DAY 1 NOTES

Tips:
1. Buy a dictionary and keep on desk
2. Delco v Darlington Futures (HCA) – read this case! About interpreting exclusion
clauses
3. Include a comprehensive interpretation clause in the contract
What is contractual interpretation?
- Point of contract law is to enforce the contractual agreement made by the parties.
Therefore, need to understand the terms of the contract.
LEGAL INTERPRETATION
- The principles of interpretation are contained in the following quotes:

- Electrical Generation Corporation v Woodside Energy Ltd (2014) at [35]

“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. As reaffirmed, it 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”.
o ‘reasonable businessperson’ (in the position of the parties at the time of
contracting)
 Imposes an objective standard – focus is on the meaning of the language
 Question is how would the J interpret it based on the words in the
contract?
o ‘language’ – the language matters
o ‘surrounding circumstances’ – the context matters but it cannot be used to re-
write the terms of the contract (language takes precedence)
o ‘commercial purpose’ – sometimes the commercial purpose of the document
assists with the interpretation of the clause – again, look at the language first.

‘As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a
court is entitled to approach the task of giving a commercial contract a businesslike
interpretation on the assumption “that the parties ... intended to produce a commercial
result”. A commercial contract is to be construed so as to avoid it “making commercial
nonsense or working commercial inconvenience”.’
o If you are looking at a difficult clause with two interpretations, one which makes
no commercial sense and one which is plausible, you would assume that the
clause meant the plausible interpretation.
o This is a much weaker argument and should not be used as first point in
argument

- Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015]
‘In determining the meaning of the terms of a commercial contract, it is necessary to ask
what a reasonable businessperson would have understood those terms to mean. That
enquiry will require consideration of the language used by the parties in the contract, the
 circumstances addressed by the contract and the commercial purpose or objects to be
secured by the contract.
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.
o Do you need to think beyond the language? The HCA here is saying two things
here.

‘However, sometimes, recourse to events, circumstances and things external to the

contract is necessary. It may be necessary in identifying the commercial purpose or
objects of the contract where that task is facilitated by an understanding “of the genesis
of the transaction, the background, the context [and] the market in which the parties are
operating”. It may be necessary in determining the proper construction where there is a
constructional choice.’
o Where there is a constructional choice (competing possible understanding of the
clause) to be made based on the contract, it may be required to look beyond the
meaning of the language

- Arnold v Britton [2015] UKSC

‘This unitary exercise involves an iterative process by which each of the rival meanings is
checked against the provisions of the contract and its commercial consequences are
investigated ... But there must be a basis in the words used and the factual matrix for
identifying a rival meaning. The role of the construct, the reasonable person, is to
ascertain objectively, and with the benefit of the relevant background knowledge, the
meaning of the words which the parties used. The construct 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.’
o UK position is similar to Aus position
o Unitary exercise – when interpreting the contract you are bringing everything
together – the language, the purpose of the contract, the other clauses and
potentially the background – you need to find a way to make these things
consistent
o Iterative process – its back and forth, need to check the rival meanings to find a
meaning which makes sense of all the different documents which need to be
considered
o Here the court said – just read the contract. It is not the court’s job to re-write the
contract where one party signed up to a bad deal.

- Wood v Capita Investment Services [2017] UKSC

‘The court’s task is to ascertain the objective meaning ... the court must consider the
contract as a whole and, depending on the nature, formality and quality of drafting of the
contract, give more or less weight to elements of the wider context in reaching its view as
to that objective meaning.’ [10]
‘Interpretation is … a unitary exercise; where there are rival meanings, the court can give
weight to the implications of rival constructions by reaching a view as to which
construction is more consistent with business common sense.’ [11]
o The quality of drafting is vital
 o If the contract is drafted by lawyers and professional parties, then court more
likely to look at the contract alone whereas if the contract is on the back of an
envelope, then more likely to consider extrinsic material – need to take into
account the character of the particular contract
- Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA
‘It is well established that the terms of a commercial contract are to be understood
objectively, by what a reasonable businessperson would have understood them to mean,
rather than by reference to the subjectively stated intentions of the parties to the
contract. In a practical sense, this requires that the reasonable businessperson be
placed in the position of the parties. It is from that perspective that the court considers
the circumstances surrounding the contract and the commercial purpose and objects to
be achieved by it.’
o You interpret the contract at the time of formation – you don’t interpret the
contract at the time of dispute (with the benefit of hindsight)
‘Clause 4 is to be construed by reference to the commercial purpose sought to be
achieved by the terms of the lease. It follows, as was pointed out in the joint judgment in
Electricity Generation Corporation v Woodside Energy Ltd, that the court is entitled to
approach the task of construction of the clause on the basis that the parties intended to
produce a commercial result, one which makes commercial sense.’
o In a situation where there are multiple interpretations of a clause, then the court
can elect to choose the interpretation which makes the most commercial sense.

