A Unified Approach to Contract Interpretation 9781509927579, 9781509927609, 9781509927593

Table of contents :
Foreword
Preface
Acknowledgements
Summary of Contents
Contents
Key Texts
Table of Cases
1. Introduction
1.1. An Overview
1.2. The Problems
1.3. The Proposed Approach to Contract Interpretation
1.4. Research Method
1.5. The Structure of this Book
PART I: THE THEORY OF CONTRACT INTERPRETATION
2. Theories of Contract Interpretation
2.1. Introduction
2.2. The Aim of Contract Interpretation
2.3. The Method of Contract Interpretation
2.4. Conclusion
3. The Key Features of Contract Interpretation
3.1. Introduction
3.2. Interpretive Materials
3.3. Interpretive Principles and Maxims
3.4. Interpretive Problems
3.5. Conclusion
4. A Unified Theory of Contract Interpretation
4.1. Introduction
4.2. The Aim of Contract Interpretation
4.3. The Method of Contract Interpretation
4.4. Conclusion
PART II: THE PRACTICE OF CONTRACT INTERPRETATION
5. The Cognition of Contract Interpretation: A Four-Stage Process
5.1. Introduction
5.2. The Interpretive Process in Action
5.3. The Four Stages of Contract Interpretation
5.4. Conclusion
6. The Practice of Contract Interpretation: The Resolution of Interpretive Disputes
6.1. Introduction
6.2. The Resolution of Interpretive Disputes
6.3. Clear Cases: One-Sided Disputes
6.4. Determinative Arguments: Breaking the Deadlock
6.5. Strict Literal Interpretation: A Lack of Sensible Justification
6.6. Linguistic Interpretation and Purposive Construction
6.7. Linguistic Interpretation and Consequentialist Construction
6.8. Textual Conflicts and the Search for Auxiliary Support
6.9. Conclusion
7. The Role of Interpretation in Contract Law
7.1. Introduction
7.2. The Cognition of Contract Law
7.3. The Definition of the Contract
7.4. The Identity and Capacity of the Parties
7.5. Characterisation
7.6. Contract Doctrine and Non-Interpretive Inferences of Intention
7.7. Conclusion
8. Conclusion
8.1. A Brief Synopsis
8.2. Potential Limitations and Criticisms
8.3. Looking to the Future
Index

Citation preview

A UNIFIED APPROACH TO CONTRACT INTERPRETATION ‘Interpretation’ (also described as ‘construction’) is central to the operation of contract law. Despite the fundamental role it plays, there have been limited attempts to explain interpretation in holistic terms. This important book aims to fill that gap by offering a systematic exposition of the iterative process. It also goes further by suggesting practical solutions to disputes regarding questions of interpretation. The book argues that interpretation is not simply about establishing what words mean – it is a process through which objective intention is inferred from the choice of words in a contract. The interpretive process involves four steps: formulate the question of interpretation in dispute; explore competing answers to the question; analyse the admissible material supporting each interpretation; and weigh and balance the competing considerations to arrive at the probable intention of the parties. By so doing, the book offers a simple yet sophisticated framework for understanding how contracts are interpreted. Volume 32 in the series Hart Studies in Private Law

ii

A Unified Approach to Contract Interpretation Ryan Catterwell

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2020 Copyright © Ryan Catterwell, 2020 Ryan Catterwell has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2020. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Catterwell, Ryan, author. Title: A unified approach to contract interpretation / Ryan Catterwell. Description: Oxford ; New York : Hart, 2020.  |  Series: Hart studies in private law ; volume 32  |  Based on author’s thesis (doctoral – University of Sydney, 2017) issued under title: Construction in contract law : a logical and structured approach.  |  Includes bibliographical references and index. Identifiers: LCCN 2019056061 (print)  |  LCCN 2019056062 (ebook)  |  ISBN 9781509927579 (hardback)  |  ISBN 9781509927586 (Epub) Subjects: LCSH: Contracts—English-speaking countries—Interpretation and construction. Classification: LCC K840 .C38 2020 (print)  |  LCC K840 (ebook)  |  DDC 346.02/2—dc23 LC record available at https://lccn.loc.gov/2019056061 LC ebook record available at https://lccn.loc.gov/2019056062 ISBN: HB: 978-1-50992-757-9 ePDF: 978-1-50992-759-3 ePub: 978-1-50992-758-6 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

