The determination of a commercial dispute often involves a dispute over the meaning of terms of a contract, or their application in a given situation.

The first step for a court in resolving a contractual dispute usually involves identifying the relevant provisions of the contract applicable to the dispute and then determining (or “constructing”) the meaning of those terms, prior to attempting to apply them to the facts of the particular case.

While there can be significant variation in the types of contract and their terms, over the last centuries the courts have developed a set of general principles to apply when constructing contracts to ensure the consistent application of the common law in Australia.

Contract construction principles

 In the Victorian appeal case of Reliance Franchise Partners PtyLtd v Ford Kinter & Associates Pty Ltd,^[1] Appeal Justices Whelan, Niall, and Hargrave jointly summarised the principles of construction as follows:

1. 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.
2. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable business person would have understood those terms to mean.
3. That inquiry 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.
4. 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.
5. However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding of the genesis of the transaction, the background, the context and the market in which the parties are operating. It may be necessary in determining the proper construction where there is a constructional choice.
6. Each of the events, circumstances and things external to the contract to which recourse may be had is 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.
7. 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’.
8. The Court should have regard to all of the words used in the agreement so as to render them all harmonious one with another and to ensure the congruent operation of the various components as a whole.

Conclusion

The above principles succinctly summarise the main principles applied by the common law courts of Australia when attempting to determine the legal meaning of contractual terms relevant to a particular commercial dispute, however application of those principles can be quite challenging and can result in differing opinions in particular cases by different legal practitioners.  

Failure to properly construct the meaning of a contract from the outset can lead to a defective case, unnecessary litigation and ultimately failed litigation.  Accordingly, it is essential in a dispute involving the application of contractual terms, that the contract is properly reviewed and constructed by a competent, experienced legal professional as early as possible, and prior to launching into contested litigation.

Law Force specialises in resolving commercial contract disputes and remains ready to step in to resolve the dispute in your favour.

‍

Citations

[1] [2018] VSCA 106,[17] to [18] (citations omitted), citing French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104, 116–17 [46]–[51].

‍

Disclaimer – Reliance on Content

The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.