CONSTRUCTION OF PRIVATE LEGAL DOCUMENTS

Professor Peter Radan

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

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

‘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 deals with the construction or interpretation of private law documents, such as contracts and trust documents. The importance of this topic cannot be overstated. A large proportion of cases in contract law and the law of trusts have as a component, and often the major component, the construction of some document relevant to the parties in the dispute. The conclusion reached by the court on the construction of the relevant document usually has significant consequences in relation to the outcome of the case before the court.

It should be noted from the outset that the issue of construction is one of law. In FBHS (Aust) Pty Ltd v Stone Homes Pty Ltd [2014] NSWCA 312 at [20], Leeming JA said:

[I]f it had not long ago been determined that the unique meaning of a contract was a question of law, there would have been no certainty in the construction of standard commercial documents.

The case law on this issue is dominated by contract cases and, in the discussion to follow, reference will usually be made to the construction of contracts. The principles that are discussed apply with equal force to contracts between private individuals and contracts between governments and individuals. As was reaffirmed by Beech J in Kidd v The State of Western Australia [2014] WASC 99 at [120], [t]here are no special rules for construction of government agreements’. Furthermore, the principles of construction of contracts apply with equal force trust documents: Byrnes v Kendle (2011) 243 CLR 253 at 286; 279 ALR 212 at 238; Commissioner of State Revenue (Vic) v Snowy Hydro Ltd [2012] VSCA 145 at [83]; The Australian Special Opportunity Fund LP v Equity Trustees

Wealth Services Ltd (2015) 298 FLR 147 at 163; 323 ALR 570 225 at 585. One of the reasons for this is that ‘[t]he contractual relationship provides one of the most common bases for the establishment or implication and for the definition of a trust’: Gosper v Sawyer (1985) 160 CLR 548 at 568-9; 58 ALR 13 at 26. Finally, as was pointed out by the Supreme Court of the United Kingdom in Marley v Rawlings [2014] 1 All ER 807 at 815-6, subject to any legislative provisions to the contrary, these principles also apply to the interpretation of wills. In New South Wales, such legislative provisions are found in ss 29-46 of the Succession Act 2006. In relation to the general principles relating the construction of wills, in Gordon Salier v Robert Angius [2015] NSWSC 853 at [26]-[32], Ball J said the following:

The general principles applicable to the construction of wills are not in dispute. The task of the court is to give effect to the ‘expressed intentions’ of the testator, which requires the court to give to the language of the will the meaning that, according to the terms of the will and the circumstances in which it was made, the testator can be said to have intended. The court is not concerned with ‘what the testator intended in some general sense, but what he intended by the words in his will’.

It is some times said that the court is to put itself in the ‘armchair of the deceased’ and in doing so to construe the words in the will knowing what the deceased knew.

The will must be construed as a whole. In applying that principle, courts have often sought to identify ‘the basic scheme which the deceased had conceived for dealing with his estate and then, so to construe the will as, if it be possible, to give effect to the scheme’. The relative importance of the overall scheme of the will is greater where the ‘language [of the will] is obscure or the effects of the literal reading and the reasoning impliedly underlying it are startlingly unlikely’. Conversely, ‘where the terms of the will are perfectly clear search for the scheme would be of little use’.

These principles are illustrated by the decision of the High Court in Hendry v The Perpetual Executors and Trustees Association of Australia Ltd (1961) 106 CLR. In that case, the testator was a partner in a partnership that owned both land and livestock. By his will he left ‘all my livestock’ to a nephew. He described the balance of his estate as ‘all my real estate’ and ‘the residue of my personal estate’. He left the proceeds of the conversion of the former to the sons of a cousin in equal shares and the proceeds of conversion of the latter to his sister. The question in the case was how the testator’s estate was to be distributed given that he owned neither livestock nor real estate. In answering that question the High Court said (at 266-7):

[T]he enquiry is not what rights did the plaintiff have by virtue of the partnership upon the death of the testator nor even what were the testator’s rights as a partner but what did he mean when in his will he used the words ‘my livestock’ and ‘my real estate’ when he had none of his own but he was a member of a partnership which had both livestock and real estate. This question is not to be answered by any strict legal analysis of the rights of the testator as a partner during his life and certainly not by considering the rights of his personal representative after his death. What has to be done is to determine what the testator meant by his words in his will and when the will is looked at in the light of the circumstances as they existed immediately before his death the conclusion is inevitable that he was dividing what he had into three parts, and that he was disposing separately of whatever interest he had in livestock (which could only be his partnership interest),

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of the net proceeds of whatever interest he had in land (which, again, could only be his partnership interest), and of the net proceeds of whatever interest he had in personalty other than livestock.

The court may also take into account the intentions of the testator if the will is ambiguous in the light of the surrounding circumstances. Section 32 of the Succession Act 2006 (NSW) provides:

32 Use of extrinsic evidence to construe wills(1) In proceedings to construe a will, evidence (including evidence of the testator’s intention) is admissible to assist in the interpretation of the language used in the will if the language makes the will or any part of the will:(a) meaningless, or(b) ambiguous on the face of the will, or(c) ambiguous in the light of the surrounding circumstances.(2) Despite subsection (1), evidence of the testator’s intention is not admissible to establish any of the circumstances mentioned in subsection (1) (c).(3) Despite subsection (2), nothing in this section prevents evidence that is otherwise admissible at law from being admissible in proceedings to construe a will.

The court should seek to adopt a construction of the will that avoids intestacy. That general rule of construction is supplemented by s 42 of the Succession Act, which provides:

42 Construction of residuary dispositions(1) A disposition of all, or the residue, of the estate of a testator that refers only to the real estate of the testator, or only to the personal estate of the testator, is to be construed to include both the real and personal estate of the testator.(2) If a part of a disposition in fractional parts of all, or the residue, of the testator’s estate fails, the part that fails passes to the part that does not fail, and, if there is more than one part that does not fail, to all those parts proportionally.(3) This section does not apply if a contrary intention appears in the will.

Similarly, the court should adopt a construction which preserves the validity of a gift rather than destroys it.

The principles of construction involve two things: (i) the meaning of the terms of the contract and (ii) the legal effects or significance of the document’s terms: Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78. Our concern here is with the first of these two things. In relation to the legal effects or significance of the document’s terms, you will have already covered this question in other subjects. For example, in Contracts this question raised the important issue of the classification of terms of a contract as being conditions, warranties or intermediate terms. This issue is of profound importance in relation to whether an innocent party to a breach of contract is entitled to terminate the contract as a result of the breach.

A preliminary point that can be made about determining the meaning of the words used is that the richness of the English language often presents the courts with significant problems when construing a contract or other legal document. This point was well made

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by Lord Simon of Glaisdale in Stock v Frank Jones (Tipton) Ltd [1978] 1 All ER 948 at 953, 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 unambiguous precision, with the aim that every citizen shall know as exactly as possible, where he stands under the law).

CONSTRUCTION OF TERMS IN PRACTICE

Justice Kenneth Martin,1 based upon his experiences as a Supreme Court judge offers the following reflections that are relevant to the issue of construction of contract:

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

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

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

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

or circumstance.

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

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

In my experience, the second requirement, which I call the ‘causative impact’ of the supposedly helpful surrounding fact or circumstance, is usually either globally glossed over, or just ignored. A typical glossing scenario as to causative impact is like an overflowing potpourri

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

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of multiple diverse alleged surrounding facts and circumstances. These are then addressed in a closing submission delivered in a style akin to the advocacy of shabby solicitor Dennis Denuto during his desperate, now infamous invocation of ‘the Vibe’ in the movie The Castle.

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

THE IMPORTANCE OF INTENTION

In ascertaining the meaning of the terms of a contract the court is primarily concerned with objectively determining the intention of the parties: Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973) 129 CLR 99 at 109.

This fundamental point was reaffirmed in Byrnes v Kendle (2011) at CLR 284; ALR 236-7, where Heydon and Crennan JJ said:

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

The basic approach in determining the intention of the parties was also set out in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at 1113-4; [2009] 4 All ER 677 at 688, where Lord Hoffmann said:

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

In this process of construction it is not the role of the court to improve the contract. In Arnold v Britton [2016] 1 All ER 1 at 18-19, Lord Hodge said:

The role of the [court] … is to ascertain objectively, and with the benefit of the relevant background knowledge, the meaning of the words which the parties used. 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 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.

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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: 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].

When construing terms of a contract, a court must have regard to all its words used to ensure the congruent operation of its various components as a whole: Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529; 214 ALR 410 at 413. Thus, in Chapmans Ltd v Australian Stock Exchange Ltd (1996) 67 FCR 402 at 411, Lockhart and Hill JJ said:

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

Similarly, in Durham v BAI (Run Off) Ltd (in scheme of arrangement) and other cases; Re Employers’ Liability Policy ‘Trigger’ Litigation [2012] 3 All ER 1161 at 1176, Lord Mance said:

To resolve these questions it is necessary to avoid over-concentration on the meaning of single words or phrases viewed in isolation, and to look at the insurance contracts more broadly. As Lord Mustill observed in Charter Reinsurance Co Ltd v Fagan [1977] AC 313 at 384, all such words ‘must be set in the landscape of the instrument as a whole’ and ([1977] AC 313 at 381) any ‘instinctive response’ to their meaning ‘must be verified by studying the other terms of the contract, placed in the context of the factual and commercial background of the transaction’. The present case has given rise to considerable argument about what constitutes and is admissible as part of the commercial background to the insurances, which may shape their meaning. But in my opinion, considerable insight into the scope, purpose and proper interpretation of each of these insurances is to be gained from a study of its language, read in its entirety. So, for the moment, I concentrate on the assistance to be gained in that connection.