For Chris and Les

vi

FOREWORD This eminently readable book is directed to an important, difficult and frequently recurring question: how to interpret a written commercial contract. More particularly, it is directed to the small minority of hard cases, which tend to be precisely those cases which lead to litigation, where the interpretation is contestable because text, purpose and consequences point in different directions. That small minority of contestably interpretable contracts represents a large proportion of commercial litigation. The majority of contract appeals in the New South Wales Court of Appeal include questions of construction,1 and there is no reason to doubt the position is different in other jurisdictions or at first instance. The issue is not merely one of sheer volume. The importance of the area is reflected in a steady stream of grants of special leave in contestable interpretation cases in recent years,2 as well as scholarly attention from jurists of the very highest calibre.3 But the common law world is well served with books on contractual interpretation, to which this book candidly acknowledges its debt. Why another? First and foremost, as its title suggests, this book presents and justifies a series of principles which inform the way in which linguistic, purposive and consequentialist arguments are resolved by courts. This is important. Textual, purposive and consequentialist arguments are the bread and butter of disputes about contractual interpretation. It is one thing to formulate such arguments, but how is a practitioner pronouncing an opinion or a court pronouncing judgment to resolve them when they point in different directions? Adages such as the ‘primacy of the text’ or ‘context in the first instance’ only go so far. One cannot cavil with an approach which is ‘neither uncompromisingly literal nor unswervingly purposive’;4 μηδὲν ἄγαν (nothing in excess) is almost always sound advice. But might there be something less Delphic to assist resolving the competing arguments? 1 By my count, of appeals delivered in 2019, 19 out of 34 (including cases where disputes were as to the construction of an insurance policy, lease, or guarantee). 2 See Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392; Simic v New South Wales Land and Housing ­Corporation [2016] HCA 47; (2016) 260 CLR 85; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; (2017) 261 CLR 544; Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; 93 ALJR 582. 3 Including chapters 8 and 9 of J D Heydon, Heydon on Contract (Thomson Reuters 2019), L ­Hoffmann, “Language and Lawyers” (2018) 134 LQR 553 and J Sumption, “A Question of Taste: The Supreme Court and the Interpretation of Contracts” (2017) 17 OUCLJ 301. 4 Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 350 (Mance J).

viii  Foreword This book supplies an approach for resolving competing arguments of interpretation, through the application of a series of principles flexible enough to accommodate the wide variety of cases, but nonetheless sufficient to give structure and transparency to the process. The book’s approach is based on principles, not rules. Hard and fast rules alone cannot work in this area (nor in the related area of statutory construction). ‘[N]o sophisticated legal system, or society, seeks intellectual refuge in the proposition that rules alone are the guardians of the security of certainty.’5 The principles do not of themselves yield a definitive answer. That would be to demand too much. But they do enable a more transparent evaluation, by directing attention to what ought to be the dispositive parts of the analysis, which is not so much formulating the largest number of arguments, but evaluating which are determinative. Thus, principles 5 and 6 ask whether textual meaning or purpose is a better indication of the parties’ objectively imputed intention, focussing attention on the strength of the competing submissions as part of the balancing process. Principle 7 states that a purposive construction is more persuasive if the alleged contractual objective is evident from the contract text, thereby once again requiring an evaluation of the cogency of the purposive submission. And so on. Applying the principles is apt to lead to a structured analysis on the strengths and weaknesses of the competing considerations. It facilitates the articulation of what might otherwise be left unexplained. An opinion or a judgment which concludes ‘in my opinion, the textual submissions of party A should be preferred over the party B’s purposive approach’ all too commonly fails to explain why that conclusion – which is dispositive of the entire dispute – has been reached. Adopting techniques along the lines of those proposed in this book will tend to result in better justifications being given, which in turn is apt to lead to the advice or judgment being more likely to be correct. Another strength of this book is its close engagement with more than a dozen contemporary Australian and United Kingdom decisions on contractual interpretation, commencing with the two modern foundations, Prenn v Simmonds6 and Investors Compensation Scheme Ltd v West Bromwich Building Society,7 and thereafter a series of leading Australian8 and United Kingdom9 decisions. It is