- In summary:
o The legal approach to interpretation is objective, made at the point of formation
and subjective intent of parties is not relevant.
o Need to place very close attention to the language used in the contract
(particularly where there is a detailed formal contract in place).
o However that language may be coloured by a variety of things – the purpose of
the contract; the genesis of the contract (understanding how the contract came to
be); other background facts known to the parties; questions about commercial
sense. But the idea is that you are using all of the above factors to try and
understand the language (where the language is deficient or where there are
multiple different interpretations).
 There is always an argument about the admissibility of contextual
evidence.
TEXT (LANGUAGE USED IN THE CONTRACT)
- When reading a clause, we need to ask:
o Is there ambiguity?
o Is there inconsistency?
o Do the words have a common English meaning?
o How could someone interpret the clause in bad faith? This is the test – always
look at clauses from this pov.
- Where there are difficulties, they must be resolved by argument
o Today’s seminar is about how to move beyond understanding by instinct
o Look at the contract, look at the language (including cases which interpret terms
and also maxims)

The contract
- The contract must be construed as a whole
 o Australian Broadcasting Commission v Australian Performing Rights Association
Ltd (1973) 129 CLR 285 at [14] – you must look at the contract as a whole
o Self-serving focus on one clause unlikely to succeed – this is because the
meaning of the clause can change when look at it in context
- Questions of interpretation force you to turn to the dustiest parts of contracts:
o order of precedence clause
 this will help you where there is an inconsistency between different
components of the contract (e.g. general terms / special conditions /
schedules) but it won’t help you where there are inconsistencies within the
one component (e.g. specifications)
o interpretation clause
 these often restate what the common law is – look at the interpretation
clause in AS4000 and compare with the interpretation clause in the
standard form Victorian PPP
o introductory paragraphs within clauses
 this can be used where the drafting is tricky and there may be grounds for
dispute – drafting an introductory clause can help set the scene (e.g. the
overarching purpose of this schedule is to: A; B; and C)
o recitals / background
 same as above, can try to sneak in things in these clauses which build up
the argument for the interpretation you are looking for so that the J can
rely on these clauses if there is an dispute.
o severability clause
o entire contract clause
 if trying to overcome entire contract clause and include additional material
(e.g. price qualifications) could argue that contract is partly oral; there is a
collateral contract; may have an estoppel argument. Likely to be
unsuccessful however

The language
- How do you interpret the language – HCA - ‘[T]he natural meaning of the language used
must receive its effect unless, on a proper application of the rules of interpretation, a
contrary intention is to be found to be contained within the instrument’
o Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association
Ltd (1935) 53 CLR 618 at 636
o ‘the golden rule’
o hard to dispute, but gives little guidance

- How do you interpret the language? Different arguments to make

o Dictionary meanings not decisive but may be helpful
 Consider Insurance Australia Pty Ltd v Consolidated Wood Products Pty
Ltd (1991) 25 NSWLR 541
 Kirby JA supported the Macquarie Dictionary
 Mahoney JA supported reference to multiple dictionaries
o Legal dictionaries and searches for phrases judicially considered are useful
 affords arguments on the basis of precedent
 but these decisions turn on precise facts and you will find inconsistencies
o Grammatical construction may be significant (this is particularly where the
contract has been formally drafted)
 style guides or grammars may help
 o Customary meanings in trade or location may prevail
 eg, 1000 has been taken to mean 1200: Smith v Wilson (1832) B & Ad
728 at 732

The maxims (not always decisive and need to look at the language itself)
- Task is to determine the parties’ objective intention
- Maxims of interpretation may help as a subsidiary tool
o Their main use seems to be in justifying a position already determined
o Well covered in Kim Lewison and David Hughes, The Interpretation of Contracts
in Australia (2011), chapter 7, from which the following list is taken
 Must construe the document as a whole
 Should give effect to all parts of the contract
 Special conditions trump general conditions
 Specific provisions trump general provisions
 Express mention of some things implies other things deliberately omitted
 Express term on a subject excludes an implied term on that subject
 Should construe against party that put forward contract
 Should construe so parties cannot benefit from their own
wrongdoing
 If you have a clause which seems to allow one party to do the
wrong thing and profit from it, the courts will be very reluctant to
enforce this clause.
 Consider the prevention principle
 Should prefer interpretation that makes clause lawful
 Attempts to re-state the common law should be given no greater scope
than the underlying common law
 A non-exclusive list of things in one class incorporates all things in that
class
 An ambiguous word may take its meaning from similar nearby words
 Where a plural subject is followed by a plural predicate, the plurals may
be distributively construed
 Should prefer an interpretation that validates the instrument
 Should prefer an interpretation that leads to a reasonable result
 Need clear words to support interpretation leading to an unfair result
 Need clear words to support an interpretation that requires a party to
perform the impossible
- Is there some sort of slip rule?
o What if a clause imported terms of another document ‘so far as they are
inconsistent herewith’
 Fitzgerald v Masters (1956) 95 CLR 420 per Dixon CJ and Fullagar J:
 Facts: contract stated that document B was to be implied into the
contract to the extent the contract is inconsistent with document B,
this was a mistake. The drafter was supposed to say to the extent
document B is consistent with the contract.
 ‘Words may generally be supplied, omitted or corrected, in an
instrument, where it is clearly necessary in order to avoid absurdity
or inconsistency.’
o How far does this principle go? Not very far, needs to be a very obvious error (as
above and not as below).
o Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA
  Clause states: ‘For sales by JIREH INTERNATIONAL PTY LTD. to GJGC
STORES in Australia and to other countries, WES shall receive a
commission of 5% of the ex-factory price of the coffees, teas and other
products.’
 BUT what about sales made by companies related to Jireh? Under this
clause, there is no obligation to pay the commission where the sale is
made by Jireh’s related bodies corporate.
 The court did not allow for the contract to be amended to include ‘or its
related bodies corporate’ and the language stood.
CONTEXT OF THE CONTRACT
- When can a J hear evidence beyond what is written in the contract? And what is the
weight of that evidence?

