Tuesday, June 8, 2010

Contracts - Interpretation

Interpretation Disputes

  • Arise in multitude of ways: e.g.-
    • Ambiguity in subject matter or terms
      • A particular problem when the parties have actually never turned their minds to the situation
    • Unreasonable or absurd outcome
    • Parties at cross purposes

Aids to Interpretation

  • Courts have inherent jurisdiction to correct Fitzgerald v Masters; Westpac v Tanzone
  • Implication
  • Rectification-Winks;
    • Particularly where a particular phrase has been chosen but where the plain meaning is different from that intended
  • Mistake
  • Estoppel –e.g.- estoppel by convention

Key Factors in Interpretation

  • Objective approach
  • Plain meaning rule
  • Internal and external context

Objective Approach

  • This derives from the fact that parties to a contract weren’t able to give evidence as to the why of that contract in court
  • Now despite the fact that parties can give evidence, this rule continues to be applied.
  • Courts look at presumed or apparent intentions as opposed to actual intentions as expressed in the word of the agreement
  • The courts, in theory, don’t look at the actual intentions of the parties involved.
  • They look at what a reasonable person would have done in the position of the parties at the time of contracting.
  • SO, the meaning of a term will be determined from all the circumstances and may not necessarily be what the parties themselves intended
  • Equuscorp v Glengallan at [33]
  • 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 and or expectations of the parties…except as they are expressed in the contract…and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties. Codelfa at 352.


  • Evidence of subjective beliefs of parties inadmissible in absence of argument for rectification or estoppel by convention Brambles at [27], [46]
  • So you can look at actual intentions in the case of rectification or estoppel.

Merits of Objective Approach

  • When parties have not discussed meaning
  • Parties are at cross purposes – so when parties have different interpretations
    • Slee v Warke
      • Lease agreement contained option to purchase vested in lessee
      • Dispute about when that option could be legitimately used
      • Dispute was settled by giving it its plain and ordinary meaning
        • Even though this wasn’t what landlord intended
  • Reasonable reliance by 3rd parties and security of transacting.
  • Objective meaning can prevail even if at odds with parties’ beliefs – so courts can manipulate the facts to achieve a desired outcome.
      • So never lose sight of the higher moral ground.
    • See eg Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61, [27], [83] and [147]

Plain Meaning Rule

  • Unless they are ambiguous, words normally to be given their plain or ordinary meaning
  • i.e. They will normally be given the meaning that reasonable people in the position of the parties would attribute to that phrase
  • Also protects certainty and security of transactions because it prevents a part from alleging a meaning that departs from an established meaning just because it suits that party’s purposes
  • It should be noted that this is often applied in a pragmatic way.
    • Secured Income;
    • Maggbury v Haffele (2001) 185 C LR 152, [45]

Plain Meaning Rule and Unreasonableness

  • Literal meaning will be applied even if unreasonable outcome
    • “The approach of the courts to the construction of such documents, when they contain no ambiguity or patent error or omission cannot be other than that of an uncritical rendering of the meaning of the text.” ABC v APRA Ltd (1973) 129 CLR 114-5

Plain Meaning and Commercial Contracts

  • In dealing with commercial contracts they should be approached fairly and broadly.
  • Courts should approach commercial documents fairly and broadly without being too astute or subtle in finding defects - Pan Foods Company Importers v ANZ at [14] per Kirby J
    • This also applies to express terms.
  • Commercial contracts need to be construed in a way to conforma to commercial purposes, so different to how they are construed in different ways.
  • SO, desire not to defeat presumed commercial purposes by excessively narrow construction Ibid [24]

Pan Foods

  • Validity of Notice given under cl 15.3 of contract of loan between ANZ and Pan Foods
  • Notice to be given by an “authorised representative”
  • Notice prepared and signed by Bank’s solicitors but served by Bank manager

Plain Meaning and Absurdity

  • Courts have drawn a distinction between unreasonable and irrational/absurd outcomes
  • Words will be supplied, omitted or corrected to avoid absurdity or inconsistency
    • Fitzgerald v Masters as applied in Westpac Banking v Tanzone Pty Ltd
  • Westpac v Tanzone NSW CA
    • Clause in lease provided for biennial reviews of rent, based on the rate of inflation, but calculated according to formula which if applied literally led to rent increases that far outstripped effect of inflation by accelerating margins. Eg, on the 5th, 6th and 7th reviews, rent increased by 68.5, 81.45 and 84 % respectively!! - Cheshire and Fifoot (2008) at para 10.35
    • So court significantly rewrote the terms of a contract.
  • So look at the particular provision
  • Look at it in its context
  • And look at it in the surrounding circumstances of the agreement
  • And attempt to argue unreasonableness i9n that this totally oversteps what a reasonable person would do

