Laws2111 Lecture10a 2011

Contractual Interpretation

  • Look to the plain, ordinary, natural meaning first (Codelfa)
  • Look at the text in context of the entire contract and surrounding factual matrix (Toll v Alphapharm)
  • Don’t isolate a term or agreement from that factual matrix
  • Only look at what an OJBECTIVE BYSTANDER would perceive – not the subjective beliefs of the parties (BNP Paribas)
  • Admissible extrinsic evidence to determining the meaning of the contract is VERY limited – in modern commercial transactions, you can bring in facts to show what both parties knew prior to the transaction, and the general purpose of transactions of that type, but nothing to demonstrate subjective goals or purposes. (Franklins v Metcash)
  • Cannot refer to non-final negotiations, as they’re unhelpful – only the final document records the consensus of the parties (Prenn v Symonds)
    • Purchased company and subsidiary subject key employee of subsidiary staying on and getting a bonus if the company earns enough profit – held that it DID include the subsidiaries profit, according to ‘commercial good sense’ (primarily means of resolving ambiguity in commercial contracts)
  • Parties CAN establish objective background facts and what they knew prior to entering the contract, to put the court in the same ‘factual matrix’ (Reardon Smith v Hansen Tangen)
    • Hirer refused to accept a ship built in another yard as the contract specified the ship by construction yard rather than name
    • Held the yard was merely an identifier, not a term – no breach had occurred
  • To admit ANY form of extraneous evidence traditionally required an ambiguity of some kind – if the contract is clear on its face, the parol evidence rule applies (Codelfa, Royal Botanic Gardens)
  • Modern approach is broader – can consult extrinsic evidence to determine if there IS an ambiguity (BNP Paribas)
  • Any extraneous information must be RELEVANT to a fact in issue (Metcash)
  • Cannot rely on later conduct to help determine the objective interpretation at the time of contractual formation (Codelfa)
  • However, recent rulings HAVE looked at later conduct to IDENTIFY the existence of terms – but not to interpret them (County Securities)
  • Single exception: Equitable doctrine of rectification
  • “Good Lawyer Practices” – try to bring in extrinsic evidence for a ‘rectification’ claim, just to expose to the judge to it.

Purposive Approach

  • Lord Hoffman advocates looking at the background and purpose of the contract to resolve ambiguity in the terms, as people make mistakes is language sometimes that can be clarified with that context (Investors’ Compensation Scheme v. West Bromwich Building Society)
  • Example – “any breach” probably isn’t meant to apply to a trivial breach of a non-essential clause – could be read as “any repudiatory breach”
  • Court will reject ‘semantic’ analysis of terms that flout common sense, particularly common commercial sense.
  • High Court in ABC v Australian Performing Rights Association favoured only interpreting pre-existing ambiguity, rather than looking for it. But that was in 1973 – more recent cases such as Toll v Alphapharm favour a broader analysis.
  • Modern Qld approach as expressed in Elderslie Property Investments involves looking at surrounding circumstances and purpose of the transaction to ‘ascertain and give effect to the intentions of the contracting parties’. (Seems to be the approach favoured in Toll v Alphapharm as well)
  • Modern English approach goes even further – proposes correctly contracts that make sense if the background suggests the wrong words were chosen. Unlikely to be good law in Australia, at least at this point.

Specific ‘rules’ of interpretation

  • Expressio Unius (an express mention excludes those not mentioned)
  • Ejusdem Generis (general term read in context of specific terms)
  • Favour interpretations that preserve validity, rather than frustrating the contract or voiding terms for uncertainty
  • Favour additional clauses specifically written for that contract over general ‘riders’ attached containing generic terms. The goal is give priority to the specific intentions of the parties (The Starsin)
  • Preserve the ‘main purpose and intent’ (Glyn v Margetson – read ‘any port’ as ‘any port en route’)
  • Can’t abuse a breach to obtain a benefit (eg. Wrongfully dismissed employees won’t lose share options even if contract states options are lost if their employment ceases for any reason)

Australia Approach

  • Current Australian Approach is that adopted in Darlington Futures v Delco for both exclusion and limitation clauses.
    • Start with plain language interpretation in the context of the contract and its purpose (not quite 4 corners approach, but close enough)
    • If multiple potential interpretations are available, then interpret contra proferentem – against in the interests of the party relying on the exclusion/limitation clause
    • Effect: Being read in context, ‘trading activity undertaken on behalf of the client’ can be read as ‘trading activity undertaken with the clients authority’, but ‘any liability’ including claims ‘in connection with the relationship’ was much broader, and offered no alternative interpretation.
    • This only applies in commercial contracts, where there is no question of reasonableness/fairness – for consumer contracts, look to the ACL

Learning Guide Cases

Pacific Carriers v BNP Paribas
Relevant To: Interpretive approach – objective approach
Issue: Did the signature of a bank manager (with no particular authority to issue indemnities) on an indemnity form that she THOUGHT she was merely signing as a ‘witness’, rather than on her behalf) objectively indicate that the bank had also agreed to indemnify a third party?
Held: Yes, it did. The third party could only rely on what the contract objectively indicated, not on what the parties thought they were signing.

