the commercial and factual background known to both parties, in order to ascertain what they
were intending to achieve.13
Where technical words or phrases are incorporated into a contract there is a rebuttable
presumption that they are used with that technical meaning in mind. Thus, in Marquis of
Cholmondeley v Lord Clinton Plumer MR said:
When technical words or phrases are made use of, the strong presumption is, that the party
intended to use them according to their correct technical meaning; but this is not conclusive
evidence that this was his real meaning. If the technical meaning is found, in the particular case,
to be an erroneous guide to the real one, leading to a meaning contrary to what the party
intended to convey by it, it ceases to answer its purpose.14
In Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council Campbell JA
said:
There has long been a principle of construction concerning words or phrases that have a
specialised or technical meaning in the law whereby: ‘[w]hen technical words or phrases are
made use of, the strong presumption is, that the party intended to use them according to their
correct technical meaning’ ...
In Sydall v Castings Ltd [1967] 1 QB 302 at 313-4, Diplock LJ explained the principle:
Documents which are intended to give rise to legally enforceable rights and duties
contemplate enforcement by due process of law, which involves their being
interpreted by courts composed of judges, each one of whom has his personal
idiosyncracies of sentiment and upbringing, not to speak of age. Such documents
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
10
Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99
at 109.
11 International Fina Services AG v Katrina Shipping Ltd (The Fina Samco) [1995] 2 Lloyd’s Rep 344 at 350.
12 Sirius International Insurance Company (Publ) v FAI General Insurance Limited [2005] 1 All ER 191 at 200.
13 Ravennavi SpA v New Century Shipbuilding Co Ltd [2007] 2 Lloyd’s Rep 24 at 27.
14 Marquis of Cholmondeley v Lord Clinton (1820) 37 ER 527 at 559.
is to draft and to construe such documents, have been compelled to evolve an
English language, of which the constituent words and phrases are more precise in
their meaning than they are in the language of Shakespeare or of any of the
passengers on the Clapham omnibus this morning. These words and phrases to
which a more precise meaning is so ascribed are called by lawyers ‘terms of art’, but
are in popular parlance known as ‘legal jargon’. We lawyers must not allow this
denigratory description to obscure the social justification for the use of ‘terms of art’
in legal documents. It is essential to the effective operation of the rule of law. The
phrase ‘legal jargon’, however, does contain a reminder that non-lawyers are
unfamiliar with the meanings which lawyers attach to particular ‘terms of art’, and
that where a word or phrase which is a ‘term of art’ is used by an author who is not a
lawyer, particularly in a document which he does not anticipate may have to be
construed by a lawyer, he may have meant by it something different from its
meaning when used by a lawyer as a term of art ....
If the document in question is drawn by a lawyer, is manifestly intended to effect a legal
transaction, and uses an expression that is not an expression in common use but that has a
meaning in an area of legal discourse that is relevant to the document in question, that in itself
provides a basis for the reasonable reader concluding that that expression is used in its special
legal sense, unless there are other factors present that show it is not used in that special legal
sense. So understood, the presumption is consistent with the current approach to construction. 15
The presumption that words with a technical meaning should not be given that technical
meaning is ‘not easily displaced’.16 Thus, in Brett v Barr Smith Isaacs J said:
It is a cardinal rule of interpretation that technical words must have their legal effect unless the
contrary is made perfectly clear. 17
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.18
The justification for this objective approach was explained by Tipping J in Vector Gas
Limited v Bay of Plenty Energy Limited 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
15
Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 at [167]-[170].
Sydney Attractions Group Pty Ltd v Frederick Schulman [2013] NSWSC 858 at [66].
17 Brett v Barr Smith (1918) 26 CLR 87 at 93.
18 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.
16
reasonable person would not ascribe to them when aware of all the circumstances in which the
contract was made.19
A formulation of the objective test of interpretation is set out in Lord Hoffmann’s speech
in Investors Compensation Scheme Ltd v West Bromwich Building Society, 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.20
Significantly, in his statement of principle, Lord Hoffmann did not restrict a court from
referring to the surrounding circumstances to cases where contractual terms are written in
ambiguous language. In the light of considerable debate over the impact of this case, in
Chartbrook v Persimmon Homes, Lord Hoffmann made the following comment:
The only points [Investors Compensation Scheme Ltd v West Bromwich Building Society]
decided that might have been thought in the least controversial were, first, that it was not
necessary to find an ‘ambiguity’ before one could have any regard to background and, secondly,
that the meaning which the parties would reasonably be taken to have intended could be given
effect despite the fact that it was not, according to conventional usage, an ‘available’ meaning of
the words or syntax which they had actually used. 21
On the other hand, in the leading Australian High Court decision on construction of
contracts of Codelfa Construction Pty Limited v State Rail Authority of New South
Wales,22 Mason J in the High Court observed that, in a commercial contract, if words are
ambiguous or susceptible of more than one meaning, a court, having regard to the origins
of the transaction, its context and the market in which the parties are operating, should
ascertain the contract’s commercial purpose in order to give the contract a sensible
commercial operation. His Honour 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.23
In relation to this passage, in Ritter v Keatley Real Estate Pty Ltd Trading as Mt Gambier
First National Stanley J said:
The concept of ambiguity referred to by Mason J in Codelfa is not without its difficulties. The
disjunctive reference to language which is ambiguous or susceptible to more than one 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
19
Vector Gas Limited v Bay of Plenty Energy Limited [2010] 2 NZLR 444 at 458.
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114.
21 Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at 1119; [2009] 4 All ER 677 at 693.
22 (1982) 149 CLR 337; 41 ALR 367.
23 Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352; 41 ALR
367 at 374.