Internal Context

  • Plain meaning rule does not mean that terms should be looked at in isolation. Contracts should always be read as a whole.
  • Terms must be read within internal context of contract. Specific words within individual clauses need to be understood in the context of the whole contract and in their own setting.
  • Courts will make cross-references to other terms within the contract and in formal contract, note will often be taken of the recital at the beginning which sets out what the parties’ objectives are.
  • The internal context means that the courts will sometimes not adopt exactly the literal or plain meaning.
  • FAI v Savoy
    • Good example of interpretation in context and can courts look at subsequent conduct
    • Involved a dispute over the interpretation of a clause in a long-term lease of a city building
    • The landlord wanted to impose on the tenant an obligation to insure the building
    • The tenant had in fact been paying that insurance but then sought legal advice and was informed that it wasn’t required to do so so stopped.
    • SO ISSUE: Was the tenant required to pick up the insurance premiums for the whole building?
    • The contract did not contain an express covenant to insure but it did contain a clause that made the tenant responsible for a whole range off outgoings in respect of the building
      • Cl 2 of lease provided:
      • THAT the lessee will ...bear pay satisfy and discharge all taxes, rates, sewerage rates, duties, charges, assessments, impositions, fees, payments and outgoings whatsoever...whether legislative municipal corporate or otherwise which now are or may from time to time...be taxed rated charged levied assessed imposed or made payable upon or in respect of the said hotel and premises...
    • So, was Cl. 2 wide enough to cover insurance premiums as well?

Landlord’s Arguments:

  • Insurance premiums were “payments” or “outgoings” “made payable upon or in respect of hotel or its occupation” [under cl 2]
  • Evidence of post-formation (subsequent) conduct should be admitted


    • HELD: Rejected both submissions
      • It took into account a range of factors including
        • The context and the wording
        • The other terms of the contract
        • Whether the lessor’s interpretation would produce a reasonable result
      • Where a term is found to be ambiguous or unclear, courts will endeavour to adopt an interpretation that is the most reasonable in all the circumstances (so e.g. in choosing out of two)
  • Rejected for 3 reasons:
    • No express covenant to cover the insurance of the building even though this is normally a standard term
    • Words in cl 2- “outgoings.. payable” to be interpreted ejusdem generis [by reference to earlier words such as taxed, levied, imposed etc] So the earlier words are taxes and rates and things imposed by outside bodies
      • So the court said that the clause was not meant to include contractual obligations voluntarily assumed by the landlord such as insurance premiums
    • Reasonableness considerations [impact of landlord’s proposed interpretation]
      • If the landlord’s interpretation had been adopted, it would have produced an unreasonable result because the landlord would have been able to pass on just about any fees or charges
  • Weight of authority also compelled court to ignore evidence of post-contract conduct as aid to interpretation

Other Examples of Interpretation in Internal Context [see written notes]

  • Burger King: cl 15.1 termination clause qualified by reference to clause 8.1 one year period; and
  • Andar Transport Pty Ltd v Brambles Ltd - indemnity clauses 8.2.2 and 8.2.3 qualified by cl 4.6

External Context

  • Contract must be construed in its factual matrix (Toll)
  • Evidence of surrounding circumstances admissible in all cases (Toll)
    • Includes the objective background facts known to the parties at the time of contracting
    • As well as evidence of the nature and the purpose of the transaction
  • Place language of document in context of “objective framework of facts” from which it arose. See Codelfa at 347.
  • Key Passage
  • This Court …has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are to be determined…What matters is what each party by words or conduct would have lead 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 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. Toll at [41].
  • This is one of the most important cases in Contract in recent years

Pre-Toll - Parol Evidence Rule

  • Before Toll, the rule was that admissibility of extrinsic evidence is only permitted where the term is ambiguous. i.e. did not have a plain or ordinary meaning
  • Where there is written contract, rule that prohibits the use of extrinsic evidence to add to or vary the terms of the agreement, applies to both:
    • Incorporation and
    • Interpretation of terms Codelfa at 347
    • “The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous. But it is not admissible to contradict the language of the contract when it has a plain meaning.” Codelfa at 352 per Mason J.
  • So the PER was designed to prevent parties from presenting infinite evidence of different terms
  • It was thought that where a term had a fixed or a clear meaning, extrinsic evidence was superfluous
    • But where a phrase is ambiguous, extrinsic evidence can be admitted.
  • So extrinsic evidence can be admitted to help interpret ambiguous contract provisions. This is a recognized exception to the Parole Evidence Rule.
    • This was the position up to Toll

Change of Attitude

  • Courts became increasingly uncomfortable with this doctrine
  • “Few 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.” Withers quoted in B & B Constructions per Kirby P
  • So Toll opens up the use of extrinsic evidence where there is no evidence of ambiguity.
    • Thus in every contractual dispute today, you must look not only at the internal context but also the external surrounding circumstances.

