Mclauchlan, David --- "Contract Interpretation: What Is It About?" [2009] SydLawRw 1; (2009) 31(1) Sydney Law Review 5
* Professor of Law, Victoria University of Wellington; Honorary Professor, TC Beirne School of Law, The University of Queensland. This article was written in 2008 while I was the McWilliam Professor in Commercial Law at The University of Sydney.
1 However, academic interest in the subject has increased markedly in recent years and there are now some excellent new books on the subject: see, for example, Gerard McMeel, The Construction of Contracts: Interpretation, Implication and Rectification (2007); and Catherine Mitchell, Interpretation of Contracts (2007). See also the valuable commentaries in Sarah Worthington (ed), Commercial Law and Commercial Practice (2003); and Andrew Burrows and Edwin Peel (eds), Contract Terms (2007).
[2]See Sir Robert Goff, ‘Commercial Contracts and the Commercial Court’ [1984] Lloyd’s Maritime and Commercial Law Quarterly 382 at 385: ‘In point of fact, if not the meat and drink, then at least the staple diet, of the Commercial Court can be summed up in one word — “Construction”. Commercial lawyers — solicitors, barristers and judges — spend a very substantial part of their time interpreting contracts. There is a dispute as to the meaning and effect of a binding contract in the circumstances which have occurred — and practitioners have to advise, and the court may be asked to decide, for example, what meaning is to be attached to certain express words in the contract, or how apparently conflicting provisions in the contract are to be reconciled, or even whether, and if so how, an apparent lacuna in the contract can be filled. In these cases, we are very often concerned with minutiae in terms of language — though minute differences in wording, or in the interpretation of words, can have a profound effect in practice.’
[3]Richard Calnan, ‘Construction of Commercial Contracts: A Practitioner’s Perspective’ in Burrows and Peel, above n1 at 17.
[4]Who could have predicted the outcomes in, to name just a few cases, Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289 (High Court of Australia), Haines v Carter [2002] UKPC 49; [2003] 3 NZLR 605 (Privy Council), Yoshimoto v Canterbury Golf International Ltd [2004] 1 NZLR 1 (Privy Council) (‘Yoshimoto’), or indeed in the leading case itself of Investors Compensation Scheme Ltd v West Bromwich Building Soc [1997] UKHL 28; [1998] 1 WLR 896 (‘ICS’) (House of Lords)? Of course, sometimes the answers are relatively obvious but cases are taken to the highest appellate courts because of the large amount of money at stake. For recent examples see the two restrictive covenant cases of Thompson v Battersby [2008] NZCA 84 (a proposed wall and deck extension not a ‘building’) and Big River Paradise Ltd v Congreve [2008] NZCA 78; [2008] 2 NZLR 402 (Court of Appeal), aff’d [2008] NZSC 51; [2008] 2 NZLR 589 (Supreme Court) (a covenant restricting ‘subdivision’ of the servient tenement to three ‘allotments’ prevented the owner creating 52 leasehold interests).
[5]See Deutsche Genossenschaftsbank v Burnhope [1996] 1 Lloyd's Rep 113 (‘Deutsche Genossenschaftsbank’) at 122 (Lord Steyn): ‘Often a question of construction can only be solved as a matter of first impression.’ See also Johan Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ [2003] SydLawRw 1; (2003) 25 Sydney Law Review 5 at 8: ‘Educated intuition may play a larger role than an examination of niceties of textual analysis’; and Sir Kim Lewison, The Interpretation of Contracts (4th ed, 2007) at para 2.12 and the cases cited therein.
[6]See A L Corbin, Corbin on Contracts (rev ed, 1960) vol 3, at §535, 17–18: ‘It is true that when a judge reads the words of a contract he may jump to the instant and confident opinion that they have but one reasonable meaning and that he knows what it is. A greater familiarity with dictionaries and the usages of words, a better understanding of the uncertainties of language, and a comparative study of more cases in the field of interpretation, will make one beware of holding such an opinion so recklessly arrived at.’
[7]See, for example, Cook v Financial Insurance Co Ltd [1998] UKHL 42; [1998] 1 WLR 1765 (House of Lords); Melanesian Mission Trust Board v AMP Society [1997] 1 NZLR 391 (Privy Council); Sunflower Services Ltd v Unisys New Zealand Ltd [1997] 1 NZLR 385 (Privy Council).