5 Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50; (2015) 236 FCR 199, 267 [266] (Allsop CJ). 6 Prenn v Simmonds [1971] 1 WLR 1381. 7 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. 8 McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151; Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570; Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392. 9 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (HL); Charter Reinsurance Co Ltd v Fagan [1997] AC 313 (HL); Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, [2007] Bus LR 1719; Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251;

Foreword  ix almost impossible to think of a reader, neophyte or expert, who would not benefit from the analysis of those decisions in chapters 5 and 6. The analysis engages with the essence of the reasoning in each case, and then applies it by reference to the broader categories of textual, purposive and consequentialist categories, thereby elucidating and justifying the underlying principles. Moreover, the book is the opposite of ivory-tower musings on what a unified theory of contractual interpretation might, or should, be. It is, at its heart, empirical. It purports to describe the way in which ultimate appellate courts in fact construe contracts. Special mention should be made of chapter 7. This includes a helpful conspectus of the differences between contractual interpretation and similar doctrines, such as implication, equitable rectification and characterisation (such as when a contract is a lease as opposed to a licence, or when a clause is a condition as opposed to an intermediate term). There is a tendency in litigation to deploy all conceivable submissions and evidence to every problem involving contractual meaning, without heed to the different approaches governing different issues. This chapter checks that tendency. It also addresses hard questions like the way in which the identity and capacity of the contracting parties is determined. I would have benefited from reading it before determining BH Australia Constructions Pty Ltd v Kapeller,10 as would most practitioners asked to advise on the use of post-contractual evidence to determine the identity of a party to a wholly written contract. This book, in short, is a valuable contribution to an important area of law. It is of real utility to practitioners, judges and scholars of the law of contract. Mark Leeming Judge of Appeal Supreme Court of New South Wales 16 January 2020

Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101; Re Sigma Finance Corp [2009] UKSC 2, [2010] BCC 40; Thompson v Goblin Hill Hotels Ltd [2011] UKPC 8, [2011] 1 BCLC 587; Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900; Arnold v Britton [2015] UKSC 36; [2015] AC 1619; Wood v Capital Insurance Services Ltd [2017] UKSC 24; [2017] AC 1173. 10 [2019] NSWSC 1086.

x

PREFACE This book should appeal to anyone – whether a legal practitioner, judge, law student, or scholar – who is interested in the nature of contract interpretation, or, for that matter, legal interpretation (or ‘interpretation’ more broadly). The focus is the approach to contract interpretation in England and Australia. But the ideas and findings in this book are relevant to other jurisdictions, other forms of legal interpretation, and the concept of interpretation itself. Contract interpretation, also described as contract construction, is a topic of both scholarly and practical significance. It is one of the most important aspects of contract law, if not the most important. Nearly every contract dispute involves an issue of interpretation. Unsurprisingly, a great deal has been written about contract interpretation, by judges, academics and practitioners. Hence, a reader may wonder: what is there to say that is new on the topic? This book was motivated by what I saw as a disjunction between statements of principle regarding interpretation and the interpretive process itself. That is to say, what a judge or scholar describes as interpretation does not explain much about the cognition of interpretation – the nature of the process in action. The universal guiding principle (that the aim is to ascertain the reasonable person’s understanding of what was meant or intended) does not reveal a great deal. And the many discrete and conflicting maxims and presumptions do not paint a coherent vision of the interpretive process. These anomalies led me to explore interpretation in detail, first, as a matter of theory, and, second, as a matter of empirical investigation. I set out to answer the question: what is the cognition of contract interpretation and how does it fit within the law of contract? The resulting picture of contract interpretation, and its place in contract law, is unique both in substance and in terms of its justification. Contrary to academic and judicial assertions, this book claims that contract interpretation can be understood within a unified framework. The aim is to infer objective intention from the choice of words in a contract. The interpretive process involves four steps: define the question of interpretation; identify potential answers (each being a potential ‘interpretation’); formulate arguments in support from the admissible materials (ie, the potential meanings for the words, the background, the purpose of the contract, the consequences of the competing interpretations, etc); and choose the correct interpretation by weighing and balancing the rival considerations. The product of the interpretive exercise is the definition of the agreement. The agreement is then given effect in accordance with, and subject to, contract doctrine.

