The interpretation of a commercial contract is a continuous area of contention, particularly in construction projects where use of technical terms relies on a large amount of assumed knowledge.

A recent decision handed down in the NSW Supreme Court, [Jabbcorp (NSW) Pty Limited v Strathfield Golf Club [2020] NSWSC 1317], Justice Ball revisited the principles of interpreting a commercial contract.

These principles should be considered upon drafting and negotiating contracts in order to minimise areas of possible contention down the line.

We’ve outlined the five key principles identified by Justice Ball below.

  1. The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context and purpose. To determine the meaning of the terms of a commercial contract, ask what a reasonable businessperson would have understood those terms to mean based on the language used in the contract, the circumstances addressed by the contract, and the commercial purpose or objects to be secured by the contract. 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. Unless a contrary intention is indicated in the contract, the contract will be interpreted on the assumption that the parties intended to produce a commercial result, and avoid making commercial nonsense or working commercial inconvenience[1].
  2. Recourse to surrounding circumstances may be necessary to identify the commercial purpose or objects of the contract, and the proper construction where there is a “constructional choice”[2]. Ambiguity is not a precondition to consideration of extrinsic or surrounding circumstances in New South Wales[3]. The surrounding circumstances to which recourse may be had are objective, ie. those that are known to the parties or assist in identifying the purpose or object of the transaction. Evidence of the parties’ statements and actions reflecting their actual intentions and expectations is inadmissible.
  3. Negotiations between the parties leading to the contract are not relevant to its correct construction, except to the extent they shed light on the “objective facts” known to the parties[4]. An exception here is where the words used have a trade or technical meaning and the negotiations show that that is the meaning the parties intended to adopt. There are competing authorities about whether this exception extends to cases where negotiations indicate the parties intended to give special meaning to words used in the contract[5].
  4. An “entire agreement” clause may modify these principles depending on the correct construction of the entire agreement clause. A clearly worded clause has the effect of answering the question whether the contract is contained wholly in the written terms[6] and such a clause may limit the use that can be made of extrinsic material in interpreting the contract[7]. That being said, there remains the possibility of considering extrinsic material where the meaning of words in the contract cannot be inferred solely from its terms because they are ambiguous[8].
  5. Post-contractual conduct is not admissible to interpret the words of a written contract[9], but it may be relevant where it amounts to an admission on a question of fact or in other ways[10].

 


[1] Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 per French CJ, Nettle and Gordon JJ at [46]ff
[2] Ibid
[3] Cherry v Steele-Park [2017] NSWCA 295 at [76]ff per Leeming JA (with whom Gleeson JA agreed); [123]ff (per White J)
[4] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 per Mason J
[5] Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd (The Karen Oltmann) [1976] 2 Lloyd’s Rep 708 at 712 per Kerr J. Approved in Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 at 309 by Santow J. Disapproved by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; [2009] UKHL 38 at [47] (Lord Hoffmann); [97] (Lord Walker).
[6] Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611 at 614 per Lightman J
[7] MacDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152 at 156 per Davies JA.
[8] Jabbcorp (NSW) Pty Limited v Strathfield Golf Club [2020] NSWSC 1317 at [64]
[9] Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35] per Gummow, Hayne and Kiefel JJ; Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407
[10] Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [120]ff per Basten JA (with whom Gleeson JA agreed)

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