CONTRACT LAW
REVIEW NOTES
CONSTRUCTION OF
CONTRACTUAL
TERMS
CONSTRUCTION OF TERMS IN PRACTICE
Justice Kenneth Martin,7 based upon his experiences as a Supreme Court judge
offers the following reflections that are relevant to the issue of construction of
contract:
As a trial judge running a busy commercial list which includes many contractual
interpretation cases, I have to say that I sometimes detect a rather clear felling approach by
advisers who, in embarking on pre-trial discovery quests, seek supposedly helpful
documents relating to surrounding circumstances. These pre-trial quests are usually
pursued on the basis that a hopeful rummage through every employee’s corporate email
box, or in metadata repositories, may possibly bring to light a document revealing a
mutually known circumstance prior to contracting that may, somehow, howsoever slightly,
advance the construction argument they are seeking to run over the disputed meaning of
words in a document.
Frequently that interlocutory searcher, like Christopher Columbus, seems not to know what
they hope to find, how they will get there, or indeed what they have found when they find
it. But a trawling exercise, however long, costly or burdensome, must, it is put, always be
undertaken. At the end of the day, someone is paying for all this and a real question arises
as to whether such expense is warranted.
After the dust of a search has settled in the wake of these expensive quests there is, I
humbly suggest, an essential need for the party who wants to argue there is a significant
mutually known surrounding fact(s) or circumstance(s) that existed at the time of
contracting, to do at least two things. First, it should explicitly plead out the fact to openly
identify it. It needs to do this so the opposition can be both:
(i) apprised of what that alleged fact or circumstance is before trial;
(ii) have a fair opportunity to indicate whether or not it accepts the existence of the
fact or circumstance.
Identification can avoid diverting excursions into side issues over facts which, at the end of
the day, may either be uncontested or even accepted.
The second requirement is for the party advancing a supposedly relevant surrounding fact
or circumstance, having identified it, to then go on to clearly explain at some point in the
, trial process how and why the fact or circumstance assists in advancing its construction
position.
In my experience, the second requirement, which I call the ‘causative impact’ of the
supposedly helpful surrounding fact or circumstance, is usually either globally glossed over,
or just ignored. A typical glossing scenario as to causative impact is like an overflowing
potpourri of multiple diverse alleged surrounding facts and circumstances. These are then
addressed in a closing submission delivered in a style akin to the advocacy of shabby
7 Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the
Ambiguity Gateway’ (2013) 37 Australian Bar Review 118, pp 138-9.
, solicitor Dennis Denuto during his desperate, now infamous invocation of ‘the Vibe’ in the
movie The Castle.
Each different surrounding fact may indeed carry some unique causative impact in the
interpolation process that should be explained. But I would humbly both suggest and
request that the causative impact of each background fact relied on be clearly spelled out.
THE IMPORTANCE OF INTENTION
In ascertaining the meaning of the terms of a contract the court is primarily
concerned with objectively determining the intention of the parties.8 This
fundamental point was reaffirmed in Byrnes v Kendle9 where Heydon and Crennan JJ
said:
Contractual construction depends on finding the meaning of the language of the contract –
the intention which the parties expressed, not the subjective intentions which they may
have had, but did not express. A contract means what a reasonable person having all the
background knowledge of the ‘surrounding circumstances’ available to the parties would
have understood them to be using the language in the contract to mean.
The basic approach in determining the intention of the parties was set out in
Chartbrook Ltd v Persimmon Homes Ltd10 where Lord Hoffmann said:
When the language used in an instrument gives rise to difficulties of construction, the
process of interpretation does not require one to formulate some alternative form of
words which approximates as closely as possible to that of the parties. It is to decide what
a reasonable person would have understood the parties to have meant by using the
language which they did. The fact that the court might have to express that meaning in
language quite different from that used by the parties … is no reason for not giving effect
to what they appear to have meant.
Thus, as was stated by Jonathan Sumption QC in submissions in Wasa International
Insurance Co Ltd v Lexington Insurance Co,11 ‘[a]ny judicial interpretation of a contract
involves retrospectively attaching to it a meaning which hypothetical persons in the
position of the parties are assumed to have intended at the time when it was made,
but which may have been unclear or unknown to those particular parties’.
In this process of construction it is not the role of the court to improve the contract.
Thus, in Arnold v Britton12 Lord Hodge said:
The [court] is not there to re-write the parties' agreement because it was unwise to gamble
on future economic circumstances in a long term contract or because subsequent events
have shown that the natural meaning of the words has produced a bad bargain for one
side. The question for the court is not whether a reasonable and properly informed [party]
8 Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973)
129 CLR 99 at 109.
9 (2011) 243 CLR 253 at 284; 279 ALR 212 at 236-7.
10 [2009] 1 AC 1101 at 1113-4; [2009] 4 All ER 677 at 688.
11 [2010] AC 180 at 186 -referred to with approval in HP Mercantile Pty Ltd v Hartnett [2016] NSWCA
342 at [145].
12 [2015] AC 1619 at 1640; [2016] 1 All ER 1 at 18-9.