xii  Preface The proposed approach is novel in substance because it gives structure to contract interpretation. It provides step-by-step guidance in the resolution of interpretive problems. It demonstrates that an interpretive dispute is determined by analysing the arguments in favour of each interpretation, with disputes of a similar argument composition being decided in a similar way. It shows that interpretation can be distinguished from related techniques, such as implication, rectification, and characterisation, because it involves a different cognitive process and it serves its own purpose in contract law. The book offers a unique perspective on contract interpretation because it tackles the topic as a matter of investigation. The first part dissects the theory of interpretation. It demonstrates that the proposed approach not only fits with recognised features of construction, but it also follows from an analysis of those features. The theoretical examination in the first part of the book makes way for rigorous empirical investigation in the second part. The focus of the second part is the practice of interpretation. The proposed approach is justified through a close analysis of the reasoning evident in leading cases. The key benefits of the approach are also explored in detail, namely, that it provides both a means to understand how interpretive disputes are resolved and a way to distinguish interpretation from related techniques. It is hoped that the combination of theoretical analysis and empirical investigation will render this book a useful contribution in the field of contract interpretation, and, more broadly, in contract law. The book represents an attempt by the author to explain the interpretive process primarily by reference to the reasoning evident in seminal cases. It explores the cognition of contract interpretation by relying on leading judgments as evidence of such cognition and by using theory (both within and outside contract law) to guide the investigation. In short, the method that underpins this book is novel and, as a result, the substance of the book is novel too. Hence, I am confident that any reader of this book will take away something new about the vexed issue of interpretation.

ACKNOWLEDGEMENTS The approach to contract interpretation advanced in this book is based on my doctoral thesis, which I completed in 2018 through the University of Sydney. However, the book has been written with a focus on practical guidance. Hence, while the first part of the book explores theoretical justification for the proposed approach, the second part examines contract interpretation in practice. It concludes by setting out guiding principles: principles that guide the resolution of interpretive disputes; and principles that assist in understanding the relationship between interpretation and related techniques. I am indebted to my thesis supervisors: Professor Elisabeth Peden and Associate Professor Wayne Courtney. Without their efforts, this book would not have been possible. I am also very grateful for the comments provided by my thesis examiners. I express my thanks to Professor Rick Bigwood for reviewing a draft manuscript of this book. His feedback was, as always, useful and insightful. Likewise, I am grateful for the helpful comments on a draft of my doctoral thesis provided by my dear mother and by Mr Simon Headland. I must also express my gratitude to Mr William Garske, my dear mother (again), and, last but certainly not least, the wonderful Vera Motina for assisting with final proofs of this book. Finally, I would like to thank the many people with whom I have discussed my views on interpretation over the years, including, but not limited to, Professor Andrew Stewart, Professor David McLauchlan and Professor Horst Lücke. I am grateful to Hart Publishing for agreeing to publish this book, particularly considering the wealth of existing commentary on the topic of contract interpretation. Some of the analysis in this book has previously appeared in the Edinburgh Law Review (R Catterwell, ‘Striking a Balance in Contract Interpretation: The Primacy of the Text’ (2019) 23 Edinburgh Law Review 52). I have also presented on the proposed approach to interpretation at institutions in Australia, the United Kingdom and Singapore, including the University of Queensland, the University of Melbourne, the University of Sydney, the University of New South Wales, the University of Oxford, the University of Edinburgh, the University of Cambridge, and Singapore Management University.