Furthermore, in construing contractual terms, a court will seek to adopt a construction that will preserve the validity of the contract and in that regard will strive to avoid holding agreements, in particular commercial agreements, void for uncertainty: Meehan v Jones (1982) 149 CLR 571 at 589; 42 ALR 463 at 475; Wentworth Shire Council v Bemax Resources Limited [2013] NSWSC 1047 at [50]. Thus, a court should construe a commercial contract ‘fairly and broadly, without being too astute or subtle in finding defects’: Australian Broadcasting Commission v Australasian Performing Rights Association at 109.

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In Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113 at 126, speaking for the Court of Appeal, Leeming JA said:

A court should strain to give effect to one obvious aspect of the shared and objectively manifested intention of the parties - namely, that they had created contractual relations. It is a signal element of the obligation of courts to approach the task of giving legal meaning to commercial contracts with ‘business commonsense’: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201. There are indubitably cases where there may be a real contest about what amounts to business commonsense: Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at [20], but the fact that the parties had, by executing pages described as a contract, entered into contractual relations with one another is not one of them. As was said by Ormiston JA in Vroon BV v Foster's Brewing Group Ltd [1994] 2 VR 32 at 68 … :

Where parties have deliberately written the terms upon which they wish to bargain but have omitted ... a term which might in other circumstances have been expressly ... stated, the courts will endeavour to give effect to the fact that the parties did not see the absence or deficiency of such a term as preventing them from reaching agreement.

In the process of construction it is clear that no hard and fast rules apply. The ‘construction [of contractual terms] is a composite exercise, neither uncompromisingly literal nor unswervingly purposive’: International Fina Services AG v Katrina Shipping Ltd (The Fina Samco) [1995] 2 Lloyd’s Rep 344 at 350. Indeed, ‘[t]here has been a shift from literal methods of interpretation towards a more commercial approach’: Sirius International Insurance Company (Publ) v FAI General Insurance Limited [2005] 1 All ER 191 at 200.

In relation to giving the words of the contract their natural and ordinary meaning, in Ravennavi SpA v New Century Shipbuilding Co Ltd [2007] 2 Lloyd’s Rep 24 at 27, 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.

Where technical words or phrases are incorporated into a contract there is a rebuttable presumption that they are used with that technical meaning in mind. Thus, in Marquis of Cholmondeley v Lord Clinton (1820) 37 ER 527 at 559, Plumer MR said:

When technical words or phrases are made use of, the strong presumption is, that the party intended to use them according to their correct technical meaning; but this is not conclusive evidence that this was his real meaning. If the technical meaning is found, in the particular case, to be an erroneous guide to the real one, leading to a meaning contrary to what the party intended to convey by it, it ceases to answer its purpose.

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In Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 at [167]-[170], Campbell JA said:

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

In Sydall v Castings Ltd [1967] 1 QB 302 at 313-4, Diplock LJ explained the principle:

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

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

The presumption that words with a technical meaning should be given that technical meaning is ‘not easily displaced’: Sydney Attractions Group Pty Ltd v Schulman [2013] NSWSC 858 at [66]. Thus, in Brett v Barr Smith (1918) 26 CLR 87 at 93, Isaacs J said:

It is a cardinal rule of interpretation that technical words must have their legal effect unless the contrary is made perfectly clear.

Finally, it can be noted that the impact of the contract upon third parties is relevant to determining the objective intention of the parties. In Kidd v The State of Western Australia [2014] WASC 99 at [121] Beech J observed:

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

THE OBJECTIVE DETERMINATION OF INTENTION

As a matter of policy, the law has always required the interpretation of a contract to be determined on an objective basis. This point has been repeatedly stressed by the High Court: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; 211 ALR 342 at 352; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 174; 242 ALR 47 at 63; Byrnes v Kendle at CLR 284; ALR 236-7.

The justification for this objective approach was explained by Tipping J in Vector Gas Limited v Bay of Plenty Energy Limited [2010] 2 NZLR 444 at 458, as follows:

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

A formulation of the objective test of interpretation is set out in Lord Hoffmann’s speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114, where his Lordship said that the interpretation of a written contract involved:

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

Significantly, in his statement of principle, Lord Hoffmann did not restrict a court from referring to the surrounding circumstances to cases where contractual terms are written in ambiguous language. In the light of considerable debate over the impact of this case, in Chartbrook v Persimmon Homes at AC 1119; All ER 693, Lord Hoffmann made the following comment:

The only points [Investors Compensation Scheme Ltd v West Bromwich Building Society] decided that might have been thought in the least controversial were, first, that it was not necessary to find an ‘ambiguity’ before one could have any regard to background and,

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secondly, that the meaning which the parties would reasonably be taken to have intended could be given effect despite the fact that it was not, according to conventional usage, an ‘available’ meaning of the words or syntax which they had actually used.

On the other hand, in the leading Australian High Court decision on construction of contracts of Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367, Mason J in the High Court observed that, in a commercial contract, if words are ambiguous or susceptible of more than one meaning, a court, having regard to the origins of the transaction, its context and the market in which the parties are operating, should ascertain the contract’s commercial purpose in order to give the contract a sensible commercial operation. In a statement of principle recently reaffirmed by the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116; 325 ALR 188 at 198, Mason J , at CLR 352; ALR 374, said:

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

The question that has generated considerable debate in the wake of these cases is whether there is a difference between the views of Lord Hoffmann and Mason J. It appears to be the case that in Codelfa Construction v State Rail Authority, Mason J confined the use of surrounding circumstances in the construction of a contract to cases where the words used are ambiguous, whereas Lord Hoffmann’s approach in Investors Compensation Scheme v West Bromwich Building Society is not so confined. A further question that arises is, if there is a difference between the two approaches, which is the proper approach to be adopted by a court engaged in construing a contract.

What can be said in response to these questions is that subsequent decisions of Australia’s High Court have been far from helpful. Thus, in Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 240 CLR 451at 62-3; 86 ALR 289 at 301, the High Court, left open for a future time the question as to whether Lord Hoffmann’s approach was broader or preferable to that of Mason J, and demanded that, in the meantime, other Australian courts ‘should continue to follow Codelfa’ if they discerned any inconsistency between the two approaches. This position was restated by the High Court, in a special leave application, in Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604 at 605. The binding nature of Mason J’s statement in Codelfa was also confirmed by the High Court recently in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 116, 134; 325 ALR 188 at 198, 211.

In relation to the question of whether the views of Mason J and Lord Hoffmann are different, in BP Australia Pty Limited v Nyran Pty Limited (2003) 198 ALR 442 at 451–2,

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Nicholson J argued that the approaches of Mason J and Lord Hoffmann are inconsistent and that surrounding circumstances can only be taken into account in cases of ambiguous language. Similarly, in GMA Garnet Pty Ltd v Barton International Inc (2010) 183 FCR 269 at 276, Buchanan J, after discussing the relevant cases, concluded that ‘evidence of surrounding circumstances may not be used, as part of an exercise in construction of a contract, to contradict unambiguous contractual stipulations’.

On the other hand, in Horton Geoscience Constructions Pty Ltd v Energy Minerals Pty Ltd [2005] QCA 169 at [36], Fryberg J, after quoting Mason J in Codelfa Construction v State Rail Authority, went on to say that, in his opinion, ‘subsequent High Court decisions establish that in determining the meaning of the terms of a contractual document the surrounding circumstances known to the parties, and the purpose and object of the transaction, may normally be taken into account; their impact is not restricted to the case where the language is ambiguous (whether latent or patent) or susceptible of more than one meaning’. This passage suggests, as did Palmer J in Brooks Pty Ltd v NSW Grains Board [2002] NSWSC 1049 at [61], that the approaches of Mason J and Lord Hoffmann are in ‘complete sympathy’ with each other.

In relation to Fryberg J’s references to ‘subsequent High Court decisions’ the following points can be noted. First, in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188; 185 ALR 152 at 155, Lord Hoffmann’s approach was explicitly referred to by the High Court. Second, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at CLR 179; ALR 352, the High Court adopted ‘the principle of objectivity by which the rights and liabilities of the parties to a contract are determined’ and went on to say:

It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

This statement in the High Court does not confine the use of surrounding circumstances to cases of ambiguity and was re-affirmed by the High Court in International Air Transport Association v Ansett Australia Holdings Ltd at CLR 174; ALR 63. On the basis of these three decisions it can be persuasively argued that the High Court has adopted the approach of Lord Hoffmann.

Prior to the High Court’s decision in Western Export Services Inc v Jireh International Pty Ltd, the majority of Australia’s intermediate appellate courts also expressed a preference for the substance of Lord Hoffmann’s approach. Thus, in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 616, Allsop P said:

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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.

