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McLauchlan, D W --- "Objectivity in Contract" [2005] UQLawJl 28; (2005) 24(2) University of Queensland Law Journal 479

OBJECTIVITY IN CONTRACT

D W McLAUCHLAN[*]

I. Introduction

In the recent case of Equuscorp Pty Ltd v Glengallan Investments Pty Ltd[1] the High Court of Australia[2] affirmed that the ‘general test of objectivity is of pervasive influence in the law of contract’.[3] There is nothing new or contentious in itself about this statement. The objective approach to determining the existence, content and interpretation of a contract is a ‘deeply entrenched’[4] feature of the common law of contract. Without it, security and sanctity of contract would be seriously undermined. Thus, although the courts will often say that consensus ad idem or a ‘meeting of the minds’ is required for the formation of a binding contract, it is clear that an apparent consensus will suffice. What this means is that if a promisee can establish that the promisor led her reasonably to believe that he agreed to and intended to be bound by certain terms, the promisor is so bound notwithstanding that he did not actually agree to or intend to be bound by those terms.[5] The need for security of transactions demands that the promisor be held to the reasonable expectations engendered in the promisee by his words or conduct.

Nevertheless, issues remain as to the precise meaning of objectivity and the consequences of applying an objective test. Most importantly, does it necessarily lead to the conclusion that the actual intentions, knowledge and beliefs of the parties themselves are irrelevant? Some versions of objectivity give an affirmative answer to this question[6] but, in my view, the answer ought to be no. Accepting and giving effect to, for example, an actual mutual intention of the parties is not inconsistent with, and hence does not require the making of an exception to, the objective approach. To the contrary, I suggest that an objective approach, at least as properly understood, requires implementation of a proven actual mutual intention. That intention is the objective intention, although surely it would be better to say that the objective principle has no application where actual mutual intention is established. In other words, while a meeting of minds or consensus ad idem is not necessary for contract formation, it is surely sufficient.

II. The High Court’s View

However, it might be inferred from the judgment of the High Court in Equuscorp that the actual intentions, knowledge and beliefs of the parties themselves are indeed irrelevant. This is because the Court went on to explain objectivity as meaning that ‘[t]he legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions’.[7] On the other hand, the Court cited as authority for this statement the descriptions of the objective principle by Lord Diplock in Gissing v Gissing[8] and Ashington Piggeries Ltd v Christopher Hill Ltd[9] which do not go nearly so far.[10] In Gissing his Lordship said:

As in so many branches of English law in which legal rights and obligations depend upon the intentions of the parties to a transaction, the relevant intention of each party is the intention which was reasonably understood by the other party to be manifested by that party’s words or conduct notwithstanding that he did not consciously formulate that intention in his own mind or even acted with some different intention which he did not communicate to the other party.

In Ashington Piggeries he said:

In each of the instant appeals the dispute is as to what the seller promised to the buyer by the words which he used in the contract itself and by his conduct in the course of the negotiations which led up to the contract. What he promised is determined by ascertaining what his words and conduct would have led the buyer reasonably to believe that he was promising. That is what is meant in the English law of contract by the common intention of the parties. The test is impersonal. It does not depend upon what the seller himself thought he was promising, if the words and conduct by which he communicated his intention to the seller (sic, the buyer) would have led a reasonable man in the position of the buyer to a different belief as to the promise; nor does it depend upon the actual belief of the buyer himself as to what the seller’s promise was, unless that belief would have been shared by a reasonable man in the position of the buyer.

These statements essentially replicate Blackburn J’s classical statement of the objective principle in Smith v Hughes:[11]

If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.

As with Lord Diplock’s formulations, the promisee’s actual knowledge and beliefs are relevant. She must reasonably understand that the promisor’s intention is that alleged by her, and a promisee who knows otherwise, or indeed ought to know otherwise, cannot so reasonably understand. A fortiori if it is established that she shared the promisor’s intention at the time of the alleged contract.[12]

Uncertainty as to the meaning of objectivity is further exacerbated by a reading of the High Court’s judgment in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,[13] delivered five days before Equuscorp. First, the Court endorsed[14] the approach to contract interpretation of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW.[15] On that approach 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 in the contractual setting.[16] Thus, where the words of a contract are ambiguous,[17] prior negotiations may be admitted to the extent that they establish ‘objective background facts which were known to the parties and the subject matter of the contract’, but ‘in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable’.[18] This is because ‘such statements and actions reveal the terms of the contract which the parties intended or hoped to make’ and, due to the operation of the parol evidence rule, ‘[t]hey are superseded by, and merged in, the contract itself’.[19]

Secondly, the Court approved[20] the statement in Ermogenous v Greek Orthodox Community of SA Inc[21] that when the word ‘intention’ is used in the context of intention to create contractual relations:

it is used in the same sense as it is used in other contractual contexts. It describes what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened. It is not a search for the uncommunicated subjective motives or intentions of the parties.

It will be noted that this version of objectivity only excludes uncommunicated subjective motives or intentions. The statement is therefore consistent with the view that the circumstances with regard to which the objective meaning of a person’s words or actions is to be determined must include that person’s communicated intention.[22]

Thirdly, the Court referred to its decision three months earlier in Pacific Carriers Ltd v BNP Paribas,[23] noting that this decision had:[24]

reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

This passage is open to different interpretations but, insofar as it contrasts the parties’ subjective beliefs with what each leads the other reasonably to believe, it is capable of being read consistently with Blackburn J’s statement of the objective principle in Smith v Hughes. Thus, since no one would suggest that either the existence or content of contractual obligation is grounded in the inner thoughts or wills of the parties, direct (and likely self-serving) evidence from the parties as to their different respective understandings of the transaction will usually be irrelevant.[25] On the other hand, reliable evidence of conduct or communications between the parties may have a strong bearing on what a reasonable person in the position of those parties would understand their rights and liabilities to be.

Fourthly, and most importantly for the purposes of this article, the Court endorsed[26] the explanation by Mason ACJ, Murphy and Deane JJ in Taylor v Johnson[27] of ‘the difference between the subjective and objective theories of contractual assent’ and the significance thereof. The problem here is that the Judges in Taylor treated Blackburn J’s statement of the objective principle in Smith v Hughes as representing a subjective theory of contract formation.[28] As I shall attempt to demonstrate, this view is misconceived. Moreover, it is inconsistent with those versions of the objective principle noted above stating that the task of the court is to determine what the promisor’s words or conduct would have led a reasonable person in the position of the promisee to believe.

III. Taylor v Johnson

It will be recalled that Taylor v Johnson concerned a written agreement for the sale of 10 acres of land at a price of $15,000. The vendor actually intended to sell for $15,000 per acre and the purchaser knew this. It was held that a contract was formed albeit one that was voidable in equity. Their Honours subscribed to the extreme form of objective theory, commonly known as the ‘detached objectivity’ (or ‘fly on the wall’) theory, under which a contract is formed when to all outward appearances the parties are agreed on the same terms and on the same subject matter, regardless of the actual intention and state of knowledge of either party. They endorsed the view of Lord Denning MR, the leading advocate in England of the ‘detached objectivity’ theory of contract formation, in Solle v Butcher that:[29]

once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good until it is set aside ... Neither party can rely on his own mistake to say it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake.