20
following meanings: ‘open to various interpretations’, ‘equivocal’, ‘doubtful’, ‘uncertain’,
‘having a double meaning’, ‘obscure’, ‘indistinct’, and ‘lacking clarity’. In Gardiner v
Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 at [12], Spigelman CJ said that
ambiguity ‘extend[s] to any situation in which the scope and applicability of the formulation
[is], for whatever reason, doubtful’. In my view, the Mason J formulation in Codelfa is directed
to circumstances in which an exclusively textual analysis of the language of a contract produces
uncertainty as to the meaning of the contractual provision. 24
The question that has generated considerable debate in the wake of these cases is whether
there is a difference between the views of Lord Hoffmann and Mason J. It appears to be
the case that in Codelfa Construction Pty Limited v State Rail Authority of New South
Wales, Mason J confined the use of surrounding circumstances in the construction of a
contract to cases where the words used are ambiguous, whereas Lord Hoffmann’s
approach in Investors Compensation Scheme v West Bromwich Building Society is not so
confined. A further question that arises is, if there is a difference between the two
approaches, which is the proper approach to be adopted by a court engaged in construing
a contract.
What can be said in response to these questions is that subsequent decisions of
Australia’s High Court have been far from helpful. Thus, in Royal Botanic Gardens and
Domain Trust v South Sydney Council,25 the High Court, left open for a future time the
question as to whether Lord Hoffmann’s approach was broader or preferable to that of
Mason J, and demanded that, in the meantime, other Australian courts ‘should continue
to follow Codelfa’ if they discerned any inconsistency between the two approaches.
This position was restated by the High Court, in a special leave application, in Western
Export Services Inc v Jireh International Pty Ltd.26
In relation to the question of whether the views of Mason J and Lord Hoffmann are
different, in BP Australia Pty Limited v Nyran Pty Limited, Nicholson J argued that the
approaches of Mason J and Lord Hoffmann are inconsistent and that surrounding
circumstances can only be taken into account in cases of ambiguous language. 27
Similarly, in GMA Garnet Pty Ltd v Barton International Inc Buchanan J, after
discussing the relevant cases, concluded that ‘evidence of surrounding circumstances
may not be used, as part of an exercise in construction of a contract, to contradict
unambiguous contractual stipulations’.28
On the other hand, in Horton Geoscience Constructions Pty Ltd v Energy Minerals Pty
Ltd, Fryberg J, after quoting Mason J in Codelfa Construction v State Rail Authority,
went on to say that, in his opinion, ‘subsequent High Court decisions establish that in
determining the meaning of the terms of a contractual document the surrounding
circumstances known to the parties, and the purpose and object of the transaction, may
normally be taken into account; their impact is not restricted to the case where the
language is ambiguous (whether latent or patent) or susceptible of more than one
24
Ritter v Keatley Real Estate Pty Ltd Trading as Mt Gambier First National [2013] SASC 46 at [53].
(2002) 240 CLR 451at 62-3; 86 ALR 289 at 301.
26 (2011) 282 ALR 604 at 605.
27 BP Australia Pty Limited v Nyran Pty Limited (2003) 198 ALR 442 at 451–2.
28 GMA Garnet Pty Ltd v Barton International Inc (2010) 183 FCR 269 at 276.
25
meaning’.29 This passage suggests, as did Palmer J in Brooks Pty Ltd v NSW Grains
Board,30 that the approaches of Mason J and Lord Hoffmann are in ‘complete sympathy’
with each other.
In relation to Fryberg J’s references to ‘subsequent High Court decisions’ the following
points can be noted. First, in Maggbury Pty Ltd v Hafele Australia Pty Ltd,31 Lord
Hoffmann’s approach was explicitly referred to by the High Court. Second, in Toll
(FGCT) Pty Ltd v Alphapharm Pty Ltd the High Court adopted ‘the principle of
objectivity by which the rights and liabilities of the parties to a contract are determined’
and went on to say:
It is not the subjective beliefs or understandings of the parties about their rights and liabilities
that govern their contractual relations. What matters is what each party by words and conduct
would have led a reasonable person in the position of the other party to believe. References to
the common intention of the parties to a contract are to be understood as referring to what a
reasonable person would understand by the language in which the parties have expressed their
agreement. The meaning of the terms of a contractual document is to be determined by what a
reasonable person would have understood them to mean. That, normally, requires consideration
not only of the text, but also of the surrounding circumstances known to the parties, and the
purpose and object of the transaction. 32
This statement in the High Court does not confine the use of surrounding circumstances
to cases of ambiguity and was re-affirmed by the High Court in International Air
Transport Association v Ansett Australia Holdings Ltd.33 On the basis of these three
decisions it can be persuasively argued that the High Court has adopted the approach of
Lord Hoffmann.
Prior to the High Court’s decision in Western Export Services Inc v Jireh International
Pty Ltd, the majority of Australia’s intermediate appellate courts also expressed a
preference for the substance of Lord Hoffmann’s approach. Thus, in Franklins Pty Ltd v
Metcash Trading Ltd Allsop P said:
The construction and interpretation of written contracts is to be undertaken by an examination of
the text of the document in the context of the surrounding circumstances known to the parties,
including the purpose and object of the transaction and by assessing how a reasonable person
would have understood the language in that context. There is no place in that structure, so
expressed, for a requirement to discern textual, or any other, ambiguity in the words of the
document before any resort can be made to such evidence of surrounding circumstances. 34
Similarly, in Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Limited,
the Court of Appeal observed that the trial judge in this case was in error when he
‘appeared to adopt a principle that background or extrinsic material can only be examined
once some textual ambiguity in the contract is revealed’.35 Similar sentiments can be
29
Horton Geoscience Constructions Pty Ltd v Energy Minerals Pty Ltd [2005] QCA 169 at [36].
[2002] NSWSC 1049 at [61].
31 (2001) 210 CLR 181 at 188; 185 ALR 152 at 155.
32 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; 211 ALR 342 at 352.
33 (2008) 234 CLR 151 at 174; 242 ALR 47 at 63.
34 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 616.
35 Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Limited [2009] NSWCA 140 at [22].