Similarly, in Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Limited [2009] NSWCA 140 at [22], the Court of Appeal observed that the trial judge in this case was in error when he ‘appeared to adopt a principle that background or extrinsic material can only be examined once some textual ambiguity in the contract is revealed’. Similar sentiments can be found in Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382 at 385, 406-7; World Best Holdings Limited v Sarker [2010] NSWCA 24 at [17]; MBF Investments Pty Ltd v Nolan [2011] VSCA 114 at [195]-[203]; and McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315 at [17].

However, these views were seemingly cast aside by the High Court in Western Export Services Inc v Jireh International Pty Ltd at 605, where Gummow, Heydon and Bell JJ said:

The applicant in this Court refers to [Franklins Pty Ltd v Metcash Trading Ltd] … as authority rejecting the requirement that it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and object of the transaction … Acceptance of the applicant’s submission, clearly would require reconsideration by this Court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by Mason J … to be the ‘true rule’ as to the admission of evidence of surrounding circumstances. Until this Court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts … We do not read anything said in this Court in Pacific Carriers Ltd v BNP Paribas; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd; Wilkie v Gordian Runoff Ltd and International Air Transport Association v Ansett Australia Holdings Ltd as operating inconsistently with what was said by Mason J in … Codelfa.

Similarly, in a footnote to their judgment in Byrnes v Kendle at CLR 285; ALR 237, Heydon and Crennan JJ noted that the High Court had not pronounced on the issue of whether there was an inconsistency between the approach of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Albion and Mason J in Codelfa Construction v State Rail Authority.

In relation to the High Court’s statement in Western Export Services Inc v Jireh International Pty Ltd, in Mrocki v Mountview Prestige Homes Pty Ltd [2012] VSCA 74 at [25], Buchanan JA, speaking for the Court of Appeal said that ‘in [that case] Gummow, Heydon and Bell JJ reiterated the position established by Codelfa Construction Pty Ltd v

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State Rail Authority of NSW, that a court is not to have regard to surrounding circumstances to construe unambiguous language’. A similar line of reasoning was adopted by the appellate courts in New South Wales in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52] and in Western Australia in McCourt v Cranston [2012] WASCA 60 at [23]. From these cases it can be concluded that there is a difference between the views of Mason J and Lord Hoffmann, and that the more restrictive view of Mason J is to be applied by Australian judges with the result that evidence of surrounding circumstances can only be admitted in relation to the construction of ambiguous language in a contract.

Finally, in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 116; 325 ALR 188 at 198, French CJ, Nettle and Gordon JJ endorsed this approach when they said the following:

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

This view was echoed in the same case by Kiefel and Keene JJ, at 210, where their Honours said:

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

The decision of the High Court in Western Export Services Inc v Jireh International Pty Ltd has been trenchantly criticised by commentators.2 For example, Carter et al, in critiquing a recent decision on the law of penalties (Andrews v Australian & New Zealand Banking Group Ltd (2012) 290 ALR 595), state the following:

Andrews joins other recent contract decisions of the High Court, the methodology of which is a source of concern … Andrews also illustrates the difficulties which intermediate appellate courts face. Prior to Andrews, the High Court had usually stood jealous guard over its own decisions, severely criticising lower courts, particularly the New South Wales Court of Appeal, who sought to detect evolution in the law of contract. For example, … recently, three members of the High Court chose the special leave application in Western Export Services Inc v Jireh International Pty Ltd as the vehicle to voice an opinion that the New South Wales Court of Appeal has wrongly treated the High Court’s position in relation to the use of context in construction as having moved on since Codelfa Construction Pty Ltd v State Rail Authority of New South Wales. They did not say why the Court of Appeal was wrong, let alone explain the passages in its own judgments from which commentators have drawn the same conclusions as the Court of Appeal.3

2 D Wong & B Michael, ‘Western Export Services v Jireh International: Ambiguity as the Gateway to Surrounding Circumstances?’ (2012) 86 Australian Law Journal 57; D McLauchlan & M Lees, ‘More Construction Controversy’ (2012) 29 Journal of Contract Law 97.3 J W Carter, W Courtney, E Peden, A Stewart & G J Tolhurst, ‘Contractual Penalties: Resurrecting the Equitable Jurisdiction’ (2013) 30 Journal of Contract Law 99, p 130.

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The standing of Western Export Services Inc v Jireh International Pty Ltd as binding authority has also been questioned on the basis that reasons given in special leave applications are not binding and are only persuasive.4 However, the fact that intermediate appellate courts have followed the decision of the High Court means that the statement of principle found there has become binding law. In this respect in Mineralogy Pty Ltd v Sino Iron Pty Ltd [2013] WASC 194 at [123]-[124], Edelman J said:

The Defendants submitted that I should not follow the remarks made in Western Export Services Inc … This submission raised the question of whether a pronouncement on a special leave application should be treated as, or as akin to, seriously considered obiter dicta. Whatever the merits of the broad approach to contractual interpretation, and whatever the answer to the question of precedent, the submission that the broad approach currently forms part of Australian law must be rejected. The approach taken by numerous intermediate appellate courts, and trial judges, to the pronouncement in Western Export Services Inc, either explicitly or implicitly, has been to follow it. In Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 at [77], McLure P made this point explicit, saying that the pronouncement ‘cannot be ignored’.

Justice Kenneth Martin,5 writing extra-judicially, suggests that the issue over the competing views of Mason J and Lord Hoffmann has not been definitively resolved and notes as follows:

It appears that at some point a final battle will be waged over this issue in the High Court. For the present, Australia, as I see it, follows a conceptually narrower approach to the admissibility of surrounding circumstance evidence (although as a matter of pragmatism this is debatable by reason of the width in implementation of the ‘gateway’ itself) than Lord Hoffmann’s approach to interpretation in the United Kingdom.

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

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

Ambiguity

4 Wong & Michael, ‘Western Export Services v Jireh International’, see note 1, p 64; Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the Ambiguity Gateway’ (2013) 37 Australian Bar Review 118, p 138. In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 133; 325 ALR 188 at 210, Kiefel and Keane JJ observed that ‘statements made in the course of reasons for refusing an application for special leave create no precedent and are binding on no one’.5 Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the Ambiguity Gateway’ (2013) 37 Australian Bar Review 118, p 138.

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The meaning of language that is, in the words of Mason J in Codelfa Construction v State Rail Authority, ‘ambiguous or susceptible of more than one meaning’, has drawn a number of comments by later Australian courts. Thus, in Ritter v Keatley Real Estate Pty Ltd Trading as Mt Gambier First National [2013] SASC 46 at [53], Stanley J said:

The concept of ambiguity referred to by Mason J in Codelfa is not without its difficulties. The disjunctive reference to language which is ambiguous or susceptible to more than one meaning suggests that the concept of ambiguity is broader than the concept of a word or phrase susceptible of more than one meaning. This may reflect an intention to include concepts of patent, latent and inherent ambiguity. The dictionary definition of ‘ambiguous’ includes the following meanings: ‘open to various interpretations’, ‘equivocal’, ‘doubtful’, ‘uncertain’, ‘having a double meaning’, ‘obscure’, ‘indistinct’, and ‘lacking clarity’. In Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 at [12], Spigelman CJ said that ambiguity ‘extend[s] to any situation in which the scope and applicability of the formulation [is], for whatever reason, doubtful’. In my view, the Mason J formulation in Codelfa is directed to circumstances in which an exclusively textual analysis of the language of a contract produces uncertainty as to the meaning of the contractual provision.

In McCourt v Cranston at [24], Pullin JA said:

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

In South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 at [35], Spigelman CJ said:

[T]he word ‘ambiguity’ - ironically a word not without its own difficulties - does not refer only to a situation in which the words used have more than one meaning. A broader concept of ambiguity is involved: reference to surrounding circumstances is permissible whenever the intention of the parties is, for whatever reason, doubtful.

In Kidd v The State of Western Australia [2014] WASC WASC 99 at [124] Beech J said:

Ambiguity is not confined to lexical, grammatical or syntactical ambiguity. It is enough if the instrument is susceptible of more than one meaning or if the scope or applicability of the contract is doubtful.

Finally, in Manufacturers Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cases 75,336 at 75,343, McHugh JA said:

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

This approach was endorsed by the Court of Appeal in Mainteck Services Pty Ltd v Stein Heurtey SA at 132, where Leeming JA said:

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[W]hether contractual language has a ‘plain meaning’ is (a) a conclusion and (b) a conclusion which cannot be reached until one has had regard to the context … Mason J [in Codelfa] was indicating that there are very real limits to the extent to which grammatical meaning can be displaced by contextual considerations. However, in order to determine whether more than one meaning is available, it may be necessary first to turn to the context.

In coming to this conclusion, Leeming JA referred to and relied upon the recent High Court decision in Electricity Generation Corporation v Woodside Energy Ltd (2014) 306 ALR 25 at 33-4, where French CJ, Hayne, Crennan and Kiefel JJ, said:

The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar … [I]t will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR at 360, citing Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-6 … A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’: Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at 559.