Blackburn J’s famous statement of the objective principle in Smith v Hughes, commonly thought to involve ‘promisee objectivity’, was viewed by their Honours as representing a subjective theory of contract formation, presumably because it holds that there cannot be a contract when the promisee knows or ought to know[30] that the promisor does not intend to contract on the stated terms. However, the fact that the promisee’s state of mind is taken into account does not mean that Blackburn J was applying a subjective theory. A subjective approach would inquire into what the promisor intended, whereas an objective approach asks what a reasonable person in the position of the promisee would believe the promisor intended. And a reasonable person who knew that the promisor did not intend to be bound to a particular term would not treat the promisor as having agreed to that term.[31]

Strangely, and perhaps demonstrating that the ramifications of its reasoning had not been fully thought through, the High Court left open the question whether the detached objectivity approach applies ‘in the case of an informal contract or in the case where there is a mistake as to the identity of the other party’.[32] There seems to be no logical reason why the approach to formation in the latter cases should differ.[33] Thus, an apparently complete and signed written agreement is no more conclusive of formation than an exchange of offer and acceptance by correspondence. This can be illustrated through a series of examples varying the facts in Taylor v Johnson.

A. Parties’ Actual Intention The Same

Let us suppose that it is established or accepted that the actual mutual intention of the parties was the same, although not necessarily the apparent intention to have a binding agreement for the sale of all the land at a price of $15,000. Here there is no need to be concerned with what a reasonable person would have inferred, although in any event application of the objective principle would surely not lead to a different result. How can a reasonable person in the position of the parties infer an intention that is contrary to the actual mutual intention of the parties?

One possibility is that it is established by extrinsic evidence that the document was not intended to be a binding agreement. Perhaps it was a sham, being signed only to enable the purchaser to establish his standing to make representations to the local Council in support of a proposed rezoning of the land,[34] or it was orally agreed to be subject to the approval of the vendor’s solicitor. There is long established case authority to support the view that extrinsic evidence is admissible, without contravening the parol evidence rule, to show that no contract was made, despite the appearance of the written document to the contrary, because, for example, the document was not intended to be binding at all or was executed subject to a condition precedent.[35]

Another possible scenario is that, as in Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd,[36] evidence of the parties’ negotiations clearly establishes that the document was intended to be a binding agreement, despite indications to the contrary from the terms contained therein. Again there must surely be a contract regardless of what a reasonable person would infer from those terms. Unless one is prepared to countenance the possibility of refusing to give effect to the parties’ actual intentions, there is simply no reason to be concerned with, let alone give effect to, objective inferences. Indeed, it might be said that ‘if the mutual actual intention was that there should be a concluded contract, it would be fraudulent to deny that intent’.[37]

Yet another possibility is that there is proof of both actual consensus ad idem and intention to be bound but the document misrecords that consensus (perhaps it states that the price is $15,000, not $15,000 per acre) or there is no objective consensus ad idem because there is more than one reasonable interpretation of the obligations assumed (perhaps the contract refers to the land being sold as say,‘Tenacres’ when the vendor owns two blocks of land with that name). In the former situation rectification will obviously be available. It is also an option in the latter situation, but it is more likely that the court will deal with it as a matter of interpretation and admit extrinsic evidence to identify the land if the parties shared the same actual understanding of the transaction. If in the famous case of Raffles v Wichelhaus,[38] which involved the sale of cotton ‘ex Peerless from Bombay’ and there happened to be two ships named Peerless leaving Bombay at different times, the evidence established that both parties had the same Peerless in mind ‘it is clear that there would have been a valid contract, notwithstanding the objective ambiguity’.[39]

B. Parties’ Actual Intention Different

Now let us suppose that it is established or accepted that the actual intention of the parties was not the same. The vendor intended to sell for $15,000 per acre (ie, $150,000) and the purchaser intended to buy for a total price of $15,000, as on the actual facts of Taylor v Johnson. There are three possible conclusions.

First, there will be a contract in accordance with the purchaser’s understanding if, and only if, the vendor led the purchaser reasonably to believe that the vendor was intending to sell all the land at a price of $15,000. The fact that the written agreement plainly provides for a sale at that price will obviously be a strong factor supporting this conclusion but it cannot be conclusive because the vendor may be able to convince the court that the purchaser knew or ought to have known otherwise.

Secondly, there will be a contract in accordance with the vendor’s understanding if the purchaser led the vendor reasonably to believe that the purchaser was intending to buy the land at a price of $15,000 per acre. Perhaps all of the discussions prior to the signing of the written agreement were in terms of a price per acre and the purchaser, noticing the mistake, sought to take advantage of it. This would be a classic case for rectification on the ground of known unilateral mistake.[40]

Thirdly, there will be no contract at all if both understandings were equally reasonable (for example, some patent or latent ambiguity in the price term) or either knew or ought to have known of the other’s understanding but had not led the other reasonably to believe that that understanding was accepted.

These examples illustrate that, as Lord Phillips of Worth Matravers recently pointed out in Shogun Finance Ltd v Hudson,[41] ‘the task of ascertaining whether the parties have reached agreement as to the terms of a contract can involve quite a complex amalgam of the objective and the subjective’. If that were not so and the task were wholly objective, how can it be, for example, that, as is now generally accepted, ‘post-contractual conduct is admissible on the question of whether a contract was formed’?[42] Such conduct may often provide evidence of some probative value as to the actual intention of one or both of the parties at the time of the alleged contract. It may show that the parties were still negotiating on important terms or it may support the inference that both of them, or at least the promisee, accepted that there would be no final commitments until a formal contract was signed. On the other hand, acts of part performance by the parties (but, most helpfully, by the promisor) may provide a strong indication that they did intend to be immediately bound. And, of course, an admission or other unequivocal acknowledgement by the promisor of the existence of a binding contract may be particularly telling. However, if the test of intention is wholly objective in the sense that the court is unconcerned with the actual intention of the parties and the question is whether a reasonable person would infer intention to be bound at the time the contract was allegedly formed, the subsequent conduct of the parties, which can only be indicative of their actual intention at that time, must surely be irrelevant.[43]

IV. Ramifications for Contract Interpretation

In principle, the approach of the court ought to be no different when the issue is one of contract interpretation, particularly when it is considered that disputes over the meaning of contractual language will very often call into question whether, due to misunderstanding between the parties, a binding contract was formed in the first place.[44] However, this will be heresy to judges and practising lawyers brought up on the staple diets of strict objectivity, plain meaning and parol evidence rules, and for whom the inadmissibility of evidence of prior negotiations and subsequent conduct as aids to interpretation are ‘sacred cows’.[45] Indeed, they can point to countless statements that the interpretation of contracts is not a matter for evidence of the actual intentions or understandings of the parties, that the court can only look to ‘the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting’,[46] and that interpretation of a contract requires ‘a purely objective assessment’ of the contractual terms.[47] Nevertheless, the position cannot be so simple. If, as presumably few would deny, the primary purpose of the law of contract is to give effect to the reasonable expectations of the parties to an agreement, it is nonsensical to enforce an agreement in accordance with a meaning which reliable evidence may show is contrary to the actual intentions of the parties. The court should, wherever possible, seek to give effect to the meaning intended by both parties or the meaning intended by one party where that party reasonably believed that the other party accepted this meaning. Only in the event that neither can be established should the focus of the inquiry be on the presumed intention of the parties.

