NSW Court of Appeal elucidates High Court’s contextual approach to contractual interpretation

By 15/06/2014Contract
contract interpretation

In Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 (Mainteck) the NSW Court of Appeal has elucidated the need to interpret a contract by reference to context as required by the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 (Woodside).

The decision itself concerned the proper interpretation of a building contract, where the probable source of textual ambiguity arose from the translation of French text into the English text of the disputed contract.

Woodside

In Woodside at [35] a majority of the High Court said:

“[T]his Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.  As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties … intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.”

Mainteck

In Mainteck Leeming JA (with whom Ward and Emmett JA agreed) made a number of important observations regarding the above statement, including the following:

  1. To the extent that Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 “supports a proposition that ‘ambiguity’ can be evaluated without regard to surrounding circumstances and commercial purpose and objects, it is clear that it is inconsistent [with Woodside at [35]]” (at [71]).
  2. “It cannot be that the mandatory words ‘will require consideration’ used by four Justices of the High Court [ie, “of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract”] were chosen lightly, or should be ‘understood as being some incautious or inaccurate use of language” (at [71]).
  3. “In principle, every legal text requires legal interpretation to determine its legal meaning, although there is no real scope for dispute about the interpretation of many legal texts” (at [73]).
  4. “Very often, language when considered in its context will have a single, clear meaning” (at [74]).
  5. “The legal meaning may diverge from its literal or grammatical meaning, especially in the (self-selectingly contestable) cases that reach courts.  Words do not have a ‘natural’ meaning that can be determined in isolation” (at [75]).
  6. “[To] say that a legal text is ‘clear’ reflects the outcome of that process of interpretation. It means that there is nothing in the context which detracts from the ordinary literal meaning” (at [77]).
  7. “[W]hether contractual language has a ‘plain meaning’ is (a) a conclusion and (b) a conclusion which cannot be reached until one has had regard to the context” (at [79]).
  8. “[T]he approach endorsed in Woodside avoids the difficulty of identifying what is meant by ‘ambiguity’, itself an ambiguous term, whose perception ‘differs from one judicial eye to the other’” (at [83]).
  9. “[A]lthough evidence of context and purpose expands the scope of the litigation, none of the foregoing should be seen as opening the door to lengthy litigation in commercial causes” (at [85]).
  10. “The starting point for construction of a legal text, whether of statute or contract, is its literal meaning (sometimes the term “grammatical meaning” is used)” (at [99]).

In this case the evidence of surrounding circumstances was too general and too removed to inform the construction of the contract (at [128]).

Comment

This decision has affirmed the practical requirement, post-Woodside, in proceedings involving the disputed interpretation of a commercial contract, for litigators to gather and adduce evidence of surrounding circumstances known to the parties, and the commercial purpose or object of the contract.  The degree to which such evidence is necessary will vary in each matter, including the extent to which the contract itself (for example, any recitals) reveals the surrounding circumstances and commercial purpose or objects.

For a recent pronouncement (October 2015) from the High Court on surrounding circumstances please see my article: High Court on contractual construction and surrounding circumstances