[8]See, for example, Deutsche Genossenschaftsbank [1996] 1 Lloyd's Rep 113 (majority of House of Lords accepting an interpretation which was rejected by the Court of Appeal and castigated by Lord Steyn (at 124) as contrary to ‘business common sense’); Lim v McLean [1997] UKPC 10; [1997] 1 NZLR 641 (majority of Privy Council upheld an interpretation which the two dissenting judges and three Court of Appeal judges thought (at 649) made ‘no sense commercially’); and Sinochem International Oil (London) Co Ltd v Mobil Sales and Supply Corp [2000] 1 Lloyd’s Rep 339. The judges who heard the latter case were evenly split as to which interpretation made better commercial sense. Kennedy LJ (dissenting) could see ‘nothing objectionable or non-commercial’ (at [36]) in the interpretation favoured by the trial judge, whereas the majority judges regarded that interpretation as ‘capricious and cumbersome in its operation and effects’ (at [26]). As pointed out by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at [43], ‘what in respect of a particular contract comprises “business commonsense”, 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’. See also J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81 Australian Law Journal 322 at 330: ‘There can be no doubt that a “business-like” interpretation or reliance on “business commonsense” is an acceptable constraint on contractual interpretation. The only difficulty is that, at least when the matter comes to the level of litigation, each party remains convinced that “a business like” [sic] interpretation or “business commonsense” happens to coincide with its own commercial interests. This is not always easy to resolve.’ For a recent illustration, see Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5, discussed in D W McLauchlan, ‘Plain Meaning and Commercial Construction: Has Australia Adopted the ICS Principles?’ (2009) 25 JCL 7 at 29–32.
[9][1997] UKHL 28; [1998] 1 WLR 896 at 912–13.
[10]See the attempts to marry the old and new approaches to interpretation in, for example, Liberty Grove (Concord) Pty Ltd v Mirvac Projects Pty Ltd [2008] NSWSC 113 at [16]–[20]; Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2008] NSWSC 274 at [26]–[28]; Casella v Hewitt [2008] WASCA 13; (2008) 36 WAR 1 at [70]–[71]; Mabbett v Watson Wyatt Superannuation Pty Ltd [2008] NSWSC 365 at [43]; and North Sydney Leagues Club Ltd v Synergy Protection Agency Pty Ltd [2008] NSWSC 413 at [16].
[11]See, for example, Ansley v Prospectus Nominees Unlimited [2004] NZCA 14; [2004] 2 NZLR 590 at [36] (the New Zealand Court of Appeal refused to ‘accept the proposition that the factual matrix is to be considered only where there is ambiguity in the terms of a contract’); Static Control Components (Europe) Ltd v Egan [2004] 2 Lloyd’s Rep 429 (‘Static Control’) at [27] (Arden LJ): ‘in principle, all contracts must be construed in the light of their factual background, that background being ascertained on an objective basis. Accordingly, the fact that a document appears to have a clear meaning on the face of it does not prevent, or indeed excuse, the court from looking at the background’; and Westminster City Council v National Asylum Support Service [2002] UKHL 38; [2002] 1 WLR 2956 at [5] (Lord Steyn): ‘The starting point is that language in all legal texts conveys meaning according to the circumstances in which it was used. It follows that the context must always be identified and considered before the process of construction or during it. It is therefore wrong to say that the court may only resort to evidence of the contextual scene when an ambiguity has arisen ... [I]n his important judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896, 912–13, Lord Hoffmann made crystal clear that an ambiguity need not be established before the surrounding circumstances may be taken into account.’
[12]See, for example, Alan Berg, ‘Thrashing through the Undergrowth’ (2006) 122 Law Quarterly Review 354; Calnan, above n3; and Don Holborow, ‘Contract Interpretation’ [2004] New Zealand Law Journal 272.
[13]Steyn, above n5 at 9.
[14]Berg, above n12 at 358.
[15]Id at 359. In Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37; [2008] 1 NZLR 277 (‘Gibbons Holdings’) at [119] Thomas J said that ‘[n]otwithstanding his express denial, [Berg’s] approach would herald a retreat to “literalism”’.
[16]Ibid.
[17]Spigelman, above n8 at 335. Compare, however, the opposite point of view expressed by Thomas J in Gibbons Holdings [2007] NZSC 37; [2008] 1 NZLR 277 at [121]: ‘Berg’s suggestion that the accepted wisdom that contracts are addressed to the original parties is a “fiction” is unsupportable. For the most part, parties wish their interests to be advanced and protected, and their legal advisers draft their contracts to advance and protect those interests. While there is the possibility that one or other of the parties may wish to assign their interest in the contract, assuming that they are contractually able to do so, the primary concern will be to secure the bargain the parties have struck. One of the parties will have paid or given good consideration for that advantage. Furthermore, many contracts, such as one-off contracts, by their very nature are unlikely to be addressed to potential third parties. Common examples are contracts for the sale of property. Then, relational or long-term contracts will, again for the most part, seek to define the relationship which the parties intend to endure throughout the duration of the contract. Contracts will be and are assigned, but to suggest that it is a “fiction” that they are not for the most part addressed to the original parties is a signal overstatement.’ See also Lord Bingham of Cornhill, ‘A New Thing under the Sun? The Interpretation of Contract and the ICS Decision’ (2008) 12 Edinburgh Law Review 374 at 387–8. The author endorsed the view of Arden LJ in Static Control [2004] 2 Lloyd’s Rep 429 at [29] that ‘the principles in the ICS case lead to a more principled and fairer result by focusing on the meaning which the relevant background objectively assessed indicates that the parties intended’ and added: ‘Notable for its absence in the criticisms made of the ICS formulation is the one accusation which, if established, would be truly damaging: that application of this approach leads to a construction of contractual documents which does not reflect the commercial intentions of the parties. Unless that criticism can be made and brought home, it would need compelling arguments to displace the current approach to the task of seeking to give effect to the reasonable expectations of honest men.’