Fortunately, whatever may have been the position in former times, there are signs that the law is moving in this direction. And ironically one of the main sources of this development is the judgment of Mason J in Codelfa Construction. After stressing 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, his Honour was prepared to concede 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’.[48] His Honour continued:[49]

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.

This qualification, whilst sensible enough in itself, actually serves to undermine the ‘presumed intention’ approach. It is difficult to see any principled basis for limiting the admissibility of evidence of the parties’ actual intention to the situation where they have refused to include a particular provision in the contract. Their actual intention, if clearly proven, surely ought to prevail regardless of the form or manner in which that intention happens to be manifested. As Lord Nicholls of Birkenhead, writing extra-judicially, has recently observed, Mason J’s qualification ‘lets the cat out of the bag’: it ‘destroys the rationale for an absolute rule’.[50] Why allow evidence of the fact that the parties have ‘united in rejecting’ a particular meaning but disallow evidence of the fact that they have united in accepting a particular meaning?[51]

In more recent times, however, a wider exception allowing the courts to give effect to any actual common understanding or assumption has evolved. On several occasions the New Zealand and Australian courts[52] have endorsed the following principle concerning the interpretation of written contracts laid down by Kerr J in The Karen Oltmann:[53]

If a contract contains words which, in their context, are fairly capable of bearing more than one meaning, and if it is alleged that the parties have in effect negotiated on an agreed basis that the words bore only one of the two possible meanings, then it is permissible for the Court to examine the extrinsic evidence relied upon to see whether the parties have in fact used the words in question in one sense only, so that they have in effect given their own dictionary meaning to the words as the result of their common intention.

A number of interesting issues arise out of this principle[54] but they are beyond the scope of this paper and, in any event I have discussed them elsewhere.[55] The point I wish to develop here is that the judicial attempts, particularly in Australia, to recognise the principle and at the same time remain faithful to the orthodox ‘presumed intention’ approach to contract interpretation have resulted in reasoning that is artificial or extremely difficult to comprehend. A relatively recent example is provided by the judgment of RD Nicholson J in BP Australia Pty Ltd v Nyran Pty Ltd.[56] After correctly pointing out[57] that Lord Hoffmann’s restatement of the fundamental principles of interpretation in Investors Compensation Scheme Ltd v West Bromwich Building Society[58] are not consistent with the Codelfa principles, his Honour said:[59]

The concept of ‘surrounding circumstances’ is to be understood to be a reference to ‘the objective framework of facts’. It will include evidence of prior negotiations so far as they tend to establish objective background facts known to both parties and the subject matter of the contract. It will also include ... evidence of a matter in common contemplation and constituting a common assumption. From the evidence of that setting the parties’ presumed intention may be taken into account in determining which of two or more possible meanings is to be given to a contractual provision. What cannot be taken into account is evidence of statements and actions of the parties which are reflective of their actual intentions and expectations. Objective background facts can include statements and actions of the parties which reflect their mutual actual intentions. That is, evidence of the mutual subjective intention of the parties to a contract may be part of the objective framework of facts within which the contract came into existence. It is the mutuality which makes the evidence admissible.

Thus, ‘evidence of statements and actions of the parties which are reflective of their actual intentions and expectations’ is inadmissible, but evidence of objective background facts which ‘can include statements and actions of the parties which reflect their mutual actual intentions’ is admissible!

This reasoning is reminiscent of that employed by Santow J, sitting in the Equity Division of the New South Wales Supreme Court, in Spunwill Pty Ltd v BAB Pty Ltd,[60] a difficult case that merits closer attention. The plaintiff had sold a hardware business to the defendant, retaining for itself a business previously associated with the business sold. The issue was whether the defendant had breached a poorly drafted and ambiguous restraint of trade clause whereby each party undertook not to carry on ‘a business of the similar nature’ to that carried on by the other. Santow J found that the ‘clear and mutual conduct of the parties in immediately engaging in competition in a range of products peripheral to the core operation of [each] business [provided] cogent evidence of a mutual subjective intention that the prohibition not encompass such competition’ and that this evidence ‘may legitimately be considered as part of the surrounding circumstances’.[61] Accordingly, it was held that the words ‘business of the similar nature’ meant ‘a resemblance greater than mere competition in peripheral products or lines of business’.[62]

This decision was plainly correct. The facts provided a particularly strong example of subsequent conduct giving a reliable guide to the meaning intended by the parties at the time of the contract.[63] However, the reasoning employed by the Judge to establish his limited exception is exceptionally difficult, although in fairness it must be said that this was largely because of the obstacles put in the way of reaching commonsense solutions by the various elements of the orthodox approach to contract interpretation noted earlier.[64] Thus, his Honour felt bound to accept that it was a settled principle of contract interpretation that the object is to give effect to the apparent or presumed intention of the parties and hence ‘direct evidence of the parties’ actual subjective intentions and expectations is inadmissible’.[65] However, in order to justify reception of evidence of subsequent conduct, which ‘generally only has a logical relevance to the meaning of a contract as later evidence of what the parties believed the contract originally meant at the time of contracting’,[66] his Honour went on to argue, citing as authority The Karen Oltmann, that ‘matters of mutual subjective intention are themselves part of the objective framework of facts within which the contract came into existence, and are thus receivable as part of the surrounding factual circumstances’.[67] In other words, ‘evidence of a mutual subjective intention is admissible as an objective fact that illuminates the meaning a reasonable person in the position of the parties would attach to a provision’.[68] Consistently with this approach, the Judge accepted that the existence of a mutual subjective intention (this objectively determined ‘shared subjectiveness’![69]) was simply one of the objective facts—one ‘factor to be taken into account in determining presumed intention, without necessarily being determinative’.[70] This is because ‘[e]xtrinsic evidence of facts, statements and conduct known to both parties’ is only admissible to ‘illuminate the meaning that reasonable persons in the position of the parties objectively intended ambiguous language of the document to bear. Extrinsic evidence which merely illuminates the actual subjective intentions, aspirations or expectations of the parties does not assist in discovering the presumed intention and is inadmissible’.[71]

The difficulties with the latter part of the reasoning in particular and the thinking on which it is based are fairly obvious. Quite what the circumstances might be where a clearly proven actual mutual intention would not be conclusive is not explained. It is difficult to see how a court could possibly refuse to give effect to a clearly proven actual mutual intention on the ground that a reasonable person in the position of the parties would not have given the language that meaning.[72] That seems to be a contradiction. A reasonable person in the position of the parties must surely give the language the meaning that the parties intend.

V. Lord Hoffmann’s Restatement

It is interesting in this context to consider Lord Hoffmann’s restatement of the fundamental principles of interpretation in Investors Compensation Scheme Ltd v West Bromwich Building Society.[73] His Lordship’s well known first principle is that ‘[i]nterpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’, but his supporting reasoning does not consistently adhere to a strict objective approach. Most significant is his Lordship’s reference to the statement by Leggatt LJ in the Court of Appeal that the appellant’s interpretation was not an available meaning of the words in dispute, a statement which was then backed up by the following observation:

As Alice objected, ‘glory’ doesn’t mean ‘a nice knock-down argument’.