30
found in Masterton Homes Pty Ltd v Palm Assets Pty Ltd,36 World Best Holdings Limited
v Sarker,37 MBF Investments Pty Ltd v Nolan,38 and McGrath v Sturesteps; Sturesteps v
HIH Overseas Holdings Ltd (in liquidation).39
However, these views were seemingly cast aside by the High Court in Western Export
Services Inc v Jireh International Pty Ltd where Gummow, Heydon and Bell JJ said:
The applicant in this Court refers to [Franklins Pty Ltd v Metcash Trading Ltd] … as authority
rejecting the requirement that it is essential to identify ambiguity in the language of the contract
before the court may have regard to the surrounding circumstances and object of the transaction
… Acceptance of the applicant’s submission, clearly would require reconsideration by this
Court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by
Mason J … to be the ‘true rule’ as to the admission of evidence of surrounding circumstances.
Until this Court embarks upon that exercise and disapproves or revises what was said in
Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of
primary judges, notwithstanding what may appear to have been said by intermediate appellate
courts … We do not read anything said in this Court in Pacific Carriers Ltd v BNP Paribas;
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd; Wilkie v Gordian Runoff Ltd and International Air
Transport Association v Ansett Australia Holdings Ltd as operating inconsistently with what
was said by Mason J in … Codelfa.40
Similarly, in a footnote to their judgment in Byrnes v Kendle,41 Heydon and Crennan JJ
noted that the High Court had not pronounced on the issue of whether there was an
inconsistency between the approach of Lord Hoffmann in Investors Compensation
Scheme v West Bromwich Albion and Mason J in Codelfa Construction Pty Limited v
State Rail Authority of New South Wales.
In relation to the High Court’s statement in Western Export Services Inc v Jireh
International Pty Ltd, in Mrocki v Mountview Prestige Homes Pty Ltd Buchanan JA,
speaking for the Court of Appeal, said that ‘in [that case] Gummow, Heydon and Bell JJ
reiterated the position established by Codelfa Construction Pty Ltd v State Rail Authority
of NSW, that a court is not to have regard to surrounding circumstances to construe
unambiguous language’.42 A similar line of reasoning was adopted by the appellate courts
in New South Wales in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd43 and in
Western Australia in McCourt v Cranston.44 From these cases it can be concluded that
there is a difference between the views of Mason J and Lord Hoffmann, and that the more
restrictive view of Mason J is to be applied by Australian judges with the result that
evidence of surrounding circumstances can only be admitted in relation to the
construction of ambiguous language in a contract.
The decision of the High Court in Western Export Services Inc v Jireh International Pty
36
(2009) 261 ALR 382 at 385, 406-7.
[2010] NSWCA 24 at [17].
38 [2011] VSCA 114 at [195]-[203].
39 [2011] NSWCA 315 at [17].
40 Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604 at 605.
41 Byrnes v Kendle (2011) 243 CLR 253 at 285; 279 ALR 212 at 237.
42 Mrocki v Mountview Prestige Homes Pty Ltd [2012] VSCA 74 at [25].
43 [2012] NSWCA 184 at [52].
44 [2012] WASCA 60 at [23].
37
Ltd has been trenchantly criticised by commentators.45 For example, Carter et al, in
critiquing a recent decision on the law of penalties (Andrews v Australian & New Zealand
Banking Group Ltd46), state the following:
Andrews joins other recent contract decisions of the High Court, the methodology of which is a
source of concern … Andrews also illustrates the difficulties which intermediate appellate courts
face. Prior to Andrews, the High Court had usually stood jealous guard over its own decisions,
severely criticising lower courts, particularly the New South Wales Court of Appeal, who
sought to detect evolution in the law of contract. For example, … recently, three members of the
High Court chose the special leave application in Western Export Services Inc v Jireh
International Pty Ltd as the vehicle to voice an opinion that the New South Wales Court of
Appeal has wrongly treated the High Court’s position in relation to the use of context in
construction as having moved on since Codelfa Construction Pty Ltd v State Rail Authority of
New South Wales. They did not say why the Court of Appeal was wrong, let alone explain the
passages in its own judgments from which commentators have drawn the same conclusions as
the Court of Appeal.47
The standing of Western Export Services Inc v Jireh International Pty Ltd as binding
authority has also been questioned on the basis that reasons given in special leave
applications are not binding and are only persuasive.48 However, the fact that
intermediate appellate courts have followed the decision of the High Court means that the
statement of principle found there has become binding law. In this respect, in Mineralogy
Pty Ltd v Sino Iron Pty Ltd Edelman J said:
The Defendants submitted that I should not follow the remarks made in Western Export Services
Inc … This submission raised the question of whether a pronouncement on a special leave
application should be treated as, or as akin to, seriously considered obiter dicta. Whatever the
merits of the broad approach to contractual interpretation, and whatever the answer to the
question of precedent, the submission that the broad approach currently forms part of Australian
law must be rejected. The approach taken by numerous intermediate appellate courts, and trial
judges, to the pronouncement in Western Export Services Inc, either explicitly or implicitly, has
been to follow it. In Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd
[2013] WASCA 66 at [77], McLure P made this point explicit, saying that the pronouncement
‘cannot be ignored’.49
On the basis that Western Export Services Inc v Jireh International Pty Ltd does stand
for the proposition that evidence of surrounding circumstances can only be admitted
where there is ambiguity in the language of the contract, the first question that arises is
what is meant by ‘evidence of surrounding circumstances’. In Bank of Credit and
Commerce International SA v Ali 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
D Wong & B Michael, ‘Western Export Services v Jireh International: Ambiguity as the Gateway to Surrounding
Circumstances?’ (2012) 86 Australian Law Journal 57; D McLauchlan & M Lees, ‘More Construction Controversy’
(2012) 29 Journal of Contract Law 97.
46 (2012) 290 ALR 595.
47 J W Carter, W Courtney, E Peden, A Stewart & G J Tolhurst, ‘Contractual Penalties: Resurrecting the Equitable
Jurisdiction’ (2013) 30 Journal of Contract Law 99, p 130.