Toll v Alphapharm
Relevant To: Incorporation of Terms – effect of signature. Objective interpretive approach.
Issue: Was the signature by an agent the plaintiff on a document that clearly identified itself as contract (please see conditions of contract overleaf) and contained no unusual terms sufficient to bind both the agent and the plaintiff, even though neither had read or subjectively accepted the terms?
Held: Yes it was – the signature was an objective indication of assent (which was the preferred approach as per Codelfa) and it had been relied on as indicating assent – however they mentioned the approach to incorporation of terms taken in ticket cases can still apply – it merely wasn’t relevant here, with no unusual terms, plenty of time to consider, etc.

Codelfa Construction Pty. Ltd. v. State Rail Authority (NSW) (1982) 149 CLR 337 (extrinsic evidence)
Relevant To: Implied Terms – BP Refinery Test. Interpretive approach
Issue: Was there an implied term to the effect that if the construction work was delayed because statutory authority was not a valid defence to nuisance, the construction company would not have to pay for failing to meet their deadlines?
Held: No, there was not. Both parties clearly anticipated that it was a valid defence. Had they identified it might not be, there were many possible outcomes. Contracts should be read according to their plain and ordinary meaning. It was not ‘so obvious’ what they would have concluded.
HC adopted the BP Refinery test for implying terms, which requires:
(1) it must be reasonable and equitable;
(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
(3) it must be so obvious that “it goes without saying”;
(4) it must be capable of clear expression;
(5) it must not contradict any express term of the contract.

*Franklins v Metcash
Relevant To: Interpretive approach – modern Australian approach
Use for: (1) In a business context, the preferred interpretation is the one that meets the commercial purpose of the contract.
(2) Extrinsic evidence can be applied to identifying, as well as interpreting, ambiguity – so long as its probative and relevant to the issues. This can include post contractual acts that indicate what the parties were aware of at the time of the contract.

Investors’ Compensation Scheme v West Bromwich Building Society
Relevant To: Interpretive approach – broader English approaches
Cite for: Hoffman’s purposive approach, rather than Australian objective approach.

Chartbrook v Persimmon Homes
Relevant To: Interpretive approach – broader English approaches
Cite for: Hoffman’s purposive approach taken a step further – actually reconstructing the contract in a more purposive manner, even without ambiguity. NOT ADOPTED IN AUSTRALIA

*Elderslie Property Investments v Dunn
Relevant To: Interpretive approach – modern Australian approach
Cite for: Modern Queensland approach – objective intention of parties, looking at extrinsic evidence to determine the knowledge and purpose of the parties so far as necessary, and giving commercial contracts a businesslike interpretation.

*Darlington Futures v Delco
Relevant To: Interpretive approach – exclusion/limitation clauses
Issue: Did an exclusion and/or limitation clause apply to prevent the liability for unauthorised broker transactions?
Held: Yes, the limitation clause did. Current approach to interpretation is identical for both, and involves taking the plain language meaning of the clause interpreted in light of the contract as a whole, and then interpreting any ambiguity at THAT point contra proferentem.

Sydney City Council v West
Relevant To: Interpretive approach – exclusion/limitation clauses – 4 corners
Issue: Did an exclusion clause preventing any liability still operate for gross negligence outside of the anticipated scope of the conduct? (Permitting the theft of a car from a car park without requiring the ticket be presented)
Held: No, it did not. It was outside of the ‘four corners’ of the contract, as the contract required the ticket be presented to depart the car park.

Nisho Iwai v Malaysian International Shipping
Relevant To: Interpretive approach – exclusion clauses.
Issue: Were stolen prawns after discharge covered by a clause preventing liability after delivery or for anything the “Carrier” could not prevent by reasonable diligence?
Held: Yes, they were. Applying a Darlington ‘plain language as read in the context of the contract as a whole’ approach, ‘mere discharge’ was not delivery, it only applied to things the carrier company could directly prevent by reasonable diligence, not their sub-contractors or employees

Van der Sterren v Cibernetics
Relevant To: Interpretive approach – exclusion clauses
Issue: Was a clause preventing liability unless notified within 14 days sufficient to prevent liability for difficult to identify defects?
Held: Yes it was – the clause was sufficiently clear and had no ambiguity.

TNT v May & Baker
Relevant To: Interpretive approach – 4 corners approach/fundamental breach
Issue: Did an exclusion clause prevent liability for a fire during storage in a private residence, rather than a depot as specified by the contract?
Held: No it did not. However, this was not due to a fundamental breach preventing the clause from applying, but rather because, as a matter of INTERPRETATION, exclusion clauses will be read to only apply to authorised acts unless the language clearly applies to unauthorised ones as well.

Wallis Son & Wells v Pratt & Haynes
Relevant To: Interpretive approach – contra proferentem
Issue: Did an exclusion clause excluding any warranties, express or implied, apply to excluding all warranties and conditions (common language definition) or only ‘non-essential’ warranties, compared to essential conditions (narrow legal definition)?
Held: It should be interpreted contra proferentem, against the interests of the party relying on it, and as such only apply the narrow legal definition.