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High Court reinforces approach to commercial contracts

Clear, unambiguous drafting will assist prevent confusion around the meaning of the terms of a contract and will reduce the risk of parties coming into disagreement over their contractual rights and obligations.

In this post, we revisit the High Court's approach to the construction of commercial agreements in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37.

Handing down its judgment, the Court affirmed the key legal principles governing the interpretation of commercial contracts (as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24 and Electricity General Corporation v Woodside Energy Ltd [2014] HCA 7) including, in particular, when it is necessary or appropriate to look beyond the terms of the contract.

“the parties ... intended to produce a commercial result".”

The key principles governing the interpretation and construction of commercial agreements were restated by the Court as follows:

  • The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

  • 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.

  • If it becomes necessary to look beyond the terms of the contract then each of the events, circumstances and things external to the contract to which recourse may be had is to be objective.

  • What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating.  What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.

  • Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result".  Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".

Unresolved ambiguity

This case did not address an important question on which intermediate courts of appeal currently are divided: whether ambiguity in a contract must be demonstrated before having recourse to external matters.

Until that question is expressly addressed by the High Court, Codelfa remains the authority for the principle that it is not necessary to establish ambiguity before having recourse to external matters.

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