48 Wong & Michael, ‘Western Export Services v Jireh International’, see note 1, p 64.
49 Mineralogy Pty Ltd v Sino Iron Pty Ltd [2013] WASC 194 at [123]-[124].
45
background’.50 This statement of principle was cited with approval by Campbell JA in
Franklins Pty Ltd v Metcash Trading Ltd.51 His Honour then went on to say that a
‘contract should be construed bearing in mind those facts that the parties knew, or that it
can reasonably be assumed they knew, that can impact upon the meaning of the words of
the contract’.52 Similarly, in Codelfa Construction Pty Limited v State Rail Authority of
New South Wales 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. 53
The practical effect of the decision in Codelfa Construction Pty Limited v State Rail
Authority of New South Wales ‘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’.54
In Franklins Pty Ltd v Metcash Trading Ltd Allsop P made the following comment on the
issue of admitting evidence of surrounding circumstances:
The High Court authorities to which I have referred and in particular Pacific Carriers v BNP
Paribas and Toll (FGCT) v Alphapharm, and the recognition of the significance of the
objective theory assist in appreciating the scope of the evidence that is admissible. The
evidence, to be admissible, must be relevant to a fact in issue, probative of the surrounding
circumstances known to the parties or of the purpose or object of the transaction, including its
genesis, background, context and market in which the parties are operating. What is
impermissible is evidence, whether of negotiations, drafts or otherwise, which is probative of,
or led so as to understand, the actual intentions of the parties. Such evidence might be
legitimate, however, if directed to one of the legitimate aspects of surrounding circumstances.
The distinction can be subtle in any particular case. As Macfarlan JA and I said in Kimberley
Securities Ltd v Esber [2008] NSWCA 301 at [5]:
The possible subtlety of the distinction can be seen in Lord Wilberforce’s reasons in
Prenn v Simmonds [1971] 1 WLR 1381 at 1384-1485, and the recognition that the
objective commercial aim may, possibly, be ascertained from some aspect of what
has passed between the parties. The distinction can also be seen in what Mason J
said in Codelfa at 352 about prior negotiations and their legitimate use ‘to establish
objective background facts which were known to both parties and the subject matter
of the contract’, and their inadmissibility ‘in so far as they consist of statements and
actions of the parties which are reflective of their actual intentions or expectations’. 55
In the same case Campbell JA said:
50
Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at 269.
Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 670.
52 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 678.
53 Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352; 41 ALR
367 at 374-5.
54 Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 294 ALR 550 at 566.
55 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 619.
51
The sort of surrounding circumstances that can be taken into account are ones that enable the
meaning of the words used in the document in question to be ascertained as that meaning would
appear to a reasonable person who knew the facts concerning those circumstances. Statements
by contracting parties about their subjective intentions in entering the agreement do not assist in
ascertaining the meaning of the words.56
Furthermore, where evidence of surrounding circumstances is admissible, it is clear that
there are limits on what a court can do with that evidence when construing the contract.
Thus, in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd, Neuberger LJ said:
[I]t seems to me right to emphasise that the surrounding circumstances and commercial
commonsense do not represent a licence to the court to re-write a contract merely because its
terms seem somewhat unexpected, a little unreasonable, or not commercially very wise. 57
Similarly, in McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in
liquidation) Bathurst CJ, speaking for the Court of Appeal, said that evidence of
surrounding circumstances ‘does not permit the Court to depart from the ordinary
meaning of the words used by the parties merely because it regards the result as
inconvenient or unjust’.58
On the other hand, facts, that would otherwise be admitted as an aid to the construction
of a contract, will be available for that purpose even if those facts were communicated
between the parties on a ‘without prejudice’ basis.59
PRINCIPLES OF CONSTRUCTION
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 ‘principles’ of construction.60 A
number of these principles is discussed below. However, it must be remembered that
these principles are not binding rules and will not apply in the face of facts to the
contrary.
Presumption that unreasonable results are not intended
It is presumed that parties to written contracts do not intend their terms to operate
unreasonably. Thus, the more unreasonable the result a particular construction of the
terms would produce, the less likely it is that such an interpretation reflects the parties’
intentions. However, if the parties intend to produce an unreasonable result, such an
intention must be abundantly clear from the words used.61
However, this principle relating to the reasonableness or otherwise of the contract cannot
be taken too far. In Chartbrook v Persimmon Homes Lord Hoffmann observed:
56
Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 686.
Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1932 at [21]-[22].
58 McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315 at [17].
59 Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2011] 1 AC 662 at 679-83; [2010] 4 All ER 1011 at 1024-7.
60 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press,
Cambridge, 2013, p 55.
61 L Schuler AG v Wickman Machine Tool Sales Limited [1974] AC 235 at 251; [1973] 2 All ER 39 at 45.
57
[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.62
Whether a court gives effect to an unreasonable interpretation depends upon the
circumstances of the case. If the language used is open to two constructions, preference is
to be given to the one which avoids an unreasonable result.63 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.64
However, even in cases where there is no ambiguity, a court may decline to apply the
plain meaning of the words used if:
it would lead to an irrational result;65
if it would lead to a meaning that is repugnant to the objectively determined
intention of the parties;66
(iii) if it makes no commercial sense.67 In such cases the plain meaning must be
manifestly absurd - mere unreasonableness is not enough.68 As to establishing the
absurdity, in Miwa Pty Ltd v Siantan Properties Pty Ltd Basten JA observed that ‘[it]
is clear from these authorities that the test of absurdity is not easily satisfied’.69 In
National Australia Bank Ltd v Clowes Leeming JA said:
(i)
(ii)
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.70
Later in his judgment Leeming JA said:
The principle is not confined to linguistic errors such as ‘inconsistent’ being read as
‘consistent’ or ‘shorter’ being read as ‘longer’ [as occurred in Saxby Soft Drinks Pty Ltd v
George Saxby Beverages Pty Ltd [2009] NSWSC 1486]. The principle extends to obvious
conceptual errors, such as ‘lessor’ being read as ‘lessee’ as in McHugh Holdings Pty Ltd v
Newtown Colonial Hotel Pty Ltd (2008) 73 NSWLR 53, or [as on the facts of this case]
62
Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at 1113; [2009] 4 All ER 677 at 687.
Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99
at 109.
64 New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski [2011] FCAFC 106 at [56].
65 Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 at [19]-[20].
66 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.
67 McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315 at [17].
68 Schwartz v Hadid [2013] NSWCA 89 at [31].
69 Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297 at [18].
70 National Australia Bank Ltd v Clowes [2013] NSWCA 179 at [34].
63
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.71
Avoidance of inconsistencies
Where internal inconsistencies in a contract arise, a court will attempt to construe the
contract so as to avoid the inconsistency. In Re Media Entertainment & Arts Alliance; Ex
Parte Hoyts Corp Pty Ltd (No 1) 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.72
In Metropolitan Gas Co v Federated Gas Employees’ Industrial Union Isaacs and Rich JJ
said the following about the need to construe an instrument as a whole:
It is a received canon of interpretation that every passage in a document must be read, not as if it
were entirely divorced from its context, but as part of the whole instrument: Ex antecedentibus
et consequentibus fit optima interpretatio. In construing an instrument ‘every part of it should
be brought into action, in order to collect from the whole one uniform and consistent sense, if
that may be done; or, in other words, the construction must be made upon the entire instrument,
and not merely upon disjointed parts of it; the whole context must be considered, in
endeavouring to collect the intention of the parties, although the immediate object of inquiry be
the meaning of an isolated clause’ (Broom’s Legal Maxims, 9th ed, pp 367-368).73
More recently, in AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd 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.74
Thus, in order to avoid inconsistencies it may be necessary to depart from the ordinary
meaning of the words approach to construction.75
However, in cases where parties contract on the basis of a standard form contract (the
primary contractual document) and incorporate further terms that they have negotiated
71
National Australia Bank Ltd v Clowes [2013] NSWCA 179 at [38].
Re Media Entertainment & Arts Alliance; Ex Parte Hoyts Corp Pty Ltd (No 1) (1993) 178 CLR 379 at 386-7; 115
ALR 321 at 326.
73 Metropolitan Gas Co v Federated Gas Employees’ Industrial Union (1925) 35 CLR 449 at 455.
74 AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985 at [13].
75 Australian Broadcasting Commission v Australasian Performing Rights Association Limi ted (1973) 129 CLR 99
at 109.
72
(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.76
In Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) 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.77
Of course, there is the preliminary question of whether an inconsistency has arisen. On
this issue, in Pagnan SpA v Tradax Ocean Transportation SA 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.78
An illustration of the application of the principle that contracts should be construed as a
whole is the case of Howe v Botwood.79 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 dwellinghouse and buildings in repair’. A relevant public authority served a notice that required a
drain to be replaced. The issue before the court was whether the cost of so doing fell upon
the tenant or upon the landlord. In ruling that the landlord was liable for the cost of the
work Channell J said:
The expense of executing the work would under this covenant fall on the [landlord]. If therefore
that covenant by the [landlord] had stood alone without the covenant by the [tenant], that is how
I should construe it. That covenant, however, has to be read with the earlier covenant by the
tenant to pay and discharge all outgoings. There are thus two covenants, one placing the burden
on the tenant and the other placing it on the landlord. We must construe the lease as a whole so
as to make it consistent in both its parts. In my opinion the covenant by the tenant must be read
as if it contained the words ‘except such as are by this lease imposed upon the landlord’. By
reading that exception into the covenant by the tenant the two covenants can be read together. 80
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
Leonie’s Travel Pty Limited v International Air Transport Association (2009) 255 ALR 89 at 106.
Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715 at 737; [2003] 2 All ER 785 at 794.
78 Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565 at 578.
79 [1913] 2 KB 387.
80 Howe v Botwood [1913] 2 KB 387 at 391.
76
77
yield to business commonsense.81 Thus, in Rainy Sky SA v Kookmin Bank Lord Clarke,
speaking for the United Kingdom Supreme Court, said that, ‘where a term of a contract is
open to more than one interpretation, it is generally appropriate to adopt the interpretation
which is most consistent with business common sense’.82 In this respect, in International
Air Transport Association v Ansett Australia Holdings 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. 83
In relation to the background facts and context in this situation, Lewison and Hughes, 84 in
a passage cited with approval by Sackar J in Michael Lahodiuk v Vincent Pace and Prid
Pty Ltd,85 state the following:
[T]he relevant background consists of facts that were actually known to both (or all) parties to
the contract, or that are sufficiently notorious that it can be presumed they were so known. Facts
which were known to only one of them will not be relevant. Nor is it sufficient to prove that
facts were reasonably available, without demonstrating that their availability should lead to an
inference being drawn that they were in fact known by both parties. It is, of course, the case that
facts which were not known to either party at the date of the contract are not relevant to the
construction of the contract, for if the facts were unknown they cannot have played any part in
forming the presumed intention which is embodied in the contract. However, where a fact is
known to one party and not to the other, in theory it may well have played a part in forming the
intention of the party who knew that fact. However, unless a fact is known to both parties, it will
not be admitted in evidence, because the court is seeking not the actual intention of one party to
the contract, but the presumed mutual intention of both of them.
The justification for this approach to the construction of commercial agreements was
explained in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd 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.86
On the question of whether the contract is one that flouts business common sense, in LB
Re Financing No 3 Ltd v Excalibur Funding No 1 Plc Briggs J said:
In this context, a distinction must be made between absurdity and irrationality on the one hand,
81
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 198; 185 ALR 152 at 163; Antaios Compania
Naviera SA v Salen Rederierna AB [1985] AC 191 at 201; [1984] 3 All ER 229 at 233
82 Rainy Sky SA v Kookmin Bank [2012] 1 All ER 1137 at 1149.
83 International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160; 242 ALR 47 at
51-2.
84 K Lewison & D Hughes, The Interpretation of Contracts in Australia, Lawbook Co, Sydney, 2012, p 118.
85 [2013] NSWSC 415 at [16].