REVIEW NOTES
CONSTRUCTION OF
CONTRACTUAL
TERMS
CONSTRUCTION OF TERMS IN PRACTICE
Justice Kenneth Martin,7 based upon his experiences as a Supreme Court judge
offers the following reflections that are relevant to the issue of construction of
contract:
As a trial judge running a busy commercial list which includes many contractual
interpretation cases, I have to say that I sometimes detect a rather clear felling approach by
advisers who, in embarking on pre-trial discovery quests, seek supposedly helpful
documents relating to surrounding circumstances. These pre-trial quests are usually
pursued on the basis that a hopeful rummage through every employee’s corporate email
box, or in metadata repositories, may possibly bring to light a document revealing a
mutually known circumstance prior to contracting that may, somehow, howsoever slightly,
advance the construction argument they are seeking to run over the disputed meaning of
words in a document.
Frequently that interlocutory searcher, like Christopher Columbus, seems not to know what
they hope to find, how they will get there, or indeed what they have found when they find
it. But a trawling exercise, however long, costly or burdensome, must, it is put, always be
undertaken. At the end of the day, someone is paying for all this and a real question arises
as to whether such expense is warranted.
After the dust of a search has settled in the wake of these expensive quests there is, I
humbly suggest, an essential need for the party who wants to argue there is a significant
mutually known surrounding fact(s) or circumstance(s) that existed at the time of
contracting, to do at least two things. First, it should explicitly plead out the fact to openly
identify it. It needs to do this so the opposition can be both:
(i) apprised of what that alleged fact or circumstance is before trial;
(ii) have a fair opportunity to indicate whether or not it accepts the existence of the
fact or circumstance.
Identification can avoid diverting excursions into side issues over facts which, at the end of
the day, may either be uncontested or even accepted.
The second requirement is for the party advancing a supposedly relevant surrounding fact
or circumstance, having identified it, to then go on to clearly explain at some point in the
, trial process how and why the fact or circumstance assists in advancing its construction
position.
In my experience, the second requirement, which I call the ‘causative impact’ of the
supposedly helpful surrounding fact or circumstance, is usually either globally glossed over,
or just ignored. A typical glossing scenario as to causative impact is like an overflowing
potpourri of multiple diverse alleged surrounding facts and circumstances. These are then
addressed in a closing submission delivered in a style akin to the advocacy of shabby
7 Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the
Ambiguity Gateway’ (2013) 37 Australian Bar Review 118, pp 138-9.
, solicitor Dennis Denuto during his desperate, now infamous invocation of ‘the Vibe’ in the
movie The Castle.
Each different surrounding fact may indeed carry some unique causative impact in the
interpolation process that should be explained. But I would humbly both suggest and
request that the causative impact of each background fact relied on be clearly spelled out.
THE IMPORTANCE OF INTENTION
In ascertaining the meaning of the terms of a contract the court is primarily
concerned with objectively determining the intention of the parties.8 This
fundamental point was reaffirmed in Byrnes v Kendle9 where Heydon and Crennan JJ
said:
Contractual construction depends on finding the meaning of the language of the contract –
the intention which the parties expressed, not the subjective intentions which they may
have had, but did not express. A contract means what a reasonable person having all the
background knowledge of the ‘surrounding circumstances’ available to the parties would
have understood them to be using the language in the contract to mean.
The basic approach in determining the intention of the parties was set out in
Chartbrook Ltd v Persimmon Homes Ltd10 where Lord Hoffmann said:
When the language used in an instrument gives rise to difficulties of construction, the
process of interpretation does not require one to formulate some alternative form of
words which approximates as closely as possible to that of the parties. It is to decide what
a reasonable person would have understood the parties to have meant by using the
language which they did. The fact that the court might have to express that meaning in
language quite different from that used by the parties … is no reason for not giving effect
to what they appear to have meant.
Thus, as was stated by Jonathan Sumption QC in submissions in Wasa International
Insurance Co Ltd v Lexington Insurance Co,11 ‘[a]ny judicial interpretation of a contract
involves retrospectively attaching to it a meaning which hypothetical persons in the
position of the parties are assumed to have intended at the time when it was made,
but which may have been unclear or unknown to those particular parties’.
In this process of construction it is not the role of the court to improve the contract.
Thus, in Arnold v Britton12 Lord Hodge said:
The [court] is not there to re-write the parties' agreement because it was unwise to gamble
on future economic circumstances in a long term contract or because subsequent events
have shown that the natural meaning of the words has produced a bad bargain for one
side. The question for the court is not whether a reasonable and properly informed [party]
8 Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973)
129 CLR 99 at 109.
9 (2011) 243 CLR 253 at 284; 279 ALR 212 at 236-7.
10 [2009] 1 AC 1101 at 1113-4; [2009] 4 All ER 677 at 688.
11 [2010] AC 180 at 186 -referred to with approval in HP Mercantile Pty Ltd v Hartnett [2016] NSWCA
342 at [145].
12 [2015] AC 1619 at 1640; [2016] 1 All ER 1 at 18-9.