Leggatt LJ was here referring to the conversation between Alice and Humpty Dumpty in chapter 6 of Lewis Carroll’s Through the Looking Glass in which the latter sought to convince Alice that ‘un-birthday’ presents were better than birthday presents. After pointing out that there were 364 days when you might get un-birthday presents, the conversation continued:

‘Certainly,’ said Alice.

‘And only one for birthday presents, you know. There’s glory for you!’

‘I don’t know what you mean by “glory”,’ Alice said.

Humpty Dumpty smiled contemptuously. ‘Of course you don’t—till I tell you. I meant “there’s a nice knock-down argument for you!”’

‘But “glory” doesn’t mean “a nice knock-down argument”,’ Alice objected.

‘When I use a word’, Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean—neither more nor less.’

‘The question is’, said Alice, ‘whether you can make words mean so many different things.’

‘The question is’, said Humpty Dumpty, ‘which is to be master—that’s all.’

Lord Hoffmann’s response to Leggatt LJ’s proposition was that it was not borne out by his literary citation. His Lordship said:[74]

Alice and Humpty Dumpty were agreed that the word ‘glory’ did not mean ‘a nice knock-down argument.’ Anyone with a dictionary could see that. Humpty Dumpty’s point was that ‘a nice knock-down argument’ was what he meant by using the word ‘glory’. He very fairly acknowledged that Alice, as a reasonable young woman, could not have realised this until he told her, but once he had told her, or if, without being expressly told, she could have inferred it from the background, she would have had no difficulty in understanding what he meant.

This passage suggests that one party’s actual meaning will prevail where the other party knows or ought to know of that meaning. Thus, suppose that during their meeting Alice and Humpty Dumpty had entered into an agreement for the sale of ‘apples’ and that Humpty was using the latter word to mean ‘pears’. It is a fair inference from the above passage that Lord Hoffmann believes that Alice would be bound to buy ‘pears’ if she were aware, or ought to have been aware, that Humpty used the words ‘apples’ to mean ‘pears’.

It thus appears that Lord Hoffmann is not a strict or ‘detached’ objectivist at all. His ‘reasonable person having all the background knowledge which would reasonably have been available to the parties’ is actually a reasonable person in the situation of the parties, or what amounts to the same in practice, a reasonable person in the situation of the promisee. This reasonable person is necessarily aware of communications between the parties and would not, for example, deny shared understandings as to the meaning of their words. Nor would he deny a meaning which, though not shared by the promisor, the promisee reasonably believed the promisor intended to accept. Thus, according to Lord Hoffmann, when Alice is told by Humpty Dumpty that the word ‘glory’ means ‘a nice knock-down argument’, Alice ‘would have had no difficulty in understanding what he meant’. The objective meaning of the word ‘glory’ is ‘a nice knock-down argument’. In my example, his Lordship would hold that Alice is bound to buy ‘pears’, not because he is concerned to give effect to Humpty’s actual intention (a subjective approach), but because Humpty reasonably believes that a person with Alice’s knowledge would have understood the meaning of his words.

There is, however, a problem. Establishing Alice’s knowledge would normally rely on evidence of the parties’ negotiations, but according to his Lordship’s third principle such evidence is inadmissible. He said that ‘[t]he law excludes from the admissible background the previous negotiations of the parties’,[75] but perhaps he had in mind his Humpty Dumpty and Alice example when he then added that ‘[t]he boundaries of this exception are in some respects unclear’![76]

VI. Conclusion

In an important recent work,[77] Professor Stephen Smith gives a similar example. After explaining that ‘meaning is always objective’ in that ‘a word means what it is reasonably understood to mean rather than what the speaker intended (or, confusingly, “meant”) it to mean’,[78] he says:[79]

In saying that the objective meaning of an agreement is its only meaning, it is not suggested, of course, that particular words or combinations of words always have the same meaning ... [I]f John and Ann agree that whenever John says ‘dog’ he means cat, then the next time John says ‘dog’ to Ann, the meaning of what John says will be the thing ordinarily called ‘cat’. Although language must be shared, it is possible for there to be only two sharers ... [W]ords must always be understood in their context ... In the above example, the most important fact about the context in which John spoke is that John and Ann had agreed that the word ‘dog’ had a certain meaning between them.

This, and my earlier examples, will no doubt be greeted with dismay by the many judges and lawyers who have firm views concerning the certainty of meaning of language and the wisdom of the plain meaning rule, particularly if they also adhere to strict nineteenth century perceptions of the scope of the parol evidence rule and the ‘detached objectivity’ version of the objective theory of contract under which the sole task of the court is to determine the parties’ presumed intention, so that their actual intentions and expectations are irrelevant. In fact, there is ample authority for the proposition that a clearly proven actual mutual intention should always trump an alleged different objective intention based on the ‘plain meaning’ of the words.[80] Furthermore, apart from the obvious injustice it would cause, any other conclusion would lead to unsustainable distinctions. For example, it is now well established that, despite the parol evidence rule, evidence is admissible to establish the existence of a term agreed orally but not recorded in the parties’ written document, so that the contract is in truth partly written and partly oral.[81] Why should it make a difference that the oral agreement is as to the meaning of a term contained in the written document as opposed to an agreement on a matter not covered in the document? In other words, why should the admissibility of extrinsic evidence depend on whether the evidence concerns the meaning the parties gave to the contractual language or the existence of an independent oral term? The two scenarios may sometimes shade into one another and therefore it is absurd to treat them differently.[82]

However, the real significance of Professor Smith’s example for present purposes is that it is not an exception to or departure from the objective approach. Giving effect to an actual mutual intention that ‘dog’ means ‘cat’ need not be seen as resorting to a subjective approach when it is consistent with an objective approach. Indeed, ‘cat’ is the objective meaning of ‘dog’ in these circumstances. But to my mind reaching the commonsense answer that upholds the true agreement between the parties is perhaps more important than precisely how we get there.

Nevertheless, academic opinion is not all one way. For example, in a recent paper, Professor Hugh Collins argues that since ‘the actual intention of the parties ... is irrelevant to the formation of a contract’ logically ‘the actual or subjective intention should be equally irrelevant to determinations of what the parties actually agreed’.[83] My argument would be exactly the opposite.[84] Since evidence of the actual mutual intention of the parties is relevant and admissible when the existence of a contract is in issue, evidence of their actual intention concerning the meaning of the contract should also be relevant and therefore admissible when it comes to the interpretation of an admitted contract.[85]

It seems inevitable that this and the other matters raised in this article will continue to be debated and to divide judges and commentators for some time to come. Despite centuries of case law, we still seem to be a long way short of a universally accepted set of principles governing the formation, content and interpretation of contracts. So far as the main issue I have addressed is concerned, perhaps Professor Corbin’s view that ‘the law of contract cannot be explained by either of these [objective and subjective] theories’[86] will command the widest measure of agreement at this stage. But surely we can do better than that.