86 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 770–1; [1997] 3 All ER 352 at 372.
and apparent unfairness or one-sidedness on the other. The former may compel the court to
conclude that something must have gone wrong with the language, but it is no part of the court’s
task to mend businessmen’s bargains. Commercial absurdity may require the court to depart
even from the apparently unambiguous natural meaning of a provision in an instrument, because
‘the law does not require judges to attribute to the parties an intention they plainly could not
have had’: [Investors Compensation Scheme Ltd v West Bromwich Building Society at 115].
Questions of commercial common sense falling short of absurdity may however enable the
court to choose between genuinely alternative meanings of an ambiguous provision. The greater
the ambiguity, the more persuasive may be an argument based upon the apparently greater
degree of common sense of one version over the other.87
However, a court needs to be careful in seeking an interpretation that is inconsistent with
commercial common sense. In Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores
Ltd 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.88
In Jireh International Pty Ltd v Western Export Services Inc Macfarlan JA said:
So far as they are able, courts must of course give commercial agreements a commercial and
business-like interpretation. However, their ability to do so is constrained by the language used
by the parties. If after considering the contract as a whole and the background circumstances
known to both parties, a court concludes that the language of a contract is unambiguous, the
court must give effect to that language unless to do so would give the 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.89
An illustration of the business common sense approach to construction is the decision in
Idya Pty Ltd v Anastasiou.90 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
87
LB Re Financing No 3 Ltd v Excalibur Funding No 1 Plc [2011] EWHC 2111 (Ch) at [45]-[46].
Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1932 at [21]-[22].
89 Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55].
90 [2008] NSWCA 102.
88
duration of the lease. The Court of Appeal rejected this argument. Beazley JA said:
In my opinion, having regard to the wide meaning that the word ‘use’ bears, depending upon its
context, the proper construction of cl 19.1(a) is that it is a prohibition upon the owners of the
Retail Shops on using, including permitting to be used, the premises as a fast food outlet. Any
other construction would be commercially nonsensical. If the construction for which the [tenant]
contend was the correct one, it would mean that an individual could be the proprietor of the
Retail Shops and by the mere device of entering into a lease or licence with a company of which
the proprietor was the sole shareholder, thereby avoid the prohibition on use. The reverse, of
course, would also operate, that is, a company could be the owner of the Retail Shops and lease
or licence the premises to its sole shareholder. Reasonable commercial persons would readily
reject that as being available under a clause in the terms of cl 19.1(a).91
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.92 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’.93 Thus, in Southern Equity Pty Limited v Timevale Pty Limited
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.94
Parties to transactions will often include within their legal documents ‘private’
dictionaries in the form of definitions of words used in the documentation.
In relation to the interpretation of these ‘private’ dictionary definitions, in Perpetual
Custodians Pty Ltd v IOOF Investment Management Ltd Leeming JA (speaking for the
Court of Appeal) said:
Lord Steyn has written extrajudicially that ‘[e]ven an agreed definition is of limited use: it takes
no account of contextual requirements’: (2001) 21 [Oxford Journal of Legal Studies] 59 at 60 …
Professor McMeel has written (The Construction of Contracts, 2nd ed (2011) Oxford University
91
Idya Pty Ltd v Anastasiou [2008] NSWCA 102 at [50].
John White & Sons Pty Ltd v Changleng (1985) 2 NSWLR 163 at 164-5.
93 Butt, Modern Legal Drafting, note 60 above p 57.
94 Southern Equity Pty Limited v Timevale Pty Limited [2012] NSWSC 15 at [40].
92
Press, p 159) that ‘even defined terms must yield to wider context or contrary intention’.
Professor Carter has said that ‘the absence of [words to the effect “unless the context indicates
otherwise”] does not mean that the definition necessarily applies to every usage of the term in
the document’ (The Construction of Commercial Contracts (2013) Hart, p 446). That must in
my opinion be correct in principle. The ordinary approach to construction insists on reading the
contract as a whole and doing so harmoniously, so as to resolve or minimise internal
inconsistency. Foreign to that approach would be a slavish rule that defined terms inevitably
bear every aspect of their defined meaning. The contestable nub of the matter is what is
sufficient to constitute a displacing context or contrary intention. Owen and Steytler JJ have said
that ‘the deliberate use of defined words is not to be lightly passed over, even where the
definition leaves open the possibility of another meaning for a defined phrase’ BHP Petroleum
(Australia) Pty Ltd v Sagasco South East Inc [2001] WASCA 159 at [24], a proposition whose
force I acknowledge.95
THE PAROL EVIDENCE RULE AND THE CONSTRUCTION OF CONTRACTS
The parol evidence rule contains two parts. The first part is concerned with the exclusion
of extrinsic evidence that would add to, subtract from or vary or qualify the terms of a
written contract. Our concern here is with the second part of the rule which deals with the
exclusion of extrinsic evidence that would otherwise have assisted the court in
interpreting or construing the contract.
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. The justification for this approach was explained in Prenn v Simmonds where
Lord Wilberforce said:
The reason for not admitting evidence of these exchanges is not a technical one or even mainly
one of convenience … It is simply that such evidence is unhelpful. By the nature of things,
where negotiations are difficult, the parties’ positions, with each passing letter, are changing and
until the final document, though converging, are still divergent. It is only the final document that
records a consensus … The words used may, and often do, represent a formula which means
different things to each side, yet may be accepted because that is the only way to get
‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to
ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is to admit evidence of
one party’s objective — even if this is known to the other party. However strongly pursued this
may be, the other party may only be willing to give it partial recognition, and in a world of give
and take, men often have to be satisfied with less than what they want. So, again, it would be a
matter of speculation how far the common intention was that the particular objective should be
realised.96
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
95
96
Perpetual Custodians Pty Ltd v IOOF Investment Management Ltd [2013] NSWCA 231 at [86].