- Codelfa Construction v State Rail Authority of NSW (1982)

o ‘The broad purpose of the parol evidence rule is to exclude extrinsic evidence
(except as to surrounding circumstances), including direct statements of intention
(except in cases of latent ambiguity) and antecedent negotiations, to subtract
from, add to, vary or contradict the language of a written instrument’. (at 347)
 Parol means ‘by mouth’
 This rule restricts the evidence the court can hear
 What is Mason saying here?
 Extrinsic evidence is excluded (this includes statement of intention,
evidence of negotiations) and this evidence cannot be used to re-
write the contract
 However evidence of surrounding circumstances may be
admissible
o ‘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. 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, as we have seen, if the facts are notorious knowledge of
them will be presumed.’
 Some academics think that need to have ambiguity before this rule comes
into play but other academics think that if there is a dispute then there is
ambiguity.

- In summary, consider three questions here –

o When is extraneous evidence admissible?
 Look at the true rule (above)
 When the language is ambiguous (argue that if there is a dispute, then
there is ambiguity)
o What evidence is admissible? Look at second sentence in quote above.
 Evidence in the form of background fact which is known to both parties or
which is notorious (i.e. really obvious) is admissible
o Does the evidence matter? Lecturers POV is that no.
 o ‘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.’
o (at 352)
 This quote refers to question 2 above
 Starting point is that you cannot bring in evidence of negotiations etc,
unless they are background facts. However sometimes evidence of
negotiations will come in through the back door.
o ‘Consequently when the issue is which of two or more possible meanings is to be
given to a contractual provision we look, not to the actual intentions, aspirations
or expectations of the parties before or at the time of the contract, except in so far
as they are expressed in the contract, but to the objective framework of facts
within which the contract came into existence, and to the parties' presumed
intention in this setting. We do not take into account the actual intentions of the
parties and for the very good reason that an investigation of those matters would
not only be time consuming but it would also be unrewarding as it would tend to
give too much weight to these factors at the expense of the actual language of
the written contract.’(at 352)
o ‘There may perhaps be one situation in which evidence of the actual intention of
the parties should be allowed to prevail over their presumed intention. If it
transpires that the parties would have refused to include in the contract a
provision which would give effect to the presumed intention of persons in their
position, it may be proper to receive evidence of that refusal.’ (at 352)
IN SUMMARY – QUESTION 2: WHAT EVIDENCE IS ADMISSIBLE AS PER MASON J?

IN OUT
- Context, purpose, genesis - Post contractual conduct (this evidence
- Background facts known to both parties is obviously admissible if dealing with
or notorious (i.e. obvious) breach of contract)
- Meaning that the parties are united in - Actual intentions and hopes of the
rejecting parties (except that it might be
admissible for the purpose of showing
that the parties rejected a particular
meaning)
- Evidence of negotiations (except that it
may sneak in as background facts,
which are admissible).
o Have to remember what Mason was dealing with, Codelfa was decided in the 70s
where there was not the same access to information as there is today.
o Remember, the evidence above cannot replace the language of the contract!

Application
-
Lessons for drafting
- Avoiding errors, ambiguity and inconsistency
o Where have you encountered problems?
 o What processes can we use to minimise drafting problems?
- Guiding decision-makers
o To what extent should we dictate how a court should interpret an agreement we
draft?
o Do we want evidence of surrounding circumstances to be readily admissible?
o What more can we do to guide later interpreters?

IN REVIEW
- Text
o The contractual framework
o The precise language used
o Maxims of interpretation
- Context
o The genesis and purpose of the transaction
o Background facts known to the parties
o Meanings the parties have united in rejecting
o Not evidence about
 Negotiations generally
 Subjective understandings
 Actions after the contract was formed
- Commercial sense
-