[18]See, for example, Sir Christopher Staughton, ‘How do the Courts Interpret Commercial Contracts?’ (1999) 58 Cambridge Law Journal 303 at 304: ‘Rule One [of contract interpretation] is that the task of the judge when interpreting a written contract is to find the intention of the parties. In so far as one can be sure of anything these days, that proposition is unchallenged.’
[19]A L Corbin, Corbin on Contracts (rev ed 1963) vol 1, at §106, 476.
[20]Calnan, above n3 at 20.
[21]Id at 21.
[22]See, for example, Gerard McMeel, ‘Prior Negotiations and Subsequent Conduct: The Next Step Forward for Contractual Interpretation’ (2003) 119 Law Quarterly Review 272; Ewan McKendrick, ‘Interpretation of Contracts: Lord Hoffmann’s Restatement’ in Worthington, above n1 at 139, 154–7; Donald Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review 577; and Andrew Burrows, ‘Construction and Rectification’ in Burrows and Peel, above n1 at 77.
[23]D W McLauchlan, ‘Contract Formation, Contract Interpretation, and Subsequent Conduct’ [2006] UQLawJl 7; (2006) 25 University of Queensland Law Journal 77 at 93.
[24]Calnan, above n3 at 18.
[25]The article does not consider the effect of so-called ‘entire agreement’ clauses: clauses stating, for example, that the agreement constitutes the entire contract between the parties and supersedes all prior representations, agreements, negotiations or understandings. It is highly questionable whether such clauses are effective to preclude the promisee from alleging the existence of a collateral contract or oral term, let alone relying on prior negotiations to ascertain the meaning of a term actually contained in the written contract: ProForce Recruit Ltd v The Rugby Group Ltd [2006] EWCA Civ 69 (‘ProForce Recruit’) at [41], [59]. See generally Elisabeth Peden and J W Carter, ‘Entire Agreement — and Similar — Clauses’ (2006) 22 Journal of Contract Law 1; Catherine Mitchell, ‘Entire Agreement Clauses: Contracting Out of Contextualism’ (2006) 22 Journal of Contract Law 222; and Mitchell, above n1 at 131–48.
[26]See generally Lewison, above n5 at para 2.13.
[27]See E Allan Farnsworth, Farnsworth on Contracts (2nd ed, 1990) vol 2, at 254: ‘In many disputes arising out of contemporary business transactions ... the parties gave little or no thought to the impact of their words on the case that later arose. Perhaps the contract is embodied in a printed form that neither party prepared; perhaps its clauses have been lifted from a form book; perhaps the deal is a routine one struck by minor functionaries … The court will then have no choice but to look solely to a standard of reasonableness. Interpretation cannot turn on meanings that the parties attached if they attached none, but must turn on the meaning that reasonable persons in the positions of the parties would have attached if they had given the matter thought. If the contract is on a widely used standard form, the use of this purely objective test has the advantage of promoting uniform interpretation, without regard to the chance circumstances of the parties’.
[28]Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617 (‘Dreux Holdings’) at 632. In the more recent case of Gibbons Holdings [2007] NZSC 37; [2008] 1 NZLR 277 at [96] (SC) his Honour said, inter alia: ‘The doctrine [of presumed intent] has necessarily had an impact on the way judges and lawyers approach contractual interpretation in general. Aware that in many, if not most, cases the parties did not, because of unforeseen events, have an actual intention in respect of the particular clause in issue, the doctrine permits Judges and lawyers to arrive at an interpretation without compromising the basic premise that the contract must not be interpreted subjectively. The presumed intent is imputed to the parties. Inevitably, and understandably, judges and lawyers come to impute an intention to the parties without questioning the process. The imputation becomes a habit of thought or attitude of mind.’
[29]Good recent examples are provided by Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 (‘Ryledar’) and Chartbrook Ltd v Persimmon Homes Ltd [2008] EWCA Civ 183 (‘Chartbrook’).
[30][1997] UKHL 19; [1997] AC 749 (‘Mannai Investment’).
[31]ICS [1997] UKHL 28; [1998] 1 WLR 896 at 913.
[32]Mannai Investment [1997] UKHL 19; [1997] AC 749 at 774.
[33][2001] UKHL 8; [2002] 1 AC 251 (‘Bank of Credit and Commerce’). See also Bingham, above n17 at 376: ‘it is one thing to abjure pedantic literalism, as we all do; it is quite another to suggest that the terms in which the contracting parties have chosen to express their bargain are not in all cases important and in most decisive’.
[34]Bank of Credit and Commerce [2001] UKHL 8; [2002] 1 AC 251 at [39]. It is interesting to note that Lord Hoffmann was the dissenting judge in this contentious case. He criticised the majority (at [37]) for giving ‘too little weight to the actual language and background’ of the document in question. It cannot be suggested, however, that he was backtracking from his principles. He was simply unconvinced that there was anything in the background that would lead a reasonable person to think that the parties must have departed from conventional usage of the words. See Mitchell, above n1 at 44–7.