[*] Professor of Law, Victoria University of Wellington; Honorary Professor, The University of Queensland.

[1] [2004] HCA 55; (2004) 218 CLR 471, 483 [34]. See E Peden and J W Carter, ‘Taking Stock: the High Court and Contract Construction’ (2005) 21 Journal of Contract Law 172.

[2] Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ.

[3] Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 549 per Gleeson CJ.

[4] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2003] NSWCA 75; (2004) 56 NSWLR 662, 675 [97] (Bryson J).

[5] Thus, a person will be held to have made a contractual offer if it was reasonable for the alleged offeree to believe that she could conclude a contract simply by indicating assent to the former’s terms. It is irrelevant that the offeror had not the slightest intention to be bound (because, for example, the promise was made in jest) if the offeree was reasonably entitled to think that the offeror did have that intention. Similarly, a response to an offer will amount to a binding acceptance, notwithstanding that the offeree did not intend it to be an acceptance, if the offeror reasonably so regarded it. Further, at common law a mistake by a promisor as to the terms of the contract does not prevent the formation of a binding contract where the promisee reasonably believes that the terms have been assented to.

[6] See, for example, Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2003] FCA 174 [34] where Finkelstein J had no qualms about adopting the strict, and now largely discredited, objectivist view of Learned Hand J in Hotchkiss v National City Bank 200 F 287, 293 (SDNY 1911), namely: ‘A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes on them, he would still be held, unless there were mutual mistake or something else of the sort.’ However, as pointed out in Corbin on Contracts (1st rev ed 1960) vol 3, 72 [538]: ‘[m]uch remainded unsaid by the words “mutual mistake or something else of the sort” ’. It is often overlooked also that Learned Hand J added the further qualification: ‘Of course, if it appear by other words, or acts, of the parties, that they attribute a particular meaning to such words as they use in the contract, that meaning will prevail, but only by virtue of the other words, and not because of their unexpressed intent.’ Thus, it appears that the Judge would in fact allow evidence to be given of other words or conduct showing that the parties ‘intended something else than the usual meaning which the law imposes on them’.

[7] [2004] HCA 55; (2004) 218 CLR 471, 483 [34], emphasis added.

[8] [1970] UKHL 3; [1971] AC 886, 906.

[9] [1972] AC 441, 502.

[10] See also similar citations by Gleeson CJ in Wilson v Anderson (2002) 213 CLR 401, 418 [8] in support of the following statement: ‘The law of contract seeks to give effect to the common intention of the parties to a contract. But the test is objective and impersonal. The common intention is to be ascertained by reference to what a reasonable person would understand by the language used by the parties to express their agreement. If the contract is in the form of a document, then it is the meaning that the document would convey to a reasonable person that matters.’

[11] (1871) LR 6 QB 597, 607.

[12] See Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309, 331C-D.

[13] [2004] HCA 52; (2004) 219 CLR 165 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ). See E Peden and J W Carter, ‘Incorporation of Terms by Signature: L’Estrange Rules!’ (2005) 21 Journal of Contract Law 96.

[14] [2004] HCA 52; (2004) 219 CLR 165, 178 [36].

[15] (1982) 149 CLR 337, 352.

[16] Ibid 352.

[17] According to Mason J, under the plain meaning rule evidence is not admissible at all ‘to contradict the language of the contract when it has a plain meaning’, although it is ‘admissible in an action for rectification’ (352). Compare Corbin on Contracts, above n 6, [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.’); Manufacturers’ Mutual Insurance Ltd v Withers (1988) 5 ANZ Insurance Cases 75,336, 75,343 (McHugh JA) (‘few, if any, English words are unambiguous or not susceptible of more than one meaning or have a plain meaning. Until a word, phrase or sentence is understood in the light of the surrounding circumstances, it is rarely possible to know what it means. In my view evidence of surrounding circumstances will generally be admissible if it is known to both parties or sufficiently notorious to be presumed to be within their knowledge.’); Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749, 778 (Lord Hoffmann) (‘words do not in themselves refer to anything; it is people who use words to refer to things. The word “allegory” does not mean a large scaly creature or anything like it, but it is absurd to conclude, as judges sometimes do, that this is not an “available meaning” in the interpretation of what someone has said. This is simply a confusion of two different concepts; … a person can use the word “allegory”, successfully and unambiguously, to refer to such a creature.’); and J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ [2003] SydLawRw 1; (2003) 25 Sydney Law Review 5, 6 (‘The purpose of interpretation is sometimes mistakenly thought to be a search for the meaning of words. This in turn leads to the assumption that one must identify an ambiguity as a pre-condition to taking into account evidence of the setting of a legal text. Enormous energy and ingenuity is expended in finding ambiguities. This is the wrong starting point. Language can never be understood divorced from its context.’). As Palmer J astutely observed in Ray Brooks Pty Ltd v NSW Grains Board [2002] NSWSC 1049 [45]-[47], under Lord Hoffmann’s restatement of the fundamental principles of interpretation in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896, 912-913, ‘the words of a document, being no more than symbols of language, can never be reliably understood in isolation from the context in which the words were used. One does not, therefore, start with the language and ascertain from the language alone whether or not there is ambiguity: one looks at the language together with the context. This is because words may seem clear and unambiguous when read in isolation, but may seem quite unclear and ambiguous when one knows the context in which they were used ... [Lord Hoffmann] did not make a consideration of the text stage one of the process, to be followed, as stage two, by reference to extrinsic evidence. Nor did he say that reference to extrinsic evidence is permissible only to resolve ambiguity. On the contrary, his Lordship regarded the exercise of construing the words of the text as necessarily requiring the Court to understand the setting in which the words of the text were used. This is so because, according to his Lordship, the exercise of interpretation requires the Court to enter the mind of the hypothetical reasonable person possessed not only of the knowledge which the parties actually had at the time of the contract, but also of the knowledge which they reasonably had available to them.’

[18] (1982) 149 CLR 337, 352.

[19] Ibid 352. Cf Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289 where the High Court of Australia held that a rent review clause stating that the lessor ‘may have regard to additional costs and expenses’ in fixing the new rent meant that the lessor ‘may and may only have regard to additional costs and expenses’. Despite endorsing the approach in Codelfa, the Court apparently had no qualms about taking into account, as part of the factual background, evidence of the parties’ prior negotiations.

[20] [2004] HCA 52; (2004) 219 CLR 165, 178 [38].

[21] (2002) 209 CLR 95, 105-106 [25] (Gaudron, McHugh, Hayne and Callinan JJ).

[22] See J W Carter and E Peden, ‘Good Faith in Australian Contract Law’ (2003) 19 Journal of Contract Law 155, 160 (Interpretation is an objective process in that its ‘concern is to insulate each contracting party from the other’s subjective (but uncommunicated) intention’). It is thus not part of the objective process to insulate a contracting party from the other party’s communicated actual intention.

[23] [2004] HCA 35; (2004) 218 CLR 451, 461-462 [22].

[24] [2004] HCA 52; (2004) 219 CLR 165, 179 [40].

[25] On this basis the High Court in Toll 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’: [2004] HCA 52; (2004) 219 CLR 165, 177-178 [35].

[26] [2004] HCA 52; (2004) 219 CLR 165, 179-180 [41].