Leeming JA, at 130, then concluded as follows:

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

The significance of the decision in Mainteck Services Pty Ltd v Stein Heurtey SA is that it very much appears that it adopts an approach to interpretation that is consistent with the approach of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society.6 In this respect, the decision in Mainteck Services Pty Ltd v Stein Heurtey SA was endorsed by the Full Court of the Federal Court in Stratton Finance Pty Limited v Webb (2014) 314 ALR 166 at 174 where the Court said:

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

However, in Gladstone Area Water Board v A J Lucas Operations Pty Ltd [2014] QSC 311 at [153]-[168], Jackson J came to the conclusion that Woodside is not inconsistent with Jireh and that the court in Mainteck was wrong to conclude that Woodside had impliedly overruled Jireh. Similar sentiments were expressed by the Court of Appeal in Western

6 B Michael & D Wong, ‘Recourse to Contractual Context Reaffirmed’ (2015) 89 Australian Law Journal 181, p 187.

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Australia in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 at [35]-[44].7

Surrounding Circumstances

In any event, whatever the courts may say in relation to this issue, ambiguity, as a matter of practice, can be readily established. Once established this gives rise to the question of what is meant by ‘evidence of surrounding circumstances.

In relation to the meaning of ‘evidence of surrounding circumstances’, in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at 269, Lord Hoffmann said that admissible background or surrounding circumstances included ‘anything which a reasonable man would have regarded as relevant’, and that ‘there is no conceptual limit to what can be regarded as background’. This statement of principle was cited with approval by Campbell JA in Franklins Pty Ltd v Metcash Trading Ltd at 670. His Honour, at 678, then went on to say that a ‘contract should be construed bearing in mind those facts that the parties knew, or that it can reasonably be assumed they knew, that can impact upon the meaning of the words of the contract’.

In Newey v Westpac Banking Corporation [2014] NSWCA 319 at [110], Gleeson JA said:

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

In a similar vein, in Codelfa Construction v State Rail Authority at CLR 352; ALR 374-5, Mason J said:

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

In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 117; 325 ALR 188 at 198, French CJ, Nettle and Gordon JJ, said the following as to what constituted ‘surrounding circumstances:

7 For an analysis of these cases see Hon Justice Kenneth Martin, ‘Surrounding Circumstances Evidence: Construing Contracts and Submissions about Proper Construction: The return of the Jedi (sic) Judii’ Paper presented to WA Bar Association Autumn Festival of CPD, 17 March 2015, available at <http://www.supremecourt.wa.gov.au/_files/Surrounding%20Circumstances%20Evidence%20Construing%20Contracts%20and%20Submissions%20About%20Proper%20Construction%20The%20Return%20of%20the%20Jedi%20(sic)%20Judii%20Justice%20Kenneth%20Martin%2017%20Mar%202015.pdf>

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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.

The practical effect of the decision in Codelfa Construction v State Rail Authority ‘is that surrounding circumstances cannot be relied on to give rise to an ambiguity that does not otherwise emerge from a consideration of the text of the document as a whole, including whatever can be gleaned from that source as to the purpose or object of the contract’: Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 294 ALR 550 at 566.

In Franklins Pty Ltd v Metcash Trading Ltd at 619, Allsop P made the following comment on the issue of admitting evidence of surrounding circumstances:

The High Court authorities to which I have referred and in particular Pacific Carriers v BNP Paribas and Toll (FGCT) v Alphapharm, and the recognition of the significance of the objective theory assist in appreciating the scope of the evidence that is admissible. The evidence, to be admissible, must be relevant to a fact in issue, probative of the surrounding circumstances known to the parties or of the purpose or object of the transaction, including its genesis, background, context and market in which the parties are operating. What is impermissible is evidence, whether of negotiations, drafts or otherwise, which is probative of, or led so as to understand, the actual intentions of the parties. Such evidence might be legitimate, however, if directed to one of the legitimate aspects of surrounding circumstances. The distinction can be subtle in any particular case. As Macfarlan JA and I said in Kimberley Securities Ltd v Esber [2008] NSWCA 301 at [5]:

The possible subtlety of the distinction can be seen in Lord Wilberforce’s reasons in Prenn v Simmonds [1971] 1 WLR 1381 at 1384-1485, and the recognition that the objective commercial aim may, possibly, be ascertained from some aspect of what has passed between the parties. The distinction can also be seen in what Mason J said in Codelfa at 352 about prior negotiations and their legitimate use ‘to establish objective background facts which were known to both parties and the subject matter of the contract’, and their inadmissibility ‘in so far as they consist of statements and actions of the parties which are reflective of their actual intentions or expectations’.

In the same case, Campbell JA, at 686, said:

The sort of surrounding circumstances that can be taken into account are ones that enable the meaning of the words used in the document in question to be ascertained as that meaning would appear to a reasonable person who knew the facts concerning those circumstances. Statements by contracting parties about their subjective intentions in entering the agreement do not assist in ascertaining the meaning of the words.

Furthermore, where evidence of surrounding circumstances is admissible, it is clear that there are limits on what a court can do with that evidence when construing the contract. Thus, in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006]

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EWCA Civ 1932 at [21]-[22], Neuberger LJ said:

[I]t seems to me right to emphasise that the surrounding circumstances and commercial commonsense do not represent a licence to the court to re-write a contract merely because its terms seem somewhat unexpected, a little unreasonable, or not commercially very wise.

Similarly, in McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315 at [17], Bathurst CJ, speaking for the Court of Appeal, said that evidence of surrounding circumstances ‘does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust’.

Kidd v The State of Western Australia [2014] WASC WASC 99 at [126] Beech J said:

There are limits on the extent to which surrounding circumstances can influence the proper construction of an instrument. Reliance on the surrounding circumstances must be tempered by loyalty to the text of the instrument

On the other hand, facts, that would otherwise be admitted as an aid to the construction of a contract, will be available for that purpose even if those facts were communicated between the parties on a ‘without prejudice’ basis: Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2011] 1 AC 662 at 679-83; [2010] 4 All ER 1011 at 1024-7.

In Sattva Capital Corporation v Creston Moly Corporation [2014] SCC 53 at [57]-[58], the Supreme Court of Canada said the following in relation to the use of surrounding circumstances:

While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The goal of examining such evidence is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.

The nature of the evidence that can be relied upon under the rubric of ‘surrounding circumstances’ will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting. Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’ [Investors Compensation Scheme Ltd v West Bromwich Building Society at 114]. Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact.

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The Supreme Court, at [61], also noted that ‘the parol evidence rule does not apply to preclude evidence of surrounding circumstances when interpreting the words of a written contract’.

PRINCIPLES OF CONSTRUCTION

As already noted, in determining the objective intention of the parties to the contract no hard and fast rules apply. Rather the court applies what are best described as ‘principles’ of construction.8 A number of these principles are discussed below. However, it must be remembered that these principles are not binding rules and will not apply in the face of facts to the contrary.

Presumption that unreasonable results are not intended

It is presumed that parties to written contracts do not intend their terms to operate unreasonably. Thus, the more unreasonable the result a particular construction of the terms would produce, the less likely it is that such an interpretation reflects the parties’ intentions. However, if the parties intend to produce an unreasonable result, such an intention must be abundantly clear from the words used: L Schuler AG v Wickman Machine Tool Sales Limited [1974] AC 235 at 251; [1973] 2 All ER 39 at 45.

However, this principle relating to the reasonableness or otherwise of the contract cannot be taken too far. In Chartbrook v Persimmon Homes at AC 1113; All ER 687, Lord Hoffmann observed:

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

Whether a court gives effect to an unreasonable interpretation depends upon the circumstances of the case. If the language used is open to two constructions, preference is to be given to the one which avoids an unreasonable result: Australian Broadcasting Commission v Australasian Performing Right Association at 109–10. Where the words of a contract are unambiguous and give rise to a capricious or unreasonable result, the court will give effect to them, even if one could reasonably surmise that the parties did not intend such a result: New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski [2011] FCAFC 106 at [56].

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

8 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 55.

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(i) it would lead to an irrational result: Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 at [19]-[20];

(ii) if it would lead to a meaning that is repugnant to the objectively determined intention of the parties: Dainford Ltd v Smith (1985) 155 CLR 342 at 364; 58 ALR 285 at 301; Dodds v Kennedy (No 2) (2011) 42 WAR 16 at 26, 31;

(iii) if it makes no commercial sense: McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) at [17]; Gloria Jean’s Coffee v Western Export Services Inc [2011] NSWCA 137 at [55]; Mainteck Services Pty Ltd v Stein Heurtey SA at 139. In such cases the plain meaning must be manifestly absurd - mere unreasonableness is not enough: Schwartz v Hadid [2013] NSWCA 89 at [31]; Current Images Pty Ltd v Dupack Pty Ltd [2012] NSWCA 99 at [47]. As was pointed out by Ward JA in International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2015] NSWCA 363 at [148], ‘[t]he Court has no mandate to rewrite agreements merely to give them a more commercial operation’. As to establishing the absurdity, in Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297 at [18], Basten JA observed that ‘[it] is clear from these authorities that the test of absurdity is not easily satisfied’. In National Australia Bank Ltd v Clowes [2013] NSWCA 179 at [34], Leeming JA said:

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

Later in his judgment, Leeming JA, at [38], said:

The principle is not confined to linguistic errors such as ‘inconsistent’ being read as ‘consistent’ or ‘shorter’ being read as ‘longer’ [as occurred in Saxby Soft Drinks Pty Ltd v George Saxby Beverages Pty Ltd [2009] NSWSC 1486]. The principle extends to obvious conceptual errors, such as ‘lessor’ being read as ‘lessee’ as in McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd (2008) 73 NSWLR 53, or [as on the facts of this case] words denoting a mortgage of company title flat being read as a mortgage of the shares in the company which entitle their owner to that flat. In all those cases, it is perfectly clear what legal meaning is to be given to the literally absurd words.