[35]Holborow, above n12 at 274.
[36]For this reason the High Court of Australia in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [35] was justifiably critical of the attention paid by the trial judge to ‘[w]ritten statements of witnesses, no doubt prepared by lawyers, [that] were received as evidence in chief’ which contained ‘largely irrelevant information about the subjective understanding of the individual participants in the dealings between the parties’.
[37]See, for example, Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (‘Codelfa’) at 352: evidence of ‘the actual intentions, aspirations or expectations of the parties before or at the time of the contract’ is not admissible because the court’s task is to determine the ‘presumed intention’ of the parties; and McLaren v Waikato Regional Council [1993] 1 NZLR 710 at 725. See also Kim Lewison, The Interpretation of Contracts (3rd ed, 2004) at 29: ‘Once it has been established that a contract has been formed, the actual intentions of the parties as to the meaning or effect of the contract become irrelevant.’ This statement appears to have been omitted from the author’s fourth edition (above n5).
[38]Nicholls, above n22 at 583 (see text at n115 for the full quotation). In the recent case of Gibbons Holdings [2007] NZSC 37; [2008] 1 NZLR 277 at [122] Thomas J said: ‘The notion that an intention can be imposed on the parties contrary to their actual intention is repugnant to any concept of fairness, common sense and the reasonable expectations of honest men and women. It should be repugnant to the common law.’
[39]See Ryledar [2007] NSWCA 65; (2007) 69 NSWLR 603 at [266] (Campbell JA): ‘a subjective intention to use words with some meaning other than the meaning that an ordinary hearer of the words would put on them, if the hearer were not in the specific context in which the words were spoken, comes to be taken into account, in deciding what are the terms of the contract, only because there is some form of communication between the parties, or context, such that a reasonable person would realise that the more usual meaning of the words was not intended’.
[40]J B Thayer, A Preliminary Treatise on Evidence at the Common Law (1898) at 428–9.
[41]Prenn v Simmonds [1971] 1 WLR 1381 (‘Prenn’) at 1385 (Lord Wilberforce).
[42]ICS [1997] UKHL 28; [1998] 1 WLR 896 at 912.
[43]Id at 913.
[44][1976] 2 Lloyd’s Rep 708 (‘The Karen Oltmann’).
[45]Id at 713.
[46]Id at 710.
[47]Id at 712.
[48]D W McLauchlan, ‘Common Assumptions and Contract Interpretation’ (1997) 113 Law Quarterly Review 237.
[49]See ProForce Recruit [2006] EWCA Civ 69. See also, for example, Travelers Casualty & Surety Company of Canada v Sun Life Assurance Company of Canada (UK) Ltd [2006] EWHC 2716 (Comm) at [95]; Jones v Bright Capital Ltd [2006] EWHC 3151 (Ch) at [23]; and Great Hill Equity Partners II LP v Novator One LP [2007] EWHC 1210 (Comm) at [54]–[59].
[50]See Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 (‘Spunwill’) at 309; LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 at [74]–[78]; BP Australia Pty Ltd (formerly BP Australia Ltd) v Nyran Pty Ltd [2003] FCA 520; (2003) 198 ALR 442 at [34]; Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2003] NSWSC 288 at [71]; and Gate Gourmet Australia Pty Ltd v Gate Gourmet Holding AG [2004] NSWSC 149 [182]. In the latter case Einstein J at [182] cites Codelfa (1982) 149 CLR 337 and The Karen Oltmann as authority respectively for the ‘unexceptional’ propositions that ‘[e]xtrinsic evidence is admissible to show that a particular contractual interpretation or a particular implied term which might otherwise arise was specifically considered and rejected by the parties’ and that ‘[c]onversely, extrinsic evidence is admissible to show that the parties by agreement or common assumption adopted a particular interpretation of a word or words in a written document’. The first proposition is based on Mason J’s statement in Codelfa, after he stressed (at 352) that evidence of statements and actions in the course of the parties’ negotiations ‘which are reflective of their actual intentions and expectations’ is not admissible, that ‘[t]here may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention’, namely (at 352–3): ‘If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract 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.’ See further D W McLauchlan, ‘Objectivity in Contract’ [2005] UQLawJl 28; (2005) 24 University of Queensland Law Journal 479 at 488–9.
[51]Air New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218 (Court of Appeal).
[52]According to Johan Steyn, ‘Written Contracts: To What Extent May Evidence Control Language’ (1988) 41 Current Legal Problems 23 at 29, it has the potential to ‘swallow up the rule’.
[53]It does not matter for present purposes whether a two-contract or one-contract analysis is employed: that is, whether the agreement is a term of a separate contract, collateral to the charterparty, or term of the one contract comprising the telex communications and the terms contained in the charterparty.
[54]Berg, above n12 at 355.
[55]Id at 360.