xiv

SUMMARY OF CONTENTS Foreword��������������������������������������������������������������������������������������������������������������������� vii Preface�������������������������������������������������������������������������������������������������������������������������� xi Acknowledgements���������������������������������������������������������������������������������������������������� xiii Contents�������������������������������������������������������������������������������������������������������������������� xvii Key Texts������������������������������������������������������������������������������������������������������������������ xxiii Table of Cases������������������������������������������������������������������������������������������������������������xxv 1. Introduction�������������������������������������������������������������������������������������������������������������1 PART I THE THEORY OF CONTRACT INTERPRETATION 2. Theories of Contract Interpretation��������������������������������������������������������������������25 3. The Key Features of Contract Interpretation�����������������������������������������������������51 4. A Unified Theory of Contract Interpretation�����������������������������������������������������82 PART II THE PRACTICE OF CONTRACT INTERPRETATION 5. The Cognition of Contract Interpretation: A Four-Stage Process�����������������109 6. The Practice of Contract Interpretation: The Resolution of Interpretive Disputes�����������������������������������������������������������������������������������������������������������������139 7. The Role of Interpretation in Contract Law�����������������������������������������������������201 8. Conclusion������������������������������������������������������������������������������������������������������������256 Index��������������������������������������������������������������������������������������������������������������������������261

xvi

CONTENTS Foreword��������������������������������������������������������������������������������������������������������������������� vii Preface�������������������������������������������������������������������������������������������������������������������������� xi Acknowledgements���������������������������������������������������������������������������������������������������� xiii Summary of Contents�������������������������������������������������������������������������������������������������xv Key Texts������������������������������������������������������������������������������������������������������������������ xxiii Table of Cases������������������������������������������������������������������������������������������������������������xxv 1. Introduction�������������������������������������������������������������������������������������������������������������1 1.1. An Overview��������������������������������������������������������������������������������������������������1 1.2. The Problems�������������������������������������������������������������������������������������������������3 The Nature of the Interpretive Task������������������������������������������������������������4 Interpretation and Related Techniques in Contract Law������������������������9 1.3. The Proposed Approach to Contract Interpretation������������������������������10 The Resolution of Interpretive Disputes��������������������������������������������������12 The Role of Interpretation in Contract Law��������������������������������������������14 1.4. Research Method����������������������������������������������������������������������������������������16 Theoretical Analysis������������������������������������������������������������������������������������17 Empirical Research�������������������������������������������������������������������������������������18 Justification for Research Method������������������������������������������������������������20 1.5. The Structure of this Book�������������������������������������������������������������������������21 PART I THE THEORY OF CONTRACT INTERPRETATION 2. Theories of Contract Interpretation��������������������������������������������������������������������25 2.1. Introduction�������������������������������������������������������������������������������������������������25 2.2. The Aim of Contract Interpretation���������������������������������������������������������26 The Meaning of Words�������������������������������������������������������������������������������26 Objective Intention�������������������������������������������������������������������������������������28 The Meaning of the Contract��������������������������������������������������������������������30 The Two-Stage Approach���������������������������������������������������������������������������32 The Definition of Promises, Rights, Liabilities or Obligations�������������34 A Dispute Resolution Mechanism������������������������������������������������������������36 2.3. The Method of Contract Interpretation���������������������������������������������������37 The Reasonable Person’s Understanding��������������������������������������������������38