Leeming JA’s observations bring into focus the relationship between the process of construction and the remedy of rectification. In Green v AMP Life [2005] NSWSC 370 at [171], Campbell J defined the remedy of rectification as follows:

Rectification is an equitable remedy which enables a document which sets out legal rights in a way different to the way the parties intended, to be corrected so as to give effect to their intention. Insofar as rectification is granted of contracts, it is only of those contracts which were intended by the parties to be wholly expressed in writing, or of those parts of the partly written contract which were intended to be expressed in writing.

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In relation to the issue of whether a court corrects errors in written documents by the process of construction or by the remedy of rectification, in W & K Holdings (NSW) Pty Ltd v Mayo [2013] NSWSC 1063 at [48]-[51], Sackar J said the following:

As part of the process of construction, as distinct from the remedy of rectification, the court has power to correct obvious mistakes in the written expression of the intention of the parties. The ability of a court in appropriate circumstances to correct an error as a matter of construction rather than by the equitable remedy of rectification was alluded to by Lord Millet in Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715 at [192]. His Lordship referred, by way of example, to the ability of courts in equity to correct errors in wills, at a time when there was no power to rectify a will.

The case of Fitzgerald v Masters (1956) 95 CLR 420 provides an example of a court’s ability to correct errors or resolve inconsistencies by a process of construction rather than by way of rectification. In J W Carter, The Construction of Commercial Contracts (2013) Hart Publishing (at [9.44]), the author refers to a number of commonly encountered mistakes in contractual documents and observes (citing mainly English cases):

However, many such ‘mistakes’ are corrected in construction. The modern approach to construction therefore makes rectification less important than in the past. This ‘close relationship’ between construction and rectification also makes it difficult to maintain the conventional view that rectification is ‘distinct from an exercise in construction’ ... But as a matter of principle there is a difference between mistakes which can be ‘corrected’ by construction and mistakes for which a formal order is required. [citations omitted]

Although there is clearly a conceptual similarity, and perhaps an overlap, between correction by construction and the doctrine of rectification, there is a difference in their respective scopes of application. As also alluded to by Professor Carter (at [9.44]), a common view is that the dividing line between cases where correction by construction is available and where only correction by rectification is available, is to be drawn on the basis of whether the party seeking the correction is seeking to rely on prior negotiations between the parties, the actual or subjective intentions of the parties or parol evidence or on whether the ‘error’ calling for correction is so obvious simply from the face of the document. That would appear to be consistent with Mason J’s comments in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 (at 352):

The object of the parole evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

The difference between the scope of operation of correction by construction and correction by rectification is perhaps more important in Australian than English contract law, given the narrower Australian view as to the permissibility of extrinsic material for the purposes of construction.

Avoidance of inconsistencies

Where contractual terms appear to be inconsistent with each other, the court will ‘do its best to reconcile them if that can conscientiously and fairly be done: Geys v Société

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Générale, London Barnch [2013] 1 AC 523 at 538. In Re Media Entertainment & Arts Alliance; Ex Parte Hoyts Corp Pty Ltd (No 1) (1993) 178 CLR 379 at 386-7; 115 ALR 321 at 326, Mason CJ, Brennan, Dawson, Toohey, Gaudron and McHugh JJ said:

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

In Metropolitan Gas Co v Federated Gas Employees’ Industrial Union (1925) 35 CLR 449 at 455, Isaacs and Rich JJ said the following about the need to construe an instrument as a whole:

It is a received canon of interpretation that every passage in a document must be read, not as if it were entirely divorced from its context, but as part of the whole instrument: Ex antecedentibus et consequentibus fit optima interpretatio. In construing an instrument ‘every part of it should be brought into action, in order to collect from the whole one uniform and consistent sense, if that may be done; or, in other words, the construction must be made upon the entire instrument, and not merely upon disjointed parts of it; the whole context must be considered, in endeavouring to collect the intention of the parties, although the immediate object of inquiry be the meaning of an isolated clause’ (Broom’s Legal Maxims, 9th ed, pp 367-368).

In North v Marina [2003] NSWSC 64 at [43]-[46] Campbell J said:

In construing a document, one seeks to ascertain the intention of the parties arising from the document as a whole, and reading the document with such background information as was known by all parties to it. In McEntire v Crossley Bros [1895] AC 457 , at 462-3 Lord Herschell LC said, in words quoted with approval by Isaacs J in Australian Guarantee Corporation Ltd v Balding (1930) 43 CLR 140 at 151

... the agreement must be regarded as a whole – its substance must be looked at. The parties cannot, by the insertion of any mere words, defeat the effect of the transaction as appearing from the whole of the agreement into which they have entered. If the words in one part of it point in one direction, and the words in another part in another direction, you must look at the agreement as a whole and see what its substantial effect is. But there is no such thing, as seems to have been argued here, as looking at the substance, apart from looking at the language which the parties have used. It is only by a study of the whole of the language that the substance can be ascertained.

In Gwyn v Neath Canal Co (1868) LR 3 Ex 209 at 215 Kelly CB said:

... when a court of law can clearly collect from the language within the four corners of the deed or instrument in writing the real intentions of the parties, they are bound to give effect to it by supplying anything necessary to be inferred from the terms used, and by rejecting as superfluous whatever is repugnant to the intention so discerned.

The court tries, if it can, to give a meaning to all parts of a contract, and will only reject one

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clause as inconsistent if an attempt to read the contract in its entirety, and harmonise the provisions, fails. In Yien Yieh Commercial Bank Ltd v Kwai Chung Cold Storage Co Ltd (1989) 2 HKLR 639 Lord Goff of Chievelly, delivering the advice of the Privy Council, said:

Their Lordships wish to stress that to reject one clause in a contract as inconsistent with another involves a rewriting of the contract which can only be justified in circumstances where the two clauses are in truth inconsistent. In point of fact, this is likely to occur only where there has been some defect of draftsmanship. The usual case is where a standard form is taken and then adapted for a special need, as is frequently done in, for example, the case of standard forms of charterparty adapted by brokers for particular contracts. From time to time it is discovered that the typed additions cannot live with the printed form, in which event the typed additions will be held to prevail as more likely to represent the intentions of the parties. But where the document has been drafted as a coherent whole, repugnancy is extremely unlikely to occur. The contract has, after all, to be read as a whole; and the overwhelming probability is that, on examination, an apparent inconsistency will be resolved by the ordinary processes of construction.

There is a rule of construction whereby, as a last resort, inconsistencies between two clauses can be resolved by adopting the earlier of them. That rule (criticised and qualified as it has been – Durbin v Perpetual Trustee Company Limited (1995) NSW ConvR ¶ 55-725 at 55,604 per Kirby P) cannot apply to resolve inconsistencies which appear within the one drawing, as is the case with Mr Scott’s plan.

More recently, in AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985 at [13], Ball J said:

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

Thus, in order to avoid inconsistencies it may be necessary to depart from the ordinary meaning of the words approach to construction: Australian Broadcasting Commission v Australasian Performing Rights Association at 109.

However, in cases where parties contract on the basis of a standard form contract (the primary contractual document) and incorporate further terms that they have negotiated (the incorporated document), if an inconsistency arises between the two documents, a court will ‘almost always’ give effect to the terms set out in the incorporated document: 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]. In Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715 at 737; [2003] 2 All ER 785 at 794, Lord Bingham of Cornhill said:

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[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 SA [1987] 3 All ER 565 at 578, Dillon LJ said:

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

An illustration of the application of the principle that contracts should be construed as a whole is the case of Howe v Botwood [1913] 2 KB 387. In that case a lease imposed an obligation upon the tenant to ‘pay and discharge all rates, taxes, assessments, charges, and outgoings whatsoever which now are or during the said term shall be imposed or charged on the premises or the landlord or tenant in respect thereof (land tax and landlord’s property tax only excepted)’. The landlord had an obligation to ‘keep the exterior of the said dwelling-house and buildings in repair’. A relevant public authority served a notice that required a drain to be replaced. The issue before the court was whether the cost of so doing fell upon the tenant or upon the landlord. In ruling that the landlord was liable for the cost of the work, Channell J, at 391, said:

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

Presumption in favour of business common sense

Where a detailed semantic and syntactical analysis of a written contract leads to a conclusion that is inconsistent with business common sense, the contract must be made to yield to business commonsense: Maggbury Pty Ltd v Hafele Australia Pty Ltd at CLR 198; ALR 163; Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201; [1984] 3 All ER 229 at 233. Thus, in Rainy Sky SA v Kookmin Bank [2012] 1 All ER 1137 at

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1149, Lord Clarke, speaking for the United Kingdom Supreme Court, said that ‘where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense’. In this respect, in International Air Transport Association v Ansett Australia Holdings at CLR 160; ALR 51-2, Gleeson CJ said:

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

In Electricity Generation Corporation v Woodside Energy Ltd (2014) 306 ALR 25 at 33-4, French CJ, Hayne, Crennan and Kiefel JJ, said:

A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’: Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at 559.