[27] [1983] HCA 5; (1983) 151 CLR 422, 429.

[28] Ibid 428.

[29] [1950] 1 KB 671, 691 (emphasis added).

[30] See, for example, Centrovincial Estates Plc v Merchant Investors Assurance Co Ltd, The Times, 8 March 1983, [1983] Com LR 158, 158 (CA) (no proof ‘that the defendants either knew or ought reasonably to have known of the plaintiffs’ error’) and OT Africa Line Ltd v Vickers Plc [1996] 1 Lloyd’s Rep 700, 703 (no contract if the plaintiffs ‘either knew or ought reasonably to have known that there had been a mistake’ by the defendants as to the terms of the ‘apparent agreement’).

[31] See T A O Endicott, ‘Objectivity, Subjectivity, and Incomplete Agreements’ in J Horder (ed), Oxford Essays in Jurisprudence (2000) 150, 157. The author discusses the well known situation in Hartog v Colin & Shields [1939] 3 All ER 566 where the defendants mistakenly offered to sell 30,000 Argentine hare skins to the plaintiff at prices quoted ‘per pound’ instead of ‘per piece’ (there being about 3 skins to the pound) and it was held that there was no contract because the plaintiff knew that a mistake had occurred. He concludes (157): ‘Note that, in Hartog, the court not only found that the buyer knew of the mistake, but also held that, because of the practice in the trade and a course of dealing in which the parties stated prices “per [piece]”, the plaintiff “could not reasonably have supposed” that the seller intended to offer a price per [pound]. On the objective approach, there is, in that case, no agreement at a price per [pound], even if the plaintiff had no actual knowledge of the mistake. If the buyer had reason to know that the seller meant to sell per piece, then the seller has not agreed to sell per pound, and that fact does not change if a silly buyer honestly believes that the seller meant “per pound”. If the rule that knowledge of a fundamental mistake prevents an offeree from enforcing the mistakenly communicated promise were a subjective test, then it ought to make a difference if an offeree who ought to have known was genuinely oblivious. This is a further reason to conclude that Hartog does not depart from the objective approach: the knowledge of the buyer does not matter because it is his or her knowledge, but because such knowledge reflects a reason that the buyer has to treat the seller as meaning “per [piece]”.’ A slightly different way of putting this (see D W McLauchlan, ‘A Contract Contradiction’ (1999) 30 Victoria University of Wellington Law Review 175, 177) is that, as Blackburn J’s statement in Smith v Hughes itself makes clear, the objective principle involves a subjective element. It requires not only that a reasonable person would believe that the promisor was assenting to the terms proposed by the other party but also that ‘that other party upon that belief enters into the contract with him’: see Sir Guenter Treitel, The Law of Contract (11th ed, 2003) 1 and 8-9; Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854, 915-917 and 924; Airways Corporation of New Zealand Ltd v Geyersland Airways Ltd [1996] 1 NZLR 116, 124-125; Rattrays Wholesale Ltd v Meredith-Young & A’Court Ltd [1997] 2 NZLR 363, 374; Magnum Photo Supplies Ltd v Viko New Zealand Ltd [1999] 1 NZLR 395, 401; Transpower New Zealand Ltd v Meridian Energy Ltd [2001] NZHC 460; [2001] 3 NZLR 700, 712; and Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608, 614 [20]. Where, for example, the other party knows that the promisor is mistaken about the terms of the contract this requirement is not satisfied and the promise cannot be enforced in its ‘objective’ sense. A party who alleges the formation of a binding contract because a reasonable person in her position would have been entitled to infer a contractual offer can only succeed if, in addition, she subjectively understood that there was an offer, although in practice this will be assumed in the absence of a challenge from the alleged offeror. (Indeed, there is much to be said for the view that ‘the courts are entitled to assume, in the absence of proof to the contrary, that a party’s subjective understanding of a transaction corresponded with the way in which a reasonable person in his position would have understood it’: J P Vorster, ‘A Comment on the Meaning of Objectivity in Contract’ (1987) 103 Law Quarterly Review 274, 287.)

[32] [1983] HCA 5; (1983) 151 CLR 422, 430.

[33] With regard to mistake of identity, see D W McLauchlan, ‘Mistake of Identity and Contract Formation’ (2005) 21 Journal of Contract Law 1.

[34] Cf Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422, 427.

[35] See, for example, Pym v Campbell [1856] EngR 480; (1856) 6 E & B 370, Wallis v Littell (1861) 11 CB (NS) 369, Clever v Kirkman (1875) 33 LT 672 and Pattle v Hornibrook [1896] UKLawRpCh 165; [1897] 1 Ch 25. See also The Law Commission, The Law of Contract: The Parol Evidence Rule, Law Com No 154, Cmnd 9700, 1986, [2.31] (The rule does not apply where the issues raised ‘are issues of general contractual validity and enforceability’. It ‘cannot apply to a writing which, although purporting to be a contract, does not fulfil some legal requirement and is not, therefore, a contract at all’.). Extrinsic evidence is also admissible to show that a document containing contractual terms was intended to be binding. It is not simply a question of construing the document because ‘intention to be bound is a jural act separate and distinct from the terms of [the] bargain’: Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309, 337 (McHugh JA).

[36] [1985] 2 NSWLR 309.

[37] Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309, 319 (Hope JA) (although, somewhat incongruously, his Honour felt bound by previous decisions of the High Court of Australia to hold that the formation question had to be resolved as one of construction, and therefore he dissented on this issue). See also the instructive judgments of Mahoney JA (especially at 330-334) and McHugh JA (334-339) in this case.

[38] [1864] EngR 150; (1864) 2 H & C 906; 159 ER 375.

[39] J C Smith, The Law of Contract (1989) 14. See also Restatement (Second) of Contracts, § 20, Illustration 1; E A Farnsworth Farnsworth on Contracts (1990) Vol II, 245-248; M A Eisenberg, ‘The Responsive Model of Contract Law’ (1984) 36 Stanford Law Review 1107, 1123-1126; M A Eisenberg, ‘Expression Rules in Contract Law and Problems of Offer and Acceptance’ (1994) 82 California Law Review 1127, 1130-1135.

[40] See generally, D W McLauchlan, ‘Rectification for Unilateral Mistake’ (1999) 18 New Zealand Universities Law Review 360.

[41] [2004] 1 AC 919, 964 [123].

[42] Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153, 163 (Heydon JA). See also, eg, Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2001] NZCA 289; [2002] 2 NZLR 433, 444-445 [56].

[43] Cf, however, the judgments of Einstein J in John R Keith Pty Ltd v Multiplex Constructions (NSW) Pty Ltd [2002] NSWSC 43 [227]-[234]; Rural Insurance (Aust) Pty Ltd v Reinsurance Australia Corp Ltd [2002] NSWSC 156; (2002) 41 ACSR 30, 36 [34]-[36]; African Minerals Ltd v Pan Palladium Ltd [2003] NSWSC 268 [28]-[36]; ABB Engineering Construction Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665 [37]; Gate Gourmet Australia Pty Ltd v Gate Gourmet Holding AG [2004] NSWSC 149 [170]-[182] and Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 716 [278]-[284]. His Honour adopted a strict objective test of intention, treating the actual intention of the parties as irrelevant, whilst at the same time accepting that evidence of their subsequent conduct is admissible. As mentioned in the text, the difficulty here is that such evidence ordinarily has probative value only to the extent that it bears upon the parties’ actual intention at the time of the alleged contract.