Prenn v Simmonds [1971] 3 All ER 237 at 240–1.
the use of such evidence for the purpose of establishing relevant background facts which
were known to the parties. In this respect, in Codelfa Construction Pty Limited v State
Rail Authority of New South Wales 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.97
Furthermore, the prior negotiations rule does not preclude the introduction of prior
agreements as evidence in relation to the construction of a later contract between the
parties.98
The appropriateness of the prior negotiations rule has been recently debated. Writing
extra-judically, Lord Nicholls of Birkenhead99 has suggested that it should be abolished
on the grounds that such a move would: (i) introduce coherence into this area of the law,
(ii) make the law more transparent, (iii) conform to current international trends, and (iv)
overcome injustices that result from the application of the rule. However, a unanimous
House of Lords in Chartbrook v Persimmon Homes subsequently rejected these
criticisms of the prior negotiations rule and confirmed the authority of Prenn v
Simmonds. In Byrnes v Kendle Heydon & Crennan JJ also confirmed the prior
negotiations rule.100
Spigelman CJ,101 also writing extra-judically, has provided reasons for the continuation
of the prior negotiations rule. First, its abolition would result in increased costs of
conducting commercial activity. Second, the abolition of the rule would expose a third
party to the contract who relies on its terms when dealing with one of its parties to
increased risk, because he or she is not aware of the prior negotiations, and is thus unable
to assess how such negotiations impact on the meaning of the words used. Accordingly, a
third party’s understanding of the meaning of the contract is more likely to be at variance
with the meaning that is determined with the assistance of evidence of prior negotiations.
This would, in his Honour’s view, lead to increased commercial uncertainty and costly
arbitration, or judicial proceedings to resolve the inevitable disputes that would arise.
However, in the New Zealand Supreme Court decision in Vector Gas Limited v Bay of
Plenty Energy, Tipping and Wilson JJ were in favour of abandoning it, while Blanchard
97
Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352; 41 ALR
367 at 375.
98 Australasian Medical Insurance Ltd v CGU Insurance Ltd (2010) 271 ALR 142 at 157-8.
99 Lord Nicholls of Birkenhead, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review
577.
100 Byrnes v Kendle (2011) 243 CLR 253 at 284-5; 279 ALR 212 at 236-7.
101 Hon J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81 Australian Law
Journal 3223, pp 331-6.
and Gault JJ were inclined to interpret the rule very liberally and to leave it open for later
consideration as to whether the rule should be abandoned. McGrath J was the only judge
in this case who was in favour of retaining the prior negotiations rule as it was currently
understood and applied in Australia and the United Kingdom. In this context McGrath J
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. 102
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 Ltd103 Kirby P canvassed various reasons in support of the conflicting
views on the admissibility of the subsequent conduct of the contracting parties. In support
of excluding evidence of subsequent conduct, his Honour noted that, if post-contract
behaviour was taken into account, it could lead a party to tailor such behaviour in order to
persuade the other party to accept his or her understanding of the contract or to provide
supporting evidence in any subsequent court case between the parties. Furthermore,
permitting such evidence would expand the field of enquiry undertaken by a court which
would lead to an increase in the length 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 Honan104 and Howard Smith & Co Ltd v
Varawa,105 there are suggestions that post-contract conduct is admissible in determining
the meaning of the contract. On the other hand, other High Court cases such as Maynard
v Goode106 and Administration of the Territory of Papua New Guinea v Daera Guba
(1973)107 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 Gardiner108
(Kirby J109 and Heydon J110 disagreed with the majority’s approach).111 The High Court
majority’s view is also supported by the Courts of Appeal in New South Wales, Victoria
102
Vector Gas Limited v Bay of Plenty Energy Limited [2010] 2 NZLR 444 at 73-4.
(1990) 20 NSWLR 310 at 316.
104 (1919) 26 CLR 183 at 197.
105 (1907) 5 CLR 68 at 78.
106 (1926) 37 CLR 529 at 538.
107 130 CLR 353 at 446.
108 (2008) 238 CLR 570 at 582; 251 ALR 322 at 330.
109 Agricultural and Rural Finance Ltd v Gardiner (2008) 238 CLR 570 at 607-8; 251 ALR 322 at 351.
110 Agricultural and Rural Finance Ltd v Gardiner (2008) 238 CLR 570 at 625; 251 ALR 322 at 366.
111 Carter et al are very critical of the High Court’s failure to provide reasons for their views: Carter et al, ‘Contractual
Penalties: Resurrecting the Equitable Jurisdiction’, note 47 above, p 129.
103
and Western Australia.112
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,113 after
consideration of the issue, supported the view that post-contractual conduct could be
taken into account in construing a contract. Thus, Tipping J 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.114
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.
112
to identify the subject matter of the contract in circumstances where the
description of the subject matter is uncertain or ambiguous.115 Thus, in White v
Australian and New Zealand Theatres Ltd (1943) 67 CLR 266, two theatrical
artists were engaged to provide their ‘professional services’ for a theatre
company. There was no definition of ‘professional services’ in the contract.
Extrinsic evidence was admitted to establish that it included producing the
performance, as well as acting in it. It is, however, probably more difficult to
introduce extrinsic evidence if the ambiguity relates to the nature or character of
the subject matter. Thus, in Hope v RCA Photophone of Australia Pty Ltd
extrinsic evidence was not admitted to establish that a lease of ‘electrical soundreproduction’ 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’.116
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 at [19]-[20]; County Securities Pty
Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [161]; Ryan v Textile Clothing & Footwear Union of
Australia [1996] VR 235 at 261; Lederberger v Mediterranean Olives Financial Pty Ltd [2012] VSCA 262 at [27];
Secure Parking (WA) Pty Ltd v Wilson (2008) 38 WAR 350 at 373.
113 [2008] 1 NZLR 277 at 283, 288–9, 294–7, 298–9, 308–11.
114 Gibbons Holdings Limited v Wholesale Distributors Limited [2008] 1 NZLR 277 at 294.
115 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].
116 Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 at 356.