In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 117; 325 ALR 188 at 198, 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 (2014) 251 CLR 640 at 647. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.

In Fons Hf v Corporal Ltd [2014] EWCA Civ 304 at [15]-[16] Patten LJ said:

Ambiguities created by different possible meanings of the word or phrase in question will often fall to be resolved by a resort to what is commonly referred to as business common sense. In Rainy Sky SA v Kookmin Bank [at 1146], Lord Clarke of Stone-cum-Ebony JSC said:

The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.

There are, of course, dangers here. The admissible background facts may not point clearly to one of two or more possible constructions and a resort to the criterion of business common sense in order to identify the most commercial interpretation of the agreement may misjudge what the parties themselves would have seen as the appropriate balance of interest and

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liability. The judge in this connection referred to a passage from the judgment of Aikens LJ in BMA Special Opportunity Hub Finance Ltd and others v African Minerals Finance Ltd [2013] EWCA Civ 416 at [24] where he said:

The court’s job is to discern the intention of the parties, objectively speaking, from the words used in the commercial document, in the relevant context and against the factual background in which the document was created. The starting point is the wording of the document itself and the principle that the commercial parties who agreed the wording intended the words used to mean what they say in setting out the parties’ respective rights and obligations. If there are two possible constructions of the document a court is entitled to prefer the construction which is more consistent with ‘business common sense,’ if that can be ascertained. However, I would agree with the statements of Briggs J, in Jackson v Dear ([2012] EWHC 2060 (Ch) at 40) first, that ‘commercial common sense’ is not to be elevated to an overriding criterion of construction and, secondly, that the parties should not be subjected to ‘ … the individual judge’s own notions of what might have been the sensible solution to the parties’ conundrum’. I would add, still less should the issue of construction be determined by what seems like ‘commercial common sense’ from the point of view of one of the parties to the contract.

In relation to the background facts and context in this situation, Lewison and Hughes,9 in a passage cited with approval by Sackar J in Michael Lahodiuk v Vincent Pace and Prid Pty Ltd [2013] NSWSC 415 at [16], state the following:

[T]he relevant background consists of facts that were actually known to both (or all) parties to the contract, or that are sufficiently notorious that it can be presumed they were so known. Facts which were known to only one of them will not be relevant. Nor is it sufficient to prove that facts were reasonably available, without demonstrating that their availability should lead to an inference being drawn that they were in fact known by both parties. It is, of course, the case that facts which were not known to either party at the date of the contract are not relevant to the construction of the contract, for if the facts were unknown they cannot have played any part in forming the presumed intention which is embodied in the contract. However, where a fact is known to one party and not to the other, in theory it may well have played a part in forming the intention of the party who knew that fact. However, unless a fact is known to both parties, it will not be admitted in evidence, because the court is seeking not the actual intention of one party to the contract, but the presumed mutual intention of both of them.

The justification for this approach to the construction of commercial agreements was explained in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 770–1; [1997] 3 All ER 352 at 372, where Lord Steyn said:

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

9 K Lewison & D Hughes, The Interpretation of Contracts in Australia, Lawbook Co, Sydney, 2012, p 118.

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On the question of whether the contract is one that flouts business common sense, in LB Re Financing No 3 Ltd v Excalibur Funding No 1 Plc [2011] EWHC 2111 (Ch) at [45]-[46], Briggs J said:

In this context, a distinction must be made between absurdity and irrationality on the one hand, and apparent unfairness or one-sidedness on the other. The former may compel the court to conclude that something must have gone wrong with the language, but it is no part of the court’s task to mend businessmen’s bargains. Commercial absurdity may require the court to depart even from the apparently unambiguous natural meaning of a provision in an instrument, because ‘the law does not require judges to attribute to the parties an intention they plainly could not have had’: [Investors Compensation Scheme Ltd v West Bromwich Building Society at 115]. Questions of commercial common sense falling short of absurdity may however enable the court to choose between genuinely alternative meanings of an ambiguous provision. The greater the ambiguity, the more persuasive may be an argument based upon the apparently greater degree of common sense of one version over the other.

However, a court needs to be careful in seeking an interpretation that is inconsistent with commercial common sense. In Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1932 at [21]-[22], Neuberger LJ said:

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

In BMA Special Opportunity Hub Fund Ltd & Ors v African Minerals Finance Ltd [2013] EWCA Civ 416 at [24], Aikens LJ said:

If there are two possible constructions of the document a court is entitled to prefer the construction which is more consistent with ‘business common sense’, if that can be ascertained. However, I would agree with the statements of Briggs J, in Jackson v Dear [2012] EWHC 2060 (Ch) at [40], first, that ‘commercial common sense’ is not to be elevated to an overriding criterion of construction and, secondly, that the parties should not be subjected to ‘… the individual judge’s own notions of what might have been the sensible solution to the parties’ conundrum’. I would add, still less should the issue of construction be determined by what seems like ‘commercial common sense’ from the point of view of one of the parties to the contract.

In Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55], Macfarlan JA said:

So far as they are able, courts must of course give commercial agreements a commercial and

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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.

Similarly in Arnold v Britton [2016] 1 All ER 1 at 7, 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.

Finally, in Lindsay v Noble Investments Limited [2015] NZCA 588 at [16], the Court of Appeal in New Zealand said:

Although a commercially absurd interpretation may provide reason to read the contract in a different way than the language might suggest, that does not mean the court can conclude the contract does not mean what it seems to say simply because the court considers it is unduly favourable to one party.

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 Britton [2016] 1 All ER 1 at 7, Lord Neuberger said:

[C]ommercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters 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.

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An illustration of the business common sense approach to construction is the decision in Idya Pty Ltd v Anastasiou [2008] NSWCA 102. In that case a tenant of retail premises under a registered strata plan used them as a fast food outlet. Pursuant to Clause 19.1(a) of the relevant strata plan documentation the ‘owners’ of the premises were not permitted to ‘use’ them as a fast food outlet. The word ‘owners’ was defined to mean the registered proprietors of the premises. The tenant claimed that, as it was not the owner of the premises, the prohibition against using them as a fast food outlet did not apply to it with the consequence that it could not be prevented from operating its fast food outlet for the duration of the lease. The Court of Appeal rejected this argument. Beazley JA, at [50], said:

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

The above discussion is based upon the premise that the court construes the words actually used by the parties. The question that arises is to what extent, if at all, can a court introduce words not used by the parties to ascertain the meaning of the contract. In this respect in Amlin Corporate Member Ltd v Oriental Assurance Corporation [2014] EWCA Civ 1135 at [44]-[45], Gloster LJ said:

In accordance with well-established principles of construction, the [contractual term] should be construed having regard to the language actually chosen by the parties and giving those words their ordinary natural meaning, unless the background indicates that such meaning was not the intended meaning. Whilst in a case where the language used has more than one potential meaning, the court is entitled to prefer the construction which is consistent with business commonsense and to reject the other, where the parties have used unambiguous language, the court must apply it even though the results may be commercially improbable …

The court is reluctant to introduce words not used in the actual contractual provisions as part of the construction exercise, unless the court is satisfied that the words selected by the parties are commercially nonsensical and it is clear that the parties intended some other purpose. As Chadwick LJ said in City Alliance Ltd v Oxford Forecasting Services Ltd [2000] EWCA Civ 510 at [13]:

It is not for a party who relies upon the words actually used to establish that those words effect a sensible commercial purpose. It should be assumed, as a starting point, that the parties understood the purpose which was effected by the words they used; and that they used those words because, to them, that was a sensible commercial purpose. Before the Court can introduce words which the parties have

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not used, it is necessary to be satisfied (i) that the words actually used produce a result which is so commercially nonsensical that the parties could not have intended it, and (ii) that they did intend some other commercial purpose which can be identified with confidence. If, and only if, those two conditions are satisfied, is it open to the court to introduce words which the parties have not used in order to construe the agreement. It is then permissible to do so because, if those conditions are satisfied, the additional words give to the agreement or clause the meaning which the parties must have intended.

THE USE OF DICTIONARIES

In ascertaining the meaning of words used in legal documents courts will often have recourse to dictionaries. However, in using dictionaries the following points need to be kept in mind. First, a dictionary definition of a word will often provide various shades of meaning to a word. Second, dictionaries published in different countries may give different meanings to words. To overcome this problem, courts will usually use a dictionary published in the country in which the document was made. In Australia, the ‘authorised’ dictionary is generally accepted to be the Macquarie Dictionary: John White & Sons Pty Ltd v Changleng (1985) 2 NSWLR 163 at 164-5. Third, ‘reference to dictionaries is no substitute for judicial determination of the meaning the parties have given a word or phrase. Dictionaries illustrate usage in general; but the parties’ contract will have its own context … The primary task of a court is to find, not the dictionary meaning, but the meaning as used by the parties in the context of their particular transaction’.10 Thus, in Southern Equity Pty Limited v Timevale Pty Limited [2012] NSWSC 15 at [40], Brereton J said:

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

In TAL Life Ltd v Shuetrim (2016) 332 ALR 507 at 526-7, Leeming JA said:

Dictionary definitions may assist in identifying the range of possible meanings a word may bear in various contexts, but will not assist in ascertaining the precise meaning the word bears in a particular context. As much was recognised by a unanimous High Court … in Thiess v Collector of Customs (2014) 250 CLR 664 at [23]; 306 ALR 594 at [23] 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.