Decision in Toll consistent with UK Approach

  • UK approach-ICS Ltd v West Bromich BS [1988] 1 WLR896, 912
    • “Interpretation is 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.

Impact of Factual Matrix on Plain Meaning

  • Impact on plain meaning rule yet to be worked out – Will the literal meaning of a phrase be displace by evidence of surrounding circumstances?
    • E.g.- Secured Income
  • Secured Income
    • This case was decided using the plain meaning rule but today may have been decided differently.
    • Contract for sale of city building on “terms”
      • Balance of purchase price reducible by reference to formula if annual rent from tenants less than specified sum
    • Issue: Did “leases” mean only genuine “commercial leases”? Or did it mean a lease allowing him to have the balance of the purchase price?
    • The purchaser argued that during discussions, it was always understood that the word lease meant commercial lease
    • So the understanding was that it had to be a bona fide legitimate commercial tenant
    • HC HELD that there was no justification for giving the word lease anything other than its plain and ordinary meaning and thus refused to admit evidence of the negotiations
    • This meant that the vendor was entitled to put itself forward as the tenant.


  • It is now more unlikely that courts will adopt an interpretation inconsistent with the factual matrix.
  • Where there is a dispute about a term, courts have traditionally differentiated between different types of ambiguity
    • Patent and latent ambiguity
  • Patent ambiguity = a term on its face has at least two different meanings. ‘supplier’s costs’
    • Can also arise from grammatical mistakes, omissions, internal inconsistencies etc.
  • Latent ambiguity = ambiguity that only becomes apparent by reference to extrinsic material
  • Can affect type of evidence admissible [but little practical impact]

Admissible evidence includes:

  • What is admissible is to be determined within the context of the objective view of contract. Analysis of the surrounding circumstances is firmly embedded in the objective view.
    • So evidence is only admissible in as much as it helps establish objective background facts. This includes:-
  • Mutually known facts or notorious facts or common assumptions Codelfa
  • Commercial or business object of transaction objectively ascertained Brambles at [139] per Ipp AJA – These are routinely admitted.
  • The genesis of the transaction, the background, the context, the market in which the parties are operating Brambles; Pacific Carriers
  • Subject matter of or parties to contract BNZ v Simpson; Cameron v Slutzkin; McDonald v Longbottom

Evidence of Subjective Intention ostensibly not Admissible

  • Statements and actions reflective of actual intentions or expectations inadmissible, even if for purpose of clarifying meaning Codelfa at 352; Brambles at [27]
    • This may help clarify what kind of contract the parties themselves liked to make but they are superseded by the written contract itself.
  • BUT this distinction between objective truth and subjective intention is, in fact, very unclear
  • A fortiori private beliefs of one party Slee v Warke; DTR Nominees v Mona Homes

Common Understandings

  • Concurrence converts common assumptions into objective constituents of transaction.
  • So the objective framework includes assumptions of subjective fact or meaning over which the parties have concurred during the course of their negotiations.
    • Cheshire and Fifoot 9th ed at para 10.13
  • Evidence of “shared subjectiveness” part of objective surrounding circumstances [ie-matters in common contemplation or of common assumption]
    • Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290, 309-310
      • Evidence of subjective intention will be admitted in order to discover the subjective intention as long as it is a case of shared subjectiveness.
  • But individual subjective intention is never going to be relevant, the subjective intention has to be shared between the parties – because this is unable to be described as a mutual known fact.

Subject Matter and Parties

  • Extrinsic evidence admissible to identify persons or things to which instrument refers. BNZ v Simpson [1900] AC 182, 188

Cameron v Slutzkin

  • Contract for sale and purchase of 200 pieces of Matchless 2475 39/40 White Voile at 17 shillings 3/4d c.i.f. Melbourne
  • The buyer refused to take delivery of the material because it did not conform to that shown to him during negotiations
  • Seller brought action for damages for breach of contract.
  • BUT unless some meaning could be attributed to the voile, then the whole thing would be void for uncertainty
  • The only way they could determine what voile was, was to look at extrinsic evidence. i.e. the meaning that the parties themselves had attached to that phrase.
    • “Extrinsic evidence is always admissible not to contradict or vary the contract but to apply it to the facts which the parties had in mind and were negotiating about.” BNZ v Simpson [1900] AC 182 at 189, as affirmed in Cameron.
  • So the court absolutely took into account what the parties had in mind.

