Interpretation of contracts under Australian law
27 February 2017
27 February 2017
This guide summarises the key principles of contractual interpretation applied by Australian courts, including:
The overarching approach taken by Australian courts is that:
The starting point is the words actually used.1 The court will give express terms their plain and ordinary meaning, unless doing so would result in manifest absurdity. In general, Australian dictionaries rather than English dictionaries should be used in determining the plain and ordinary meaning of words.2
Where a term of a commercial contract is ambiguous or capable of more than one meaning, Australian courts attempt to give the contract a businesslike and commercial interpretation. The court proceeds on the assumption that the parties intended to achieve a commercial result, and seeks to construe the contract to avoid it making commercial nonsense or causing commercial inconvenience. In seeking to interpret a contract where a term is ambiguous, the court may have regard to the circumstances surrounding the contract, such as evidence of the background known to the parties at or before the contract, including evidence of the genesis and objective aim of the transaction, and pre-contractual negotiations.
There is currently debate in Australia as to whether such surrounding circumstances can only be considered where there is ambiguity on the face of the contract (ie there is a gateway requirement of ambiguity before surrounding circumstances can be considered), or whether surrounding circumstances can be considered in order to determine whether the terms of the contract in fact have a plain meaning. The traditional position is the former, ie that ambiguity is a gateway requirement, and evidence of surrounding circumstances is not admissible to contradict express terms where they have a plain meaning.3 However, passing comments in a recent High Court decision that surrounding circumstances and the commercial purpose of a contract were relevant to its interpretation4 have been interpreted by the NSW Court of Appeal5 and Full Federal Court6, and in first instance decisions of the Supreme Courts of Victoria7 and South Australia8, to mean there is no longer any “gateway requirement”.
The Western Australian Court of Appeal, on the other hand, has stated that ambiguity remained a gateway requirement, subject to narrow exceptions.9
The High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd10 acknowledged the controversy but did not consider that that case was a suitable occasion to resolve it.
Some words and phrases which commonly appear in contracts, such as a requirement to use “all reasonable endeavours”, “best endeavours” and “reasonable endeavours” have been judicially considered and have obtained a legally accepted meaning as a result. It is beyond the scope of this guide to consider such words and phrases, although there are resources which provide a collection of them.11
There is an exception to the rule that evidence of surrounding circumstances is not admissible, where the words used in a contract have special or technical meanings. In such circumstances, the courts will have regard to extrinsic evidence which demonstrates that words have, for example, meanings which are specific to particular localities,12 are trade, customary or technical,13 or which are specific to the parties.14 Where a special or technical term is used there is a rebuttable presumption that the parties have intended to use them according to their correct technical meaning.15
The “parole evidence rule” means that evidence of prior negotiations is not admissible to the interpretation of contract terms,16 unless it provides evidence of the surrounding circumstances.17 Such evidence is admissible but not in aid of a subjective interpretation of the problem clause. The use of surrounding circumstances in contractual interpretation has been discussed above.
Terms may be implied based on fact, law (common law or statute) or by dealing, custom or usage.
There are only limited circumstances in which a term will be implied into a formal written contract; for a term to be implied it must:18
The test for informal contracts is less stringent: the term need only be “necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case”.19
Terms may be implied at common law where the term is necessary in the sense that, without it, the rights conferred by the contract may be rendered worthless (or, perhaps, seriously undermined), and where the term would not be unjust or unreasonable. In certain kinds of contracts, such as employment, consumer, and tenancy agreements, and contracts for the sale of goods, certain implied terms are well established. Examples include:
Terms implied by statute include:
In certain contracts, terms may be implied by virtue of trade custom or usage, or by an established course of dealing, although such implied terms are often difficult to prove. In Con-Stan Industries v Norwich Winterthur Insurance (Aust) Ltd, the High Court summarised the position in respect of implying a term by custom as follows:30
It is possible to challenge the plain language of a contract on the basis that the agreement reached by the parties has been incorrectly recorded in the document. A court can rectify the problem clause to make it accord with what the parties agreed. There is a heavy onus on a party attempting to persuade a court to rectify a contract.34