10 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 57.

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In relation to the interpretation of these ‘private’ dictionary definitions, in Perpetual Custodians Pty Ltd v IOOF Investment Management Ltd [2013] NSWCA 231 at [86], Leeming JA (speaking for the Court of Appeal) said:

Lord Steyn has written extrajudicially that ‘[e]ven an agreed definition is of limited use: it takes no account of contextual requirements’: (2001) 21 [Oxford Journal of Legal Studies] 59 at 60 … Professor McMeel has written (The Construction of Contracts, 2nd ed (2011) Oxford University Press, p 159) that ‘even defined terms must yield to wider context or contrary intention’. Professor Carter has said that ‘the absence of [words to the effect “unless the context indicates otherwise”] does not mean that the definition necessarily applies to every usage of the term in the document’ (The Construction of Commercial Contracts (2013) Hart, p 446). That must in my opinion be correct in principle. The ordinary approach to construction insists on reading the contract as a whole and doing so harmoniously, so as to resolve or minimise internal inconsistency. Foreign to that approach would be a slavish rule that defined terms inevitably bear every aspect of their defined meaning. The contestable nub of the matter is what is sufficient to constitute a displacing context or contrary intention. Owen and Steytler JJ have said that ‘the deliberate use of defined words is not to be lightly passed over, even where the definition leaves open the possibility of another meaning for a defined phrase’ BHP Petroleum (Australia) Pty Ltd v Sagasco South East Inc [2001] WASCA 159 at [24], a proposition whose force I acknowledge.

THE PAROL EVIDENCE RULE AND THE CONSTRUCTION OF CONTRACTS

The parol evidence rule contains two parts. The first part is concerned with the exclusion of extrinsic evidence that would add to, subtract from or vary or qualify the terms of a written contract. Our concern here is with the second part of the rule which deals with the exclusion of extrinsic evidence that would otherwise have assisted the court in interpreting or construing the contract. This rule was stated by Lord Morris in Bank of Australasia v Palmer [1897] AC 540 at 545, as follows:

[P]arol testimony cannot be received to contradict, vary, add to or subtract from the terms of a written contract, or the terms in which the parties have deliberately agreed to record any part of their contract.

In its operation relating to the construction of contracts, the parol evidence rule excludes extrinsic evidence of a number of matters that would otherwise be relevant in ascertaining the intention of the parties in relation to the meaning of a written agreement.

Prior negotiations

The parol evidence rule excludes extrinsic evidence of the prior negotiations of the parties: Australia and New Zealand Banking Group Ltd v Compagnie D’Assurances 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]. The justification for this approach was explained in Prenn v Simmonds [1971] 3 All ER 237 at 240–1, where Lord

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Wilberforce said:

The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience … It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final document, though converging, are still divergent. It is only the final document that records a consensus … The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is to admit evidence of one party’s objective — even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than what they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.

However, although the prior negotiations rule prevents the use of pre-contractual negotiations as evidence of the interpretation of contractual terms, it does not preclude the use of such evidence for the purpose of establishing relevant background facts which were known to the parties. In this respect, in Codelfa Construction v State Rail Authority at CLR 352; ALR 375, Mason J said:

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

Furthermore, the prior negotiations rule does not preclude the introduction of prior agreements as evidence in relation to the construction of a later contract between the parties: Australasian Medical Insurance Ltd v CGU Insurance Ltd (2010) 271 ALR 142 at 157-8.

The appropriateness of the prior negotiations rule has been recently debated. Writing extra-judically, Lord Nicholls of Birkenhead11 has suggested that it should be abolished on the grounds that such a move would: (i) introduce coherence into this area of the law, (ii) make the law more transparent, (iii) conform to current international trends, and (iv) overcome injustices that result from the application of the rule. However, a unanimous House of Lords in Chartbrook v Persimmon Homes subsequently rejected these criticisms of the prior negotiations rule and confirmed the authority of Prenn v Simmonds. In Byrnes v Kendle at CLR 284-5; ALR 236-7, Heydon & Crennan JJ also confirmed the prior negotiations rule.11 Lord Nicholls of Birkenhead, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review 577.

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Spigelman CJ,12 also writing extra-judically, has provided reasons for the continuation of the prior negotiations rule. First, its abolition would result in increased costs of conducting commercial activity. Second, the abolition of the rule would expose a third party to the contract who relies on its terms when dealing with one of its parties to increased risk, because he or she is not aware of the prior negotiations, and is thus unable to assess how such negotiations impact on the meaning of the words used. Accordingly, a third party’s understanding of the meaning of the contract is more likely to be at variance with the meaning that is determined with the assistance of evidence of prior negotiations. This would, in his Honour’s view, lead to increased commercial uncertainty and costly arbitration, or judicial proceedings to resolve the inevitable disputes that would arise.

However, in the New Zealand Supreme Court decision in Vector Gas Limited v Bay of Plenty Energy, Tipping and Wilson JJ were in favour of abandoning it, while Blanchard and Gault JJ were inclined to interpret the rule very liberally and to leave it open for later consideration as to whether the rule should be abandoned. McGrath J was the only judge in this case who was in favour of retaining the prior negotiations rule as it was currently understood and applied in Australia and the United Kingdom. In this context McGrath J, at 473-4, observed

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

Post-contract conduct

The question as to whether the parol evidence rule excludes evidence of the conduct of the parties subsequent to the entry into the contract has been one that has attracted a divergence of judicial and academic opinions. In Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 316, Kirby P canvassed various reasons in support of the conflicting views on the admissibility of the subsequent conduct of the contracting parties. In support of excluding evidence of subsequent conduct, his Honour noted that, if post-contract behaviour was taken into account, it could lead a party to tailor such behaviour in order to persuade the other party to accept his or her understanding of the contract or to provide supporting evidence in any subsequent court case between the parties. Furthermore, permitting such evidence would expand the field of enquiry undertaken by a court which would lead to an increase in the length 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.

12 Hon J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81 Australian Law Journal 3223, pp 331-6.

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In High Court cases such as Farmer v Honan (1919) 26 CLR 183 at 197 and Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 78, there are suggestions that post-contract conduct is admissible in determining the meaning of the contract. On the other hand, other High Court cases such as Maynard v Goode (1926) 37 CLR 529 at 538 and Administration of the Territory of Papua New Guinea v Daera Guba (1973) 130 CLR 353 at 446, suggest that evidence of post-contractual conduct is inadmissible.

More recently, but without any discussion of the issue, the latter approach was endorsed by a bare majority of the High Court in Agricultural and Rural Finance Ltd v Gardiner (2008) 238 CLR 570 at 582; 251 ALR 322 at 330 (Kirby J, at CLR 607-8; ALR 351, and Heydon J, at CLR 625; ALR 366, disagreed with the majority’s approach).13 The High Court majority’s view is also supported by the Courts of Appeal in New South Wales, Victoria and Western Australia: Franklins Pty Ltd v Metcash at 678-82; Byrne v Macquarie Group Services Australia Pty Ltd [2011] NSWCA 68 at [40]; World Best Holdings Limited v Sarkar [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] VSCA 262 at [27]; Secure Parking (WA) Pty Ltd v Wilson (2008) 38 WAR 350 at 373.

On the other hand, it can be noted that all members of the Supreme Court in New Zealand, in Gibbons Holdings Limited v Wholesale Distributors Limited [2008] 1 NZLR 277 at 283, 288–9, 294–7, 298–9, 308–11, after consideration of the issue, supported the view that post-contractual conduct could be taken into account in construing a contract. Thus, Tipping J at 294, said:

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

Later in his judgment, Tipping J, at 297, said:

13 Carter et al are very critical of the High Court’s failure to provide reasons for their views: Carter et al, ‘Contractual Penalties: Resurrecting the Equitable Jurisdiction’, note 2 above, p 129.

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If the court can be confident from their subsequent conduct what both parties intended their words to mean, and the words are capable of bearing that meaning, it would be inappropriate to presume that they meant something else.

The approach of Tipping J was reaffirmed by the Court of Appeal in AAI Limited v 92 Lichfield Street Limited (in receivership and in liquidation) [2015] NZCA 559 at [47].

Exceptions to the parol evidence rule

In the construction of a contract the impact of the parol evidence rule is qualified by a number of exceptions that enable extrinsic evidence to be admitted. The major exceptions to the rule permit the use of extrinsic evidence for the following purposes:

1. to identify the subject matter of the contract in circumstances where the description of the subject matter is uncertain or ambiguous: Process Minerals International Pty Ltd v Consolidated Minerals Pty Ltd [2011] WASCA 219 at [98]; Paul Fishlock v The Campaign Palace Pty Limited [2013] NSWSC 531 at [103]-[114]. Thus, in White v Australian and New Zealand Theatres Ltd (1943) 67 CLR 266, two theatrical artists were engaged to provide their ‘professional services’ for a theatre company. There was no definition of ‘professional services’ in the contract. Extrinsic evidence was admitted to establish that it included producing the performance, as well as acting in it. It is, however, probably more difficult to introduce extrinsic evidence if the ambiguity relates to the nature or character of the subject matter. Thus, in Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 at 356, extrinsic evidence was not admitted to establish that a lease of ‘electrical sound-reproduction’ equipment meant new, as opposed to 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: Codelfa Construction v State Rail Authority at CLR 248–50, 352–3; ALR 372-4, 374-6; Australasian Medical Insurance Ltd v CGU Insurance Ltd at 156-7; Canberra Hire Pty Ltd v Koppers Wood Products Pty Ltd [2013] ACTSC 162 at [203]-[208]. Such cases are sometimes referred to as ‘private dictionary’ cases because the parties have agreed that a word or expression in the express terms of the contract is to have, or not have, a particular meaning: Lodge Partners Pty Ltd v Pegum (2009) 255 ALR 516 at 521.