[56] [2008] EWCA Civ 183 at [120]–[121]. See also euNetworks Fiber UK Ltd v Abovenet Communications UK Ltd [2007] EWHC 3099 (Ch) (‘euNetworks Fiber’) at [194]–[195] (Briggs J): ‘[Counsel argued] that, for there to be established a private dictionary between the parties, it is necessary to show that the meaning which it is desired to be ascribed to the particular word, phrase or term is one upon which the parties expressly or by necessary implication agreed, rather than merely one about which, without any mutual discussion about it, they can be shown to have had a common understanding …I am not persuaded that this is a rigid exclusionary rule. Kerr J used both the words of mutual agreement and common intention in his definition of the principle. In my judgment, if there is a private dictionary principle at all which admits evidence of the parties' negotiations in aid of construction, the better view is that the question whether the private meaning was expressly or impliedly agreed, or merely the subject of a common understanding, goes to the weight rather than to the admissibility of that evidence.’
[57]See Corbin, above n6 (1971 Pocket Part) at §543A: ‘Words, in themselves alone, have no “meaning”; it is always some person who has a “meaning”, a person who uses them to convey his thoughts (his “meaning”), or a person who hears or reads the words and thereby receives a “meaning” and understanding (a “meaning” and thoughts that are his own). This latter person may be one who is a party to the agreement, the judge, or any other third person.’ [original emphasis].
[58]Stephen A Smith, Contract Theory (2004) at 273–4. See further McLauchlan, above n50 at 488–97.
[59]See further D W McLauchlan, ‘The Plain Meaning Rule of Contract Interpretation’ (1996) 2 New Zealand Business Law Quarterly 80 at 89–91.
[60]Corbin, above n6 at §544, 157. See also A L Goodhart, ‘Mistake as to Identity in the Law of Contract’ (1941) 57 Law Quarterly Review 228 at 230: ‘It is always possible ... for either the offeror or the offeree to show that, owing to the peculiar circumstances of the case, the other party did or as a reasonable man ought to have understood the words in a sense different from the ordinary one. Thus if A says “white” when other persons would say “black,” and B knows that by “white” A means “black”, then the word “white” must be interpreted as meaning “black” when the offer is construed. Words have no inherent sanctity in themselves, but are merely labels by which things are identified. As a rule words are used in their ordinary sense, but there is nothing to prevent persons from using them to connote something else.’ Contrast the view of Clarke JA in Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (t/as ‘Uncle Ben’s of Australia’) (1992) 27 NSWLR 326 at 362: ‘I am prepared to accept that the parties may include in their written agreement a definition of a phrase used in that agreement which would indicate they had used that phrase to convey a meaning which it otherwise was not capable of bearing. It is otherwise if a party seeks to rely on an antecedent oral agreement to support a contention that the word or phrase in the written agreement bore an agreed meaning which, as a matter of English, it was not capable of bearing. In that instance the oral agreement would contradict the written contract and the parol evidence rule would prevent its reception into evidence.’ In Corbin’s view, however, the parol evidence rule has no application because (at §543, 130–1): ‘[t]he terms of any contract must be given a meaning by interpretation before it can be determined whether an attempt is being made to “vary or contradict” them’.
[61]In Benjamin Developments Ltd v Robt Jones (Pacific) Ltd [1994] 3 NZLR 189 (‘Benjamin Developments’) at 207, Gallen J said: ‘If a contract refers to apples, then it will not be open to parties to aver that the real intention was to refer to pears. Such a contention would not only do violence to the language which the parties have clearly adopted, but may be unfair to persons outside the negotiations who have taken the concluded expression of the agreement at its face value.’ The judge’s concern that allowing the parties to aver an intention contrary to the plain meaning of their language may be unfair to third parties is addressed in Part 8 of this article.
[62]Corbin, above n6 at §544, 158.
[63]Chartbrook [2007] EWHC 409; aff’d [2008] EWCA Civ 183.
[64]Id at [42]. He reiterated his view in euNetworks Fiber [2007] EWHC 3099 (Ch) at [189], drawing ‘some comfort’ (at [191]) from the fact that his reasoning had been endorsed by Aikens J in Harper v Interchange Group Ltd [2007] EWHC 1834 (Comm) at [86]–[88].
[65]Nicholls, above n22 at 586. Compare Burrows & Peel, above n22 at 95 (suggesting that The Karen Oltmann could have been decided either on the basis of contextual interpretation or rectification).
[66]Lewison, above n5 at para 3.08, 76.
[67]See, for example, Re Butlin’s Settlement Trusts [1976] Ch 251 at 260; NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 (‘NSW Medical Defence Union’) at 748; Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 (‘Bush’) at 406 (Hodgson J): ‘rectification will not be refused merely because the common mistake is as to the legal effect of the words used, rather than as to the actual words used’; and Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 (‘Carlenka’) at 345.
[68]I have elaborated on these points in D W McLauchlan, ‘The “Drastic” Remedy of Rectification for Unilateral Mistake’ (2008) 124 Law Quarterly Review 608 at 618.
[69]As in, for example, NSW Medical Defence Union (1986) 6 NSWLR 740 and Bush (1992) 35 NSWLR 390.
[70]As in, for example, Carlenka (1995) 41 NSWLR 329.
[71]Chartbrook [2008] EWCA Civ 183 at [123].