McDonald v Longbottom

  • Offer made to plaintiff (seller) and accepted by them to buy “your wool” at 16s. per stone.
  • The defendant was the purchaser because he made the above offer to the seller
  • He later refused to take delivery because he said that the farmer had supplied wool from famrs other than his own
  • So was a contract for the sale and purchase of wool (‘your wool’)
  • SO, what did the parties mean by ‘your wool’
  • The court admitted evidence of a conversation between the seller and the buyer’s agen in which the seller told the buyer which wool was coming from his farm and which wool was coming from other farms.
  • So, he made it clear that he would be supplying wool from several different sources so ‘your wool’ meant your wool sourced from wherever.
  • HELD: This did not alter or add to the contract, it simply allowed the court to ascertain what the subject matter of the contract was

Scientific and Trade Usage

  • Because in this context word seldom have a plain or ordinary meaning
  • Extrinsic evidence of scientific or trade usage admissible where no plain meaning or to contradict plain meaning Cameron v Slutzkin;
  • white salvage=dark salvage
    • Mitchell v Henry (1880) 15 CH D 181,196 (Thesiger LJ)
      • There was a contract for the sale and purchase of white salvage but it actually meant black salvage according to the customary use attributed to that particular phrase
  • So when you are dealing with knowledge or phrase beyond the knowledge of the everyday reasonable person then the court will always admit extrinsic evidence to show the specific meaning attached to those admissions

Descriptive Phrases

  • Extrinsic evidence will also be admitted to give meaning to a descriptive term.
  • This may show that the parties have given their own dictionary meaning to a particular word or phrase.

B and B Constructions

  • B and B contracted to build a large development near Coffs Harbour
  • It made a sub-contract with a small company to carry out landscaping work (Brian Cheeseman and Associates)
  • That work was to be carried out for,
    • Original sub-contract sum $3,179,120
  • But sub-contractor undervalued cost of work and had liquidity problems
  • So B and B paid some charges that should have been paid by Cheesesman and called them Backcharges
    • Backcharges of $385,000
  • Sub-contract Amendment Advice (sent by B & B 16 May
  • Subtract
    • (1)Backcharges against Cheeseman to 30/4/90 $385,221.41
    • (2) Section 8.Bowling green deleted from project $99,000
  • AMENDED CONTRACT SUM $3,036,139.93
    • [Original contract price $3,179,120]
  • Handwritten Contract Amendment dated 26 May 1990
    The parties hereby agree that:
    • (1) The final contract value for the said works above is ($3,200,000)....and same includes all and any contractual claims now and in the future by Brian A Cheeseman & Associates Pty Ltd.
    • (2) The above mentioned contract sum includes [the liabilities of the parties] for all original contracted works between the parties including all variations to date 26th May with the exception of some minor labour and bob cat hire....
      • This document was, in effect, a bona fide settlement of dispute. Essentially the new contract price is $3,200,000
  • Legal Issue
  • Did “all variations to date” include:
  • The backcharges between the parties?
    • [i.e.-were backcharges included in the $3,200,000]
  • or
  • Could B and B deduct $385,000 off $3,200,000?
  • Were variations limited to actual changes in the contract works as defined in cl 1.06.13?
  • SO, were those backcharges included in the final contract price of $3,200,000
  • Holding, NSW CA held that Cheeseman was entitled to the total amount
  • Kirby JA
  • Past conduct of parties and mutually known facts admissible to show sense in which parties used word “variations”.
    • The first contract amendment document showed the way in which the parties used variations – to include backcharges.
  • Variations had wider meaning than just variations to works
  • Mahoney JA
  • Court entitled to know:
    • Context in which document executed and problems to be solved by it
    • Backcharges had accrued and their nature
    • Disputes over debits and credits
    • Discussing a compromise
    • Back charges under discussion as item to be taken into account
  • So the factual matrix in this case was absolutely critical to determine the meaning of the term.