xviii  Contents Basic Interpretive Theories������������������������������������������������������������������������39 Logic and Inference������������������������������������������������������������������������������������40 An Iterative Balancing Act�������������������������������������������������������������������������42 Intuition and Impression���������������������������������������������������������������������������44 Linguistics����������������������������������������������������������������������������������������������������45 Rational Choice�������������������������������������������������������������������������������������������49 2.4. Conclusion���������������������������������������������������������������������������������������������������49 3. The Key Features of Contract Interpretation�����������������������������������������������������51 3.1. Introduction�������������������������������������������������������������������������������������������������51 3.2. Interpretive Materials���������������������������������������������������������������������������������52 The Text as a Whole������������������������������������������������������������������������������������53 The Meanings of Words�����������������������������������������������������������������������������54 Background��������������������������������������������������������������������������������������������������58 Contractual Purpose�����������������������������������������������������������������������������������59 Potential Results������������������������������������������������������������������������������������������61 Normative Standards and Objectives�������������������������������������������������������62 Excluded Materials�������������������������������������������������������������������������������������64 Comment�����������������������������������������������������������������������������������������������������66 3.3. Interpretive Principles and Maxims���������������������������������������������������������66 Linguistic or Textual Principles����������������������������������������������������������������67 Principles Specific to Certain Types of Contract or Clause������������������70 Principles Specific to Certain Questions of Interpretation�������������������72 Comment�����������������������������������������������������������������������������������������������������73 3.4. Interpretive Problems���������������������������������������������������������������������������������74 Ambiguity����������������������������������������������������������������������������������������������������74 Inconsistency�����������������������������������������������������������������������������������������������77 Error��������������������������������������������������������������������������������������������������������������78 Comment�����������������������������������������������������������������������������������������������������79 3.5. Conclusion���������������������������������������������������������������������������������������������������80 4. A Unified Theory of Contract Interpretation�����������������������������������������������������82 4.1. Introduction�������������������������������������������������������������������������������������������������82 4.2. The Aim of Contract Interpretation���������������������������������������������������������83 The Nature of Objective Intention������������������������������������������������������������83 Objective Intention and Linguistic Meaning������������������������������������������86 Choice of Meaning��������������������������������������������������������������������������������������87 A Search for Objective Intention, Not Linguistic Meaning�������������������88 Criticisms of Objective Intention�������������������������������������������������������������91 4.3. The Method of Contract Interpretation���������������������������������������������������93 A Four-Stage Process����������������������������������������������������������������������������������94 Logic and Argumentation��������������������������������������������������������������������������95 The Role of Meaning�����������������������������������������������������������������������������������96

Contents  xix The Nature of the Balancing Exercise�������������������������������������������������������99 The Scope to Infer Objective Intention��������������������������������������������������103 4.4. Conclusion�������������������������������������������������������������������������������������������������105 PART II THE PRACTICE OF CONTRACT INTERPRETATION 5. The Cognition of Contract Interpretation: A Four-Stage Process�����������������109 5.1. Introduction�����������������������������������������������������������������������������������������������109 5.2. The Interpretive Process in Action���������������������������������������������������������111 Prenn v Simmonds�������������������������������������������������������������������������������������111 Investors Compensation Scheme Ltd v West Bromwich Building Society�������������������������������������������������������������������������������������114 Comment���������������������������������������������������������������������������������������������������117 5.3. The Four Stages of Contract Interpretation�������������������������������������������117 The Question of Interpretation���������������������������������������������������������������118 Perspective���������������������������������������������������������������������������������������������118 Subject Matter���������������������������������������������������������������������������������������119 Multiple Questions�������������������������������������������������������������������������������120 The Competing Interpretations���������������������������������������������������������������121 The Formulation of Competing Interpretations�������������������������������121 Alternative Interpretations������������������������������������������������������������������122 Interpretive Arguments����������������������������������������������������������������������������123 Linguistic Arguments���������������������������������������������������������������������������123 Textual Arguments�������������������������������������������������������������������������������125 Contextual Arguments�������������������������������������������������������������������������126 Purposive Arguments��������������������������������������������������������������������������127 Consequentialist Arguments���������������������������������������������������������������128 Normative Arguments�������������������������������������������������������������������������129 The Role of Precedent��������������������������������������������������������������������������131 The Correct Interpretation����������������������������������������������������������������������132 Strength��������������������������������������������������������������������������������������������������133 Balance���������������������������������������������������������������������������������������������������135 5.4. Conclusion�������������������������������������������������������������������������������������������������137 6. The Practice of Contract Interpretation: The Resolution of Interpretive Disputes�����������������������������������������������������������������������������������������������������������������139 6.1. Introduction�����������������������������������������������������������������������������������������������139 6.2. The Resolution of Interpretive Disputes������������������������������������������������140 6.3. Clear Cases: One-Sided Disputes������������������������������������������������������������143 Reardon Smith Line Ltd v Yngvar Hansen-Tangen��������������������������������144 Fiona Trust & Holding Corp v Privalov��������������������������������������������������145