[72]He also rejected at [131] Briggs J’s view (at [44] of the High Court decision) that ‘it is at least reasonably clear that the private dictionary inroad into the exclusion of the parties’ negotiations from the admissible background ought not to extend to any case in which the word, phrase, clause or term is itself subject of an express definition in the contract itself’. As counsel for the appellant argued (at [100] of the Court of Appeal decision), ‘[t]here is no reason in logic or principle why the admissibility of (as opposed to weight given to) pre-contractual material should in any way depend (as the judge thought) upon whether the ambiguity in question is to be found within the confines of a defined term’.
[73]See further McLauchlan, above n59 at 88–9.
[74][1832] EngR 643; (1832) 3 B & Ad 728; 110 ER 266.
[75][1880] UKLawRpCh 191; (1880) 15 Ch D 181.
[76]J H Wigmore, Wigmore on Evidence (Chadbourn rev ed, 1981), vol 9, at 204.
[77][1854] EngR 537; (1854) 3 El & Bl 703 at 716; [1854] EngR 537; 118 ER 1304 at 1309.
[78]E Allan Farnsworth, ‘“Meaning” in the Law of Contracts’ (1967) 76 Yale Law Journal 939 at 965.
[79]As Briggs J said in Chartbrook [2007] EWHC 409 at [43], if ‘the private dictionary principle … [is] a rule of construction’, the question ‘as to the boundary between it and the policy exclusion of the parties’ negotiations as admissible background’ is ‘logically unfathomable’. See, however, Proforce Recruit Ltd v The Rugby Group Ltd [2007] EWHC 1621 (QB) at [87] (Cresswell J): ‘The [Karen Oltmann] exception ... should not be allowed to become a means, regularly adopted by litigants, of attempting to circumvent the fundamental principle that generally the law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent’.
[80]See, for example, Codelfa (1982) 149 CLR 337 at 352.
[81]See also euNetworks Fiber [2007] EWHC 3099 at [192] (Ch) where counsel argued that ‘a private dictionary meaning may not be used to subvert the unambiguous meaning of a word, phrase or term in a contract, but only where the word, phrase or term is on its face capable of different meanings’. Briggs J, who had earlier (at [189]) reiterated the view he expressed in Chartbrook [2007] EWHC 409 that ‘the supposed private dictionary principle … [is] an aspect of the law of rectification’, did not find it necessary to decide the point. Interestingly, however, he did say (at [193]) that: ‘The difficulty with [the] submission is that the ICS case was decided after The Karen Oltmann, and marked a watershed in admitting background circumstances as the context for the purposes of construction, even in the absence of a patent ambiguity. Furthermore, in the more recent cases (since the ICS case) which have addressed the dictionary principle, the same clear restriction enunciated by Kerr J is not to be found. He himself said that the question whether an ambiguity existed depended upon considering the disputed words “in their context”.’
[82] (1982) 149 CLR 337 at 352.
[83]Ibid.
[84]Macdonald v Longbottom [1859] EngR 635; (1859) 1 E & E 977, 120 ER 1177, a decision approved in both Prenn [1971] 1 WLR 1381 at 1384 and Codelfa (1982) 149 CLR 337 at 349.
[86]Id at 237.
[87]Ibid.
[88][2003] NZCA 103; [2003] 3 NZLR 145.
[89]Id at 156–7.
[91]Id at 959.
[92]Ibid.
[93]Id at 959–60.
[94]Id at 960.
[95]Ibid.
[96] (1981) 149 CLR 337 at 352.
[97][2003] FCA 520; (2003) 198 ALR 442 at [34]. This passage was accepted as a correct statement of the law by Hamilton J in Braystock Pty Ltd v Garland [2004] NSWSC 874 at [17].
[98] (1994) 36 NSWLR 290, discussed more fully in McLauchlan, above n50 at 491–2.
[99] (1994) 36 NSWLR 290 at 299.
[100]Id at 309.
[101]Id at 310.
[102]Id at 309, 311.
[103]Id at 310.
[104]Id at 309.
[105]So, too, does Lord Hoffmann’s analysis of the legal ramifications of the conversation between Alice and Humpty Dumpty in ICS [1997] UKHL 28; [1998] 1 WLR 896 at 914.
[106]See text following n57.
[107][1997] UKHL 28; [1998] 1 WLR 896 at 913.
[108] [1971] 1 WLR 1381 at 1384–5.
[109]See, for example, D W McLauchlan, ‘The New Law of Contract Interpretation’ (2000) 19 New Zealand Universities Law Review 147. See also Yoshimoto [2000] NZCA 350; [2001] 1 NZLR 523 where Thomas J argued at length that there are no convincing reasons of principle or policy for an absolute rule that evidence of the parties’ negotiations is inadmissible. While acknowledging that such evidence will sometimes be unhelpful and that it should be received with caution, he suggested that it may equally provide a reliable guide to the true intention of the parties. It is a question for the court to decide what weight should be given to the evidence in the particular circumstances of each case rather than to reject it outright and thus run the risk of holding the parties to a meaning different to that which they attached to the words in dispute. Contrast Bingham, above n17 at 389: ‘In almost any contractual negotiation worth the name, the parties will have competing and sometimes fluctuating aims, which they may or may not achieve. Any detailed consideration of the exchanges to and fro is in my view liable to lead to excessive emphasis on what the parties wanted to agree and too little on what they actually did agree’. Interestingly, the author endorsed (at 389) the decision in The Karen Oltmann (‘never to my knowledge questioned’) because it seemed to him ‘wholly consistent with the rule which admits evidence of the meaning of trade and technical expressions’.