[44] See generally D W McLauchlan, ‘A Contract Contradiction’ (1999) 30 Victoria University of Wellington Law Review 175.

[45] J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ [2003] SydLawRw 1; (2003) 25 Sydney Law Review 5, 10. Cf, however, D Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review 577.

[46] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352 (Mason J).

[47] McLaren v Waikato Regional Council [1993] 1 NZLR 710, 731 (Fisher J).

[48] (1982) 149 CLR 337, 352.

[49] (1982) 149 CLR 337, 352-353.

[50] D Nicholls, above n 45, 584.

[51] Lord Nicholls concludes (ibid) that ‘[t]here can be no answer to that question’.

[52] Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290, 309; Air New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218; LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 [74]-[78]; BP Australia Pty Ltd v Nyran Pty Ltd [2003] FCA 520 [34]; Optus Vision Ltd v Australian Rugby League Ltd [2003] NSWSC 288 [71]; and Gate Gourmet Australia Pty Ltd v Gate Gourmet Holding AG [2004] NSWSC 149 [182]. In the latter case Einstein J cites Codelfa and The Karen Oltmann as authority respectively for the ‘unexceptional’ propositions that ‘[e]xtrinsic evidence is admissible to show that a particular contractual interpretation ... 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’.

[53] Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd’s Rep 708, 712. In this case a two-year charterparty gave the charterers ‘the option to redeliver the vessel after 12 months’ trading subject giving 3 months’ notice’. After 19 months the charterers gave three months’ notice of their intention to redeliver. The plaintiff owners protested, arguing that the option to redeliver could only be exercised when the vessel had been trading for 12 months and that accordingly the necessary notice had to be given nine months from the commencement of the charter. The dispute hinged on the meaning of the word ‘after’. The owners contended that ‘after 12 months’ trading’ meant ‘when the vessel has traded 12 months’ or ‘on the expiry of 12 months’ trading’, whereas the charterers contended that the meaning was ‘at any time after the vessel has traded for 12 months’. Kerr J. accepted that both interpretations were plausible but upheld the owners’ contention on the basis of the principle quoted in the text. There had been a series of telex exchanges prior to the contract in which various charter durations and option periods for redelivery were proposed. In relation to the latter both sides were clearly referring to an option exercisable ‘on the expiry of’ the period they proposed. This was their actual common understanding as to the meaning of the word ‘after’. They had ‘in effect both given it the same dictionary meaning to the exclusion of the other meaning’ (713).

[54] For example, why should the exception be confined to situations where the words of the contract are ambiguous or ‘fairly capable of bearing more than one meaning’? Should the parties’ common intention be defeated because the words in question appear to the court to have a plain meaning? Where there is convincing evidence that at the time of the contract the parties attached the same meaning to the words in dispute, the task of the court is to give effect to that meaning, regardless of whether those words on their face are ambiguous or have a plain meaning. Also, why should the exception be limited to evidence of actual common intention? Surely the position should be no different where, for example, the evidence may establish that one party intended the particular meaning and that party reasonably believed that the other party accepted this meaning. It would be a strange twist in the law if such an objectively determined agreement as to meaning did not suffice.

[55] See D W McLauchlan, ‘Common Assumptions and Contract Interpretation’ (1997) 113 Law Quarterly Review 237.

[56] [2003] FCA 520.

[57] In disagreement with the view of Palmer J in Ray Brooks Pty Ltd v NSW Grains Board [2002] NSWSC 1049 [6] (Codelfa ‘is entirely in line with the contextual approach to construction promoted by Lord Hoffmann’).

[58] [1997] UKHL 28; [1998] 1 WLR 896, 912-913.

[59] [2003] FCA 520 [34] (emphasis added). This passage was accepted as a correct statement of the law by Hamilton J in Braystock Pty Ltd v Garland [2004] NSWSC 874 [17].

[60] (1994) 36 NSWLR 290. See also Eastmond v Bowis [1962] NZLR 954 which is frequently cited in New Zealand for a first principle of the law of contract interpretation that ‘pre-contract negotiations are irrelevant except when used for the very limited purpose of ascertaining what objectively observable facts, as distinct from intentions, must have been within the contemplation of both parties’: Potter v Potter [2003] NZCA 103; [2003] 3 NZLR 145, 156-157 [34] (CA). However, close analysis of the judgment of Richmond J in Eastmond reveals that the distinction is devoid of substance. Despite his protestations to the contrary, the Judge did in effect use the evidence of the parties’ negotiations to determine the meaning they actually attributed to the words in dispute. The case concerned the meaning of the phrase ‘subject to finance’ in an agreement by the plaintiff to purchase the defendant’s farm. Richmond J held that the negotiations between the plaintiff and the defendant’s agent could not ‘be resorted to as direct evidence of the intention of the parties as to the meaning of the phrase’ (959). However, he then went on to concede (959-960) that the negotiations can ‘be resorted to in so far as they may disclose that facts were in the mutual contemplation of the parties of a kind which will give assistance to the Court in giving a more precise meaning to the phrase’. And in this case they disclosed, inter alia, the facts that the plaintiff, although ‘a man of considerable means’, had specifically discussed with the defendant’s agent his need to raise a mortgage for £6,000 on the defendant's farm and that the agent undertook to assist him in this endeavour. It was held (960) that: ‘the existence of this arrangement ... is an objective fact, in the mutual knowledge of the parties, to which the Court may legitimately refer as an aid to the interpretation of the ambiguous words “subject to finance” ... When they are read in the light of the extrinsic evidence it becomes apparent that the particular raising of money which the parties had in contemplation was the raising of a sum of £6,000 on mortgage of the defendant’s property by the joint efforts of [the defendant’s agent] and the plaintiff.’ No amount of such verbal camouflage can hide the fact that evidence of the negotiations was used by the Judge to show what the parties actually intended the words ‘subject to finance’ to mean.

[61] (1994) 36 NSWLR 290, 313.

[62] (1994) 36 NSWLR 290, 313.

[63] Unfortunately, the Judge limited his exception to the general rule to the situation where there is mutual conduct which unambiguously shows actual common agreement as to the meaning of a term. In other words, ‘[o]nly conduct which amounts to clear evidence of a mutual subjective intention as to what the contract meant at the time of the contract is admissible’ (311). Thus, evidence of the conduct of one party alone, which is consistent with the meaning which the other party alleges was held at the time of the contract, would apparently not be admissible.

[64] See text following n 43.

[65] (1994) 36 NSWLR 290, 299.

[66] (1994) 36 NSWLR 290, 309.

[67] (1994) 36 NSWLR 290, 309. This view was accepted by Osborn J in Camberfield Pty Ltd v Foustanis [2003] VSC 313 [10].

[68] (1994) 36 NSWLR 290, 310.

[69] (1994) 36 NSWLR 290, 309 and 311.