3. to identify the parties to the contract: Damien v JKAM Investments Pty Ltd [2015] NSWCA 368 at [28].Thus, in Edwards v Edwards (1918) 24 CLR 312, a deed 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,

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brother or nephew, as they were all named John Edwards. Extrinsic evidence was admitted to establish that the transferee was the transferor’s brother. In relation to identifying contractual parties, in Lederberger v Mediterranean Olives Financial Pty Ltd [2012] VSCA 262 at [19], the Victorian Court of Appeal said:

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

4. to establish whether a person’s post-contractual conduct, if it constitutes admissions adverse to his or her interests, shows that a contract, that he or she claims to exist, was formed: Cooper v Hobbs [2013] NSWCA 70 at [54]; Brambles Holdings Ltd v Bathurst City Council (2000–1) 53 NSWLR 153 at 164; Stirnemann v Kaza Investments Pty Ltd [2011] SASCFC 77 at [17]-[18]; Hughes v St Barbara Ltd [2011] WASCA 234 at [106]; Pavlovic v Universal Music Australia Pty Ltd [2015] NSWCA 313 at [118]-[125]. In County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193 at [24], Spigelman CJ said that where ‘the issue is the identification, as a matter of fact, of the subject matter of the contract, as distinct from the interpretation of the contract, subsequent conduct … is, in my opinion, entitled to significant weight’. In Hopcroft & Edwards v Edmonds [2013] SASFC 38 at [108], White J said:

[R]egard has been had to the subsequent conduct of the parties as providing evidence that they had not concluded a contract. For example, in Howard Smith & Co Ltd v Varawa [(1907) 5 CLR 68 at 77], Griffith CJ considered that the subsequent conduct of the parties indicated that their previous communications were ‘not intended to have a contractual operation at all’. Similarly, in Barrier Wharfs Ltd v W Scott Fell & Co Ltd [(1908) 5 CLR 647 at 668], Griffith CJ considered that subsequent correspondence could show that a concluded contract had not been formed. Issacs J [at 672] also referred to the subsequent conduct of the parties, holding that it indicated ‘that it was not understood that they were bound down contractually to the exact terms which had already been set out in the letters’.

In Glendalough Holdings Pty Ltd v Militaire Pty Ltd [2013] WASC 457 at [117], Beech J said:

Evidence of the parties’ subsequent communications is admissible for the light it casts on their dealings from which the contract was alleged to have arisen. The statement that there is or is not a concluded contract, if admissible, may carry significant weight or little weight depending on the circumstances.

In Fazio v Fazio [2012] WASCA 72 at [193], Murphy JA said:

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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: Bankway Properties Ltd v Pensfold-Dunsford [2001] 1 WLR 1369 at 1380.

6. to establish whether a term was incorporated into a contract: Great North Eastern Railway Ltd v Avon Insurance plc [2001] 2 Lloyd’s Rep 649 at 655. Thus, post-contractual conduct may be admissible as an admission by one party as to the terms of a contract: Johnson v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [84]. Also if the contract is oral or party written and partly oral evidence of subsequent conduct can be admitted to establish the terms of the contract: Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 at [143]; Hightime Investments Pty Ltd v Adamus Resources Ltd [2012] WASC 295 at [98]-[99].

7. to establish whether the remedy of rectification is available: Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at 657–8.

8. post-contractual conduct is admissible ‘for the purpose of showing the meaning of words in ancient documents where the meaning of those words is now obscure’: Mineralogy Pty Ltd v Sino Iron Ltd (No 6) [2015] FCA 825 at [719].

EXCLUSION CLAUSES AND EXTRINSIC EVIDENCE

In relation to the extent to which extrinsic evidence is admissible, either as an exception to the parol evidence rule or on the view that evidence of prior negotiations and/or post-contract conduct should generally be admissible on questions of the interpretation of contracts, an entire agreement clause is an effective way of preventing such evidence from being so used.14 Spigelman CJ15 has noted that ‘a strong argument can be made that such a clause precludes consideration of “surrounding circumstances” external to the document, on the basis that the parties have agreed to do just that’.

However, in Westpac Banking Corporation v Newey [2013] NSWSC 447 at [44], Pembroke J said the following:

14 C Mitchell C, ‘Entire Agreement Clauses: Contracting out of Contexualism’ (2006) 22 Journal of Contract Law 222; E Peden & J W Carter, ‘Entire Agreement - And Similar – Clauses’ (2006) 22 Journal of Contract Law 1.15 Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’, note 7 above, p 336.

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

LEGAL DRAFTING AND THE CONSTRUCTION OF LEGAL DOCUMENTS

The importance of effective legal drafting in minimising the occurrence of cases in which the construction of legal documents is an issue cannot be overstated. In many cases poor legal drafting is the reason why the issue of construction arises for judicial determination. Judges have often commented on the poor quality of drafting. In this respect Butt16 has made the following observation:

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

Thus, in Hydrofibre Pty Ltd v Australian Prime Fibre Pty Ltd [2013] QSC 163 at [93], where Philip McMurdo J said:

It could hardly be said that the contract is a model of legal drafting and that the interpretation of the contract advanced by the plaintiff was plainly the only possibility.

A further example of a judicial comment on poor drafting, with particular reference to the role of punctuation in the process of interpretation, is Mainteck Services Pty Ltd v Stein Heurtey SA at 137, where Leeming JA said:

I acknowledge that punctuation informs meaning, and on occasion, can do so influentially. ‘Punctuation is a rational part of English composition, and is sometimes significantly employed’, as Lord Shaw of Dunfermline noted in Houston v Burns [1918] AC 337 at 348 … The placement of commas was significant in AMCI Investments Pty Ltd v Rio Doce Australia Pty Ltd [2008] QCA 387 at [31]. However a prerequisite to relying on punctuation is being satisfied that it has been used consciously and not haphazardly …

I am not satisfied, in a clause which is littered with grammatical errors and which does not pay regard to defined terms, and which plainly was copied verbatim from the First Consortial Agreement without regard to the vital fact that the Main Contract had now been entered into, that the commas are a meaningful guide to its grammatical, let alone legal, meaning.

Poor drafting has its impact on the construction of the document. Thus, in Lord Bridge in Mitsu Construction Company Limited v The Attorney General of Hong Kong [1986] UKPC 6 at 9, Lord Bridge said:

16 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 47.

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[T]he poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis.

Similarly, in Cohen v Teseo Properties Ltd [2014] EWHC 2442 (Ch) at [30], Sales J said:

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

Much of today’s legal drafting is in a form which is difficult for non-lawyers to understand. In this respect, Butt17 states:

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

However, some progress is being made towards the use of plain English in legal drafting. This is a trend that is favoured by an overwhelming majority of Australian judges 18 and legal practitioners.19 A Discussion Paper issued by the Victorian Law Reform Commission provides the following description of what is meant by ‘plain English’:

Plain English is language that is not artificially complicated, but is clear and effective for its intended audience. While it shuns the antiquated and inflated word and phrase, which can readily be either omitted altogether or replaced with a more useful substitute, it does not seek to rid documents of terms which express important distinctions. Nonetheless, plain language documents offer non-expert readers some assistance in coping with these technical terms. To a far larger extent, plain language is concerned with matters of sentence and paragraph structure, with organisation and design, where so many of the hindrances to clear expression originate.20

Former High Court justice, Michael Kirby21 propounds the following 10 commandments for plain language in law, the observance of which he suggest would greatly improve the clarity, vigour and directness of legal writing:

17 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 1.18 K O’Brien, ‘Judicial Attitudes to Plain Language and the Law (2009) 32 Australian Bar Review 204.19 B McKillop, ‘What Lawyers Think About Plain Legal Language’ (1994) 32 New South Wales Law Society Journal (May) 68.20 Quoted in P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, p 102.21 M Kirby, ‘Ten Commandments for Plain Language in Law’ (2010) 33 Australian Bar Review 10, p 14.

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Butt22 lists the following benefits of using plain English: (i) ease of understanding, (ii) increases in the ‘efficiency’ with which readers absorb and understand legal documents, (iii) the reduction of errors in drafting documents, (iv) the reduction of litigation in relation to the construction of documents, and (v) the reduction of complaints against lawyers.

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

In summing up the benefits of plain English in legal drafting, Butt23 writes as follows:

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

22 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, pp 104-13.23 P Butt, Modern Legal Drafting, A Guide to Using Clearer Language, 3rd ed, Cambridge University Press, Cambridge, 2013, pp 128-9.

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