Royal Botanic Gardens and Domain Trust v Sth Sydney Council

  • Most recent High Court of Australia case on extrinsic evidence
  • Facts
  • Involved a dispute over a rent review clause of a lease of a car park under the Botanical Gardens in Sydney
  • The council had built the car park and had a 50 year lease (from the 1950s) of the car park
  • The lessor was the owner of the B.G. and the lessee was the S.S. Council
  • The car park was operated for the first 20 years with no formal contract which was drawn up in the 1970s and backdated to the 1950s
  • The original trust had indicated that the rent would only be increased every three years if the costs involved in maintaining the gardens also increased as a result of the car park. i.e. maintenance to the garden directly attributable to the car park.
  • So, the car park was never supposed to be a profit-making exercise for the domain
    • It wasn’t the standard rent-review clause
  • In the 80s and 90s the increases increased substantially more so the council decided to challeng e the power to increase the rent under cl. 4
  • Clause 4 (b) (iv) of the lease provided:
  • b) That the yearly rental payable during …periods each of three years…after the first three years…may be determined by the Trustees…PROVIDED that –
    • (iv) in making any such determination the Trustees may have regard to additional costs and expenses which they may incur in regard to the surface of the Domain above or in the vicinity of the parking station and the footway and which arise out of the construction operation and maintenance of the parking station by the lessee.
  • Legal Issue
  • Did the words “the Trustees may have regard to additional costs and expenses” mean that Trustees could not have regard to matters other than additional costs and expenses?
  • In effect, did “may have regard to” mean “may and may only have regard to”?
    • Thus provision ambiguous so would look at the surrounding circumstances.
  • Factual Matrix included:
  • Parties to transaction were two public authorities
  • Lessee was responsible for substantial cost of construction of car park
  • Parties’ concern was to protect lessor from financial disadvantage as a result of transaction; and
  • Only financial disadvantage to lessor which parties identified related to additional expenses which it would or might incur immediately or in the future.
  • Held
  • The domain trust should only have regard to changes to its costs arising from the operation of the car park because of the fact
    • That the car park was constructed by the council
    • That the two parties were both public authorities
    • It was never intended to be a profit-making lease.

Is evidence of Subsequent Conduct Admissible?

  • That is, conduct of parties after execution of contract


  • Post-contract conduct should be admitted in cases where evidences clear mutual intention as to what a contract meant at time of contracting
    • It can be used to clarify what the intention of the parties was at times of contracting.
    • Hide and Skin (NSW Court of Appeal)
  • Post-contract conduct, like negotiations, can be seen as part of surrounding circumstances.
    • Spunwill per Santow J


  • Victorian Full Court rejected its use in FAI v Savoy.
  • Brambles and LMI have since endorsed latter view.

High Court’s View

  • HC in Royal Botanic Gardens case aware of conflict but thought better to wait for case where strong evidence of subsequent conduct before resolving issue.


  • Extrinsic evidence admissible to establish (or refute) contract formation or variation.
    • ANZ v Frost; Brambles Holdings Ltd [2001] NSWCA 61, 27
      • ANZ, looked at behaviour of parties after formation which showed that the parties were still Negotiating
  • Post-contractual conduct in relation to original contract is part of factual matrix to contract variation.
    • So what happens between original agreement and variation.
    • Centrepoint Investments.
  • Previous contracts can also be looked at to cast light on ambiguity in later contract.
    • Hungry Jacks’

Implied Terms and Factual Matrix

  • Factual matrix also relevant to implied terms
    • Codelfa at per Mason J(common assumption that injunction would not be granted to restrain construction of tunnel)
      • Because implication is part of the overall process of construction of the terms of the contract, it is legitimate to have regard to the factual matrix when attempting to understand how they apply
  • BP Refinery Case (Govt policy of decentralisation etc)
    • The court took into account the surrounding circumstances and what the commercial aims of the parties were

Mutual Rejection

  • But is it right to carry that [objective approach] to the point of placing on words a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an
  • inference sought to be drawn from surrounding circumstances.” Codelfa at 352 per Mason

Application to Implied Terms

  • Cannot propose an implied term based on parties’ presumed intentions if evidence that parties previously expressly rejected such a term. NZI Capital Corp. Pty Ltd v Child (1991) 23 NSWLR 481, 494 per Rogers CJ

Construction Contra Proferentem

  • Some commercial contracts or clauses subject to special rules of construction
    • Eg-guarantees, indemnities and exclusion clauses
  • Construction contra proferentem or strictissimi juris
  • = Ambiguity resolved against party seeking to enforce clause or helping the party who will be disadvantaged by that term.
    • Pan Foods; Andar;
    • CCP Australian Airships Ltd v Primus

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