xx  Contents 6.4. Determinative Arguments: Breaking the Deadlock�����������������������������146 Rainy Sky SA v Kookmin Bank�����������������������������������������������������������������147 Bank of Credit and Commerce International SA v Ali���������������������������149 6.5. Strict Literal Interpretation: A Lack of Sensible Justification��������������151 Chartbrook Ltd v Persimmon Homes Ltd�����������������������������������������������152 Re Sigma Finance Corp�����������������������������������������������������������������������������155 6.6. Linguistic Interpretation and Purposive Construction�����������������������157 Agricultural and Rural Finance Pty Ltd v Gardiner������������������������������159 Royal Botanic Gardens and Domain Trust v South Sydney City Council�������������������������������������������������������������������������������������������161 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd������������������163 Wood v Capita Insurance Services Ltd����������������������������������������������������165 Charter Reinsurance Co Ltd v Fagan�������������������������������������������������������167 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd�������������������������������������������������������������������������������170 Victoria v Tatts Group Ltd������������������������������������������������������������������������171 McCann v Switzerland Insurance Australia Ltd�������������������������������������173 Comment���������������������������������������������������������������������������������������������������175 6.7. Linguistic Interpretation and Consequentialist Construction������������176 Thompson v Goblin Hill Hotels Ltd����������������������������������������������������������177 Antaios Compania Naviera SA v Salen Rederierna AB������������������������180 L Schuler AG v Wickman Machine Tool Sales Ltd���������������������������������181 Investors Compensation Scheme Ltd v West Bromwich Building Society�����������������������������������������������������������������������������������������������������183 Arnold v Britton�����������������������������������������������������������������������������������������184 Comment���������������������������������������������������������������������������������������������������187 6.8. Textual Conflicts and the Search for Auxiliary Support����������������������188 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd������������������189 International Air Transport Association v Ansett Australia Holdings Ltd�������������������������������������������������������������������������������������������191 Electricity Generation Corp v Woodside Energy Ltd������������������������������195 Comment���������������������������������������������������������������������������������������������������198 6.9. Conclusion�������������������������������������������������������������������������������������������������199 7. The Role of Interpretation in Contract Law�����������������������������������������������������201 7.1. Introduction�����������������������������������������������������������������������������������������������201 7.2. The Cognition of Contract Law��������������������������������������������������������������202 7.3. The Definition of the Contract����������������������������������������������������������������206 Rules in Oral and Partly Oral Contracts������������������������������������������������208 Implication�������������������������������������������������������������������������������������������������210 Textual Connection������������������������������������������������������������������������������213 A Different Cognitive Approach��������������������������������������������������������216