[110]He had earlier foreshadowed his reservations concerning Lord Hoffmann’s third principle in Bank of Credit and Commerce [2001] UKHL 8; [2002] 1 AC 251 at [31].
[111]Nicholls, above n22 at 579.
[112]Id at 582–3.
[113]Id at 585–6.
[114]Spigelman, above n8 at 331–4.
[115]Nicholls, above n22 at 583.
[116]See concluding paragraph of Part 4A of this article.
[117]See, for example, H G Beale (ed), Chitty on Contracts (29th ed, 2004), vol 1, paras 12-096–12-099.
[118]ICS [1997] UKHL 28; [1998] 1 WLR 896 at 912 — Lord Hoffmann’s first principle.
[119]Lord Hoffmann’s second principle, as qualified in Bank of Credit and Commerce [2001] UKHL 8; [2002] AC 251 at [39].
[120] [1971] 1 WLR 1381 at 1385.
[121]See text following n82.
[122]Spigelman, above n8 at 332.
[123]Ibid.
[124]Ibid.
[125]Nicholls, above n22 at 585.
[126]Ibid.
[127]Ibid.
[128]Id at 578.
[129]Spigelman, above n8 at 332.
[130]A similar argument was made by Thomas J in Dreux Holdings (1996) 7 TCLR 617 at 643 in relation to the admissibility of evidence of subsequent conduct. He pointed out that ‘the Courts are already influenced by evidence of subsequent conduct’. After noting that such evidence is often adduced to support alternative causes of action, he said that (at 643–4) ‘it would be unrealistic to suggest that the Courts are not influenced by this evidence in arriving at a construction of the contract’ and he later concluded (at 644) that ‘[i]f, as is to be accepted, the Courts are influenced by the extrinsic evidence in this manner it is appropriate to make that influence overt’.
[131]Nicholls, above n22 at 586.
[132]Spigelman, above n8 at 332–3.
[133]Sale of Goods (Vienna Convention) Act 1986 (NSW); Sale of Goods (Vienna Convention) Act 1986 (Qld); Sale of Goods (Vienna Convention) Act 1986 (SA); Sale of Goods (Vienna Convention) Act 1987 (Tas); Sale of Goods (Vienna Convention) Act 1987 (Vic); Sale of Goods (Vienna Convention) Act 1986 (WA); Sale of Goods (Vienna Convention) Act 1987 (ACT); Sale of Goods (Vienna Convention) Act 1987 (NT). The validity of the argument in the text is not affected by the fact that in Australia parties commonly contract out of the Convention.
[134]See Unidroit Principles, art 4.3, and European Principles, art 5:102.
[135]See the observations to similar effect by the New Zealand Court of Appeal in Dreux Holdings (1996) 7 TCLR 617 at 627, 642.
[136]Nicholls, above n22 at 586.
[137]Spigelman, above n8 at 333.
[138] [2007] EWHC 409; aff’d [2008] EWCA Civ 183.
[139] [1971] 1 WLR 1381 at 1384–5. See text above at n108.
[140] [2007] EWHC 409 at [32].
[141]Id at [33].
[142]Ibid.
[143]Nicholls, above n22 at 587.
[144]Staughton, above n18 at 307.
[145]Spigelman, above n8 at 334. See also Bingham, above n17 at 389–90 (admitting prior negotiations ‘really would have the potential to increase, hugely, the complexity, and with it the time and cost, of commercial litigation’).
[146]Ibid.
[147]Nicholls, above n22 at 588.
[148]Ibid.
[149]Ibid.
[150]Ibid.
[151]See the passage quoted in the text at n115. Compare Bingham, above n17 at 389: ‘the admission of such evidence for the purpose of construing a contract in my view undermines the objective basis of interpretation to which we adhere’.
[152]Codelfa (1982) 149 CLR 337 at 347–52.
[153]McLauchlan, above n50.
[154]Burrows, above n22 at 82–3. Interpretation is an objective process in that its ‘concern is to insulate each contracting party from the other’s subjective (but uncommunicated) intention’: J W Carter and Elisabeth Peden, ‘Good Faith in Australian Contract Law’ (2003) 19 Journal of Contract Law 155 at 160. It is not part of the objective process to insulate a contracting party from the other party’s communicated actual intention.
[155]As Burrows notes (at 83n), ‘witness statements as to what a party was inwardly intending at the time would be contrary to the objective approach’.
[156][1997] UKHL 28; [1998] 1 WLR 896 at 912.
[157]Id at 914.
[159]See text following n16.
[160]Berg, above n12 at 358.
[161]Spigelman, above n8 at 335.