[70] (1994) 36 NSWLR 290, 310. His Honour referred to the statement, in ‘an analogous context’, by Mahoney JA in Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309, 330 that ‘[a]ctual subjective intention to contract is a factor which the law takes into account in determining whether a contract exists but it is not, or not always, the determining factor’. However, Mahoney JA’s reasoning (330-331) clearly states that an actual mutual intention that a contract should or should not result from an exchange of promises is decisive of the issue of contract formation (assuming a sufficiently certain consensus) regardless of what a reasonable person would infer from what the parties said and did.

[71] (1994) 36 NSWLR 290, 309.

[72] Cf, however, Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153. In this strange case one of the issues was whether a contract for the management of a waste disposal depot regulated the charging of fees for liquid waste. Heydon JA (with whom Mason P and Ipp AJA agreed) held that it did because, objectively interpreted, the term ‘general commercial waste’ in the contract covered liquid waste. Compelling evidence that the parties actually held the contrary intention was dismissed as irrelevant and inadmissible. This included pre-contractual conduct (the parties had made an arrangement for higher charges in respect of liquid waste some months prior to the contract), post contractual conduct that was consistent with the latter arrangement and, most significantly, testimony from both contracting parties that they understood that the contract did not relate to liquid waste. Heydon JA held that all of this evidence was ‘irrelevant in the absence of any argument that a decree of rectification should be ordered or an estoppel by convention found’ (164, [27]). Even more remarkable for present purposes was the judgment of Ipp AJA. His Honour accepted that the parties did not intend that the contract should regulate fees for liquid waste (194 [151]) but said that they were wrong as to what the contract actually provided! (193 [147]). Furthermore, his judgment seems internally inconsistent. When dealing with a separate issue concerning the interpretation of a later alleged agreement between the parties, he accepted that, even where the contract is unambiguous (192 [140]), ‘shared beliefs of the parties as to their respective rights as they existed immediately before the contract was entered into are admissible, such beliefs constituting common assumptions’ (191 [139]). See further Andrew Robertson, ‘On the Distinction between Contract and Tort’ in Andrew Robertson (ed), The Law of Obligations: Connections and Boundaries (2004) ch 6, 95-97.

[73][1997] UKHL 28; [1998] 1 WLR 896, 912-913.

[74] Ibid 914.

[75] Ibid 913.

[76] Ibid.

[77] S A Smith, Contract Theory (2004). See also A Kramer, ‘Common Sense Principles of Contract Interpretation’ (2003) 23 Oxford Journal of Legal Studies 173.

[78] Ibid 273.

[79] Ibid 274.

[80] See generally D W McLauchlan, ‘The Plain Meaning Rule of Contract Interpretation’ (1996) 2 NZBLQ 80. See also, eg, Corbin on Contracts, above n 6, 155 [544] (‘White can be made to mean black, five can be made to mean ten, 500 feet can be made to mean 100 inches, and Bunker Hill Monument can be made to signify Old South Church’) and A L Goodhart, ‘Mistake as to Identity in the Law of Contract’ (1941) 57 Law Quarterly Review 228, 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.’). Of course, the existence of such codes is inherently unlikely. But that is a matter going to the weight of evidence needed to rebut the presumption that the parties used language bearing its ordinary meaning. As Corbin also observes (158 [544]): ‘We need not be so simple as to suppose that evidence of this sort has to be believed. The plausibility and weight of evidence are very different matters from the admissibility and relevancy of evidence. But in some instances the existence of a private or special code may be admitted by the defendant; or the fact that the plaintiff communicated his special word meanings to the defendant before the integration was written down may be proved up to the hilt, by letters taken from the defendant’s own files, by his express admissions, or by the testimony of disinterested witnesses.’ Cf, however, Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326, 362 (Clarke JA): ‘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.’

[81] See, eg, Chitty on Contracts (29th ed, 2004) vol 1 [12-096]-[12-099].

[82] See further D W McLauchlan, ‘The New Law of Contract Interpretation’ (2000) 19 New Zealand Universities Law Review 147, 167-168.

[83] ‘Objectivity and Committed Contextualism in Interpretation’ in S Worthington (ed), Commercial Law and Commercial Practice (2003), ch 8, 189, 190.

[84] See D W McLauchlan, ‘A Contract Contradiction’ (1999) 30 Victoria University of Wellington Law Review 175.

[85] Professor Collins continued (190): ‘A promisor cannot enforce the terms of the contract in the sense that she may have intended, if the promisee reasonably understood them to contain a different meaning. As Justice Holmes once wrote [‘The Path of the Law’ (1897) 10 Harvard Law Review 457, 463], “nothing is more certain than that the parties may be bound by a contract to things which neither of them intended ...”.’ The first sentence in this passage is perfectly unexceptionable. So too is the second sentence to the extent that it encompasses the implication of terms to cover matters that the parties did not address or foresee and the interpretation of express terms where the parties did not contemplate the situation that has arisen and therefore did not adopt a shared meaning at the time of the contract. In the great majority of interpretation disputes the latter will indeed be the case, so that the court can only seek to resolve the dispute by reference to the presumed intention of the parties. In other words, the task is to ascertain the meaning that the document would convey to a reasonable person with knowledge of the background. It is entirely another matter, however, to adopt an interpretation that reliable evidence shows is contrary to the actual intention of the parties. That would, in effect, be to allow one party to perpetrate a fraud on the other. As Corbin points out (above n 6, 81 [539]), ‘to hold that, although A intends to sell Blackacre and B intends to buy Whiteacre, A must convey and B must accept Greenacre because their [written contract] would so be understood by C or by a large community of third persons, is to hold justice up to ridicule’.

[86] Corbin on Contracts, above n 6, vol 1, 474 [106]. A useful point of departure for the ongoing debate might be Professor Corbin’s list of 14 general principles of contract formation and interpretation, which were largely adopted by the Restatement (Second) of Contracts, to be found in J M Perillo, ‘Twelve Letters from Arthur L Corbin to Robert Braucher Annotated’ (1993) 50 Washington and Lee Law Review 755, 770-771. These include: ‘The primary and ultimate purpose of interpretation of the words of a contract is to determine and make effective the intention of the contracting parties ... No contract should ever be interpreted and enforced with a meaning that neither party gave to it ... There is no rule of law or language that requires a party to a contract to comply with any standard of usage or interpretation in choosing the words used in the contract ... No word or group of words in any language has an “objective” meaning separate from and independent of its actual use by one person to convey his thoughts to another person ... No writing is ever an “integration” of the terms of a contract unless the parties thereto have manifested their assent to it as such ... No writing, whatever its form and content, is sufficient to establish its existence and operation as an “integration” assented to as such by the parties ... There is no way to determine whether evidence of an antecedent agreement or negotiation varies or contradicts an “integration” until after the “integration” has been interpreted ... A party to a bargaining exchange (written or oral) is never bound in accordance with an interpretation different from the one that he gave to its words, if he neither knew nor had reason to know that the other party gave them a different interpretation ... A party to a bargaining exchange (written or oral) may be bound in accordance with an interpretation that he did not give to its words, if (a) he knew or had reason to know that the other party in fact gave that interpretation to the words, and (b) the other party neither knew nor had reason to know that the first party did not give the words that interpretation.’