Contract Law

Macdonald Rudder are lawyers based in Perth. We have extensive knowledge in a broad range of business and commercial dealings with a primary emphasis on the drafting and construction of contracts.

Contracts are the bedrock of commercial law. Care and skill is required in drafting them and in interpreting or construing them after the event.

Construction of a contract: Principles

The primary duty of the court in construing an instrument is to endeavour to discover the intention of the parties as embodied in the words they have used in the instrument: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109 110.

It is the objectively ascertained intention of the parties, as it is expressed in the instrument, that matters, not the parties' subjective intentions. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood the terms to mean: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40]; Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 [98].

An instrument should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience: Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530 [82]; Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 [43]. However, as Gleeson CJ, Gummow and Hayne JJ observed in Maggbury [43], what comprises 'business commonsense' in respect of a particular contract, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible.

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 350, Mason J said:

In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating (995 996).

That passage has been cited with approval in many cases since, including in the High Court. See, for example, Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 [10]; Pacific Carriers Ltd v BNP Paribas [22]. Thus it seems clear from these cases, that the objectively ascertained purpose and objective of the transaction may be taken into account in construing the instrument. See also Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 [8], [53].

However in Codelfa at [35] Mason J, with Stephen & Wilson JJ agreeing, said with emphasis added:

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.

Controversy rages as to the meaning and scope of this true rule.

The apparent purpose or object can be inferred from the express and implied terms of the contract, and from any admissible evidence of surrounding circumstances: Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq) [2008] WASCA 80; (2008) 36 WAR 342 [41].

The use of precedents in drawing a contract

In choosing your commercial lawyer the words of Young CJ in Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 (28 May 2008) at [496] should be kept in mind.

People do not go to solicitors just so that the solicitor can earn a fee by pulling out a form from his or her computer and instructing a word processing clerk how he or she should fill out the blanks. A solicitor earns his or her money by directing his or her mind to the transaction and the risks that need to be covered and the advice that needs to be given to the client. Doubtless it is very tempting in a transaction which looks at first sight to be the same as thousands of other transactions that have been processed by the solicitor, and where it appears that there is no fraud, to just adopt the policy of “one size fits all”. If that were all the solicitor was to do, then an unqualified clerk in the mortgagee’s employee could do the same task far more efficiently and cheaply. So, the solicitor is there to direct his or her mind to the transaction.

At [495] his Honour noted the comments of the editors to the�Law Book Company’s Practical Forms and Precedents�in 1957, Vol,1 p xxi that:

“The transactions of modern society are so varied, that it would be impossible to devise a set of precedents which would suit all occasions.....Not even a line should be copied from a precedent without proper consideration of its meaning and effect, and its application to the then instant transaction. Precedents are not made for the ignorant. They are only in aid, in method and expression, to those who know their subject, and a reminder of dangers to be avoided, and of provisions which should not be overlooked. The draftsman...should have an exact knowledge or understanding of the meaning and legal significance of every phrase and clause in a precedent, and the reason for the retention or the omission of any phrase or clause in such precedent.”

Commercial certainty

The High Court in Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 emphasised the concern with which courts view delays in the conduct of commercial litigation. As stated by Heydon J:

... Those claims rest on the idea that a failure to resolve commercial disputes speedily is injurious to commerce, and hence injurious to the public interest ... Commercial life depends on the timely and just payment of money. Prosperity depends on the velocity of its circulation. Those who claim to be entitled to money should know, as soon as possible, whether they will be paid. Those against whom the entitlement is asserted should know, as soon as possible, whether they will have to pay. In each case that is because it is important that both the claimants and those resisting claims are able to order their affairs. How they order their affairs affects how their creditors, their debtors, their suppliers, their customers, their employees, and, in the case of companies, their actual and potential shareholders, order their affairs. The courts are thus an important aspect of the institutional framework of commerce. The efficiency or inefficiency of the courts has a bearing on the health or sickness of commerce [137].

On the benefit and otherwise of arbitration

For those contemplating arbitration as opposed to litigation, the observations of Heydon J in Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37 at [110] are apposite, namely:

The arbitration proceedings began on 15 October 2004 when Gordian served points of claim. This appeal comes to a close seven years later. The attractions of arbitration are said to lie in speed, cheapness, expertise and secrecy. It is not intended to make any criticisms in these respects of the arbitrators, of Einstein J, or of the Court of Appeal, for on the material in the appeal books none are fairly open. But it must be said that speed and cheapness are not manifest in the process to which the parties agreed. A commercial trial judge would have ensured more speed and less expense. On the construction point it is unlikely that the arbitrators had any greater relevant expertise than a commercial trial judge. Secrecy was lost once the reinsurers exercised their right to seek leave to appeal. The proceedings reveal no other point of superiority over conventional litigation. One point of inferiority they reveal is that there have been four tiers of adjudication, not three. Comment on these melancholy facts would be superfluous.