[162]Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003] UKHL 12; [2004] 1 AC 715 at 754.
[163]Spigelman, above n8 at 335.
[164]Id at 334.
[165]Id at 335–6.
[166] [2007] EWHC 409; aff’d [2008] EWCA Civ 183.
[167]Id at [35].
[168]Id at [35]–[38].
[169]Nicholls, above n22 at 587.
[170]See the observation of Thomas J in Yoshimoto [2000] NZCA 350; [2001] 1 NZLR 523 at [81]: ‘Nor, thirdly, is this a case where third parties might seek to rely on the literal wording of the contract, not knowing of the evidence external to the contract which would change its apparent meaning. Why third parties may be thought to be entitled to hold the parties who are privy to the contract to a meaning which is not their meaning is difficult to see.’
[171]See text following n67.
[172]See Burrows, above n22 at 97: parties may be ‘estopped from denying that a contract means what it, on its face, appears to mean where a bona fide purchaser for value has relied on that meaning’.
[173]See, most recently, Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 251 ALR 322 at [35] (Kirby J dissenting on this issue at [115]).
[174][2007] NZSC 37; [2008] 1 NZLR 277. Predictably, concern has been expressed that the decision will result in an unnecessary increase in litigation costs: see Jack Hodder, ‘The Supreme Court — A Brief Introduction to a Long Conversation’ in Claudia Geiringer and Dean R Knight (eds), Seeing the Whole World: Essays in Honour of Sir Kenneth Keith (2008) 347 at 350.
[175]See McLauchlan, above n23.
[176]Gibbons Holdings [2007] NZSC 37; [2008] 1 NZLR 277 at [50] (Tipping J).
[177]Id at [74] (Anderson J).
[178]Dreux Holdings (1996) 7 TCLR 617 at 641. He repeated this view in Gibbons Holdings [2007] NZSC 37; [2008] 1 NZLR 277 at [114]. In the same case Tipping J said (at [59]): ‘Evidence of subsequent conduct does not invite a subsequent meaning. It is directed to the original meaning; that is, the meaning of the contract when it was signed. It is a distraction to suggest that post-contract evidence is capable of changing the contract date meaning, when its sole purpose is to elucidate that meaning.’
[179] [1970] AC 583 at 603.
[180]As Thomas J pointed out in Dreux Holdings (1996) 7 TCLR 617 at 638, ‘the parties cannot be thought to have acted on a shared meaning of the contract at the time it was completed if, in fact, there was no shared meaning at that time’.
[181]At best, the conduct may be one factor to be considered by the court in determining the parties’ presumed intention. It may assist in establishing the commercial purpose of the contract or that certain important background facts were known to the parties at the time of the contract.
[182] (1994) 36 NSWLR 290 at 311.
[183]Tipping and Anderson JJ. Thomas J and Elias CJ disagreed. Blanchard J preferred to reserve his position on the general question whether subsequent conduct can be taken into account at all, although he did record (at [27]) that he had ‘seen no convincing argument against such use and there is force in the argument in its favour’.
[184][2007] NZSC 37; [2008] 1 NZLR 277.
[185]Id at [53].
[186]Id at [135].
[187]Id at [135]–[136].
[188]Id at [53].
[189]Id at [62].
[190]Id at [64].
[191]Nicholls, above n22 at 589: ‘it is surely time the law recognised what we all recognise in our everyday lives, that the parties’ subsequent conduct … may be a useful guide to the meaning they intended to convey by the words of their contract’; Steyn, above n5 at 10; and Bingham, above n17 at 390.
[192]Steyn, above n5 at 10.
[193]Bingham, above n17 at 390.
[194]Id at 389.
[195][1973] UKHL 2; [1974] AC 235 at 268 (‘Schuler’).
[196]Id at 261.
[197]Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 391.
[198]Contrast Benjamin Developments [1994] 3 NZLR 189 at 203 (objecting to use of the background to create uncertainty of meaning and then using it again to resolve that uncertainty). As pointed out by J W Carter and Andrew Stewart, ‘Interpretation, Good Faith and the “True Meaning” of Contracts: The Royal Botanic Decision’ (2002) 18 Journal of Contract Law 182 at 190, ‘if a court informs itself of the surrounding circumstances before interpreting the contract, it will often find that there is no ambiguity at all’. For a useful illustration see Kilkerrin Investments Pty Ltd v Yiu Ying Mei Pty Ltd [2001] QSC 88.
[199]Blakeley and Anderson v De Lambert [1959] NZLR 356 at 367 (Adams J). See also Schuler [1973] UKHL 2; [1974] AC 235 at 263 (Lord Simon) quoting Norton on Deeds (1906) at 43: ‘the question to be answered always is, “What is the meaning of what the parties have said?” not, “What did the parties mean to say?” ... it being a presumption juris et de jure ... that the parties intended to say that which they have said.’
[200]McLauchlan, above n109 at 176.
[201]ICS [1997] UKHL 28; [1998] 1 WLR 896 at 912 — Lord Hoffmann’s first principle.
[202]Schuler [1973] UKHL 2; [1974] AC 235 at 251 (Lord Reid).