2.
to show the intention that both parties had in relation to the meaning of a
particular ambiguous contractual term.117 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.118
3.
to identify the parties to the contract. Thus, in Edwards v Edwards119 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 Ltd the Victorian Court of Appeal said:
Identification of the parties to a contract must be in accordance with the objective
theory of contract. That is the intention that a reasonable person, with the knowledge of
the words and actions of the parties communicated to each other, and the knowledge
that the parties had of the surrounding circumstances, would conclude that the parties
had. The process of construction requires consideration not only of the text of the
documents, but also the surrounding circumstances known to the parties and the
purpose and object of the transaction. This in turn presupposes knowledge of the
genesis of the transaction, the background, and the context in which the parties are
operating.120
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.121 Thus, in Hopcroft & Edwards v Edmonds White J
said:
[R]egard has been had to the subsequent conduct of the parties as providing evidence
that they had not concluded a contract. For example, in Howard Smith & Co Ltd v
Varawa [(1907) 5 CLR 68 at 77], Griffith CJ considered that the subsequent conduct of
the parties indicated that their previous communications were ‘not intended to have a
contractual operation at all’. Similarly, in Barrier Wharfs Ltd v W Scott Fell & Co Ltd
[(1908) 5 CLR 647 at 668], Griffith CJ considered that subsequent correspondence
could show that a concluded contract had not been formed. Issacs J [at 672] also
referred to the subsequent conduct of the parties, holding that it indicated ‘that it was
not understood that they were bound down contractually to the exact terms which had
already been set out in the letters’.122
5.
117
to establish whether a document or clause in a document is a sham.123
Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 248–50, 352–
3; 41 ALR 367 at 372-4, 374-6; Australasian Medical Insurance Ltd v CGU Insurance Ltd at 156-7.
118 Lodge Partners Pty Ltd v Pegum (2009) 255 ALR 516 at 521.
119 (1918) 24 CLR 312.
120 Lederberger v Mediterranean Olives Financial Pty Ltd [2012] VSCA 262 at [19].
121 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].
122 Hopcroft & Edwards v Edmonds [2013] SASFC 38 at [108].
123 Bankway Properties Ltd v Pensfold-Dunsford [2001] 1 WLR 1369 at 1380.
6.
to establish whether a term was incorporated into a contract.124
7.
to establish whether the remedy of rectification is available.125
EXCLUSION CLAUSES AND EXTRINSIC EVIDENCE
In relation to the extent to which extrinsic evidence is admissible, either as an exception
to the parol evidence rule or on the view that evidence of prior negotiations and/or postcontract 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.126 Spigelman CJ127 has noted that ‘a strong argument can be made
that such a clause precludes consideration of “surrounding circumstances” external to
the document, on the basis that the parties have agreed to do just that’.
However, in Westpac Banking Corporation v Newey 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’.128
LEGAL DRAFTING AND THE CONSTRUCTION OF LEGAL DOCUMENTS
The importance of effective legal drafting in minimising the occurrence of cases in which
the construction of legal documents is an issue cannot be overstated. In many cases poor
legal drafting is the reason why the issue of construction arises for judicial determination.
Judges have often commented on the poor quality of drafting. In this respect Butt129 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.
A recent instance of such criticism is the case of Hydrofibre Pty Ltd v Australian Prime
Fibre Pty Ltd where Philip McMurdo J said:
It could hardly be said that the contract is a model of legal drafting and that the interpretation of
the contract advanced by the plaintiff was plainly the only possibility. 130
Great North Eastern Railway Ltd v Avon Insurance plc [2001] 2 Lloyd’s Rep 649 at 655.
Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at 657–8.
126 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.
127 Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’, note 7 above, p 336.
128 Westpac Banking Corporation v Newey [2013] NSWSC 447 at [44].
129 Butt, Modern Legal Drafting, note 60 above, p 47.
130 Hydrofibre Pty Ltd v Australian Prime Fibre Pty Ltd [2013] QSC 163 at [93].
124
125
Much of today’s legal drafting is in a form which is difficult for non-lawyers to
understand. In this respect, Butt131 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 judges132 and
legal practitioners.133 A Discussion Paper issued by the Victorian Law Reform
Commission provides the following description of what is meant by ‘plain English’:
Plain English is language that is not artificially complicated, but is clear and effective for its
intended audience. While it shuns the antiquated and inflated word and phrase, which can
readily be either omitted altogether or replaced with a more useful substitute, it does not seek to
rid documents of terms which express important distinctions. Nonetheless, plain language
documents offer non-expert readers some assistance in coping with these technical terms. To a
far larger extent, plain language is concerned with matters of sentence and paragraph structure,
with organisation and design, where so many of the hindrances to clear expression originate. 134
Butt135 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, Butt136 writes as follows:
131
Butt, Modern Legal Drafting, note 60 above, p 1.
K O’Brien, ‘Judicial Attitudes to Plain Language and the Law (2009) 32 Australian Bar Review 204.
133 B McKillop, ‘What Lawyers Think About Plain Legal Language’ (1994) 32 New South Wales Law Society Journal
(May) 68.
134 Quoted in Butt, Modern Legal Drafting, note 60 above, p 102.
135 Butt, Modern Legal Drafting, note 60 above, pp 104-13.
136 Butt, Modern Legal Drafting, note 60 above, pp 128-9.
132
Legal language should not be a language of coded messages, unintelligible to ordinary citizens.
Modern, plain English can cope with the concepts and complexities of the law and legal
process. It is as capable of precision as traditional legal English. The few technical terms that a
lawyer might feel compelled to retain for convenience or necessity can be incorporated without
destroying the document’s legal integrity. The modern English of a legal document will never
read like a good novel, but it can be attractive and effective in a clean, clear, functional style.
FURTHER READING
P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge
University Press, Cambridge, 2013
J W Carter, The Construction of Commercial Contracts, Hart Publishing, Oxford, 2013
K Lewison & D Hughes, The Interpretation of Contracts in Australia, Lawbook Co,
Sydney, 2012
G McMeel, The Construction of Contracts, Interpretation, Implication, and Rectification,
2nd ed, Oxford University Press, Oxford, 2011