Contents  xxi Rectification�����������������������������������������������������������������������������������������������219 Scope to Correct Error�������������������������������������������������������������������������220 A Different Cognitive Approach��������������������������������������������������������222 Comment���������������������������������������������������������������������������������������������������224 7.4. The Identity and Capacity of the Parties������������������������������������������������225 The Identity of a Party������������������������������������������������������������������������������226 The Capacity of a Party����������������������������������������������������������������������������228 7.5. Characterisation����������������������������������������������������������������������������������������231 Factual Characterisation��������������������������������������������������������������������������232 Legal Characterisation������������������������������������������������������������������������������234 7.6. Contract Doctrine and Non-Interpretive Inferences of Intention�����238 Intention to Contract��������������������������������������������������������������������������������240 Termination for Breach at Common Law����������������������������������������������244 Discharge by Frustration��������������������������������������������������������������������������248 Comment���������������������������������������������������������������������������������������������������253 7.7. Conclusion�������������������������������������������������������������������������������������������������253 8. Conclusion������������������������������������������������������������������������������������������������������������256 8.1. A Brief Synopsis����������������������������������������������������������������������������������������256 8.2. Potential Limitations and Criticisms������������������������������������������������������257 8.3. Looking to the Future�������������������������������������������������������������������������������259 Index��������������������������������������������������������������������������������������������������������������������������261

xxii

KEY TEXTS The following texts are cited frequently in this book, using the abbreviation ­designated below: Calnan (2017)

R Calnan, Principles of Contract interpretation, 2nd edn (Oxford University Press, 2017)

Carter (2013)

JW Carter, The Construction of Commercial Contracts (Hart Publishing, 2013)

Lewison (2015)

K Lewison, The Interpretation of Contracts, 6th edn (Sweet & Maxwell, 2015)

Lewison and Hughes (2012) K Lewison and D Hughes, The Interpretation of Contracts in Australia (Thomson Reuters, 2012) McMeel (2017)

G McMeel, McMeel on the Construction of Contracts: Interpretation, Implication and Rectification, 3rd edn (Oxford University Press, 2017)

Mitchell (2019)

C Mitchell, Interpretation of Contracts, 2nd edn (Routledge Cavendish, 2019)

xxiv

TABLE OF CASES Part A – Leading English and Australian Cases on Contract Interpretation Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57, (2008) 238 CLR 570 (Gardiner)��������������������������������������������������������viii, 56, 58, 65, 126–27, 131, 158–61, 175 Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191(HL) (The Antaios)���������������������������������������������61, 119, 129, 177, 180–81 Arnold v Britton [2015] UKSC 36,[2015] AC 1619���������������� 5–6, 27–29, 38, 56, 58, 63, 79, 101, 130, 143, 156–57, 177, 184–88, 199–200, 220 Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 (BCCI v Ali)����������������������������������������������viii, 46, 58–59, 67–68, 71, 73, 121, 130–33, 147, 149–52 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 (Chartbrook)����������������������������������������������� ix, 5, 41, 57, 61, 66, 78–79, 101, 127, 129, 134, 152–56, 199–200, 220, 222–24 Charter Reinsurance Co Ltd v Fagan [1997] AC 313 (HL) (Fagan)��������������������������������������������������������������������� vii–viii, 36, 59, 61, 87, 90, 122, 124, 127–28, 158, 167–69, 175 DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12, (1978) 138 CLR 423 (DTR Nominees)��������������������������������������������������������� 246–47 Durham v BAI (Run Off) Ltd [2012] UKSC 14, [2012] 1 WLR 867 (Durham)������������������������������������������������������������������������������������ 41, 65, 133–34, 152 Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12, (2017) 261 CLR 544 (Ecosse)�������������������������������������� vii, 27, 38, 125, 134, 158, 188 Electricity Generation Corp v Woodside Energy Ltd[2014] HCA 7, (2014) 251 CLR 640 (Electricity Generation)���������������������������vii–viii, 27, 33–34, 38, 52, 58–60, 63, 101, 104, 119, 143, 188, 195–200, 233, 259 Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, [2007] Bus LR 1719 (Fiona Trust)�����������������������������������������viii, 36, 64, 71, 122, 125–27, 129, 131–32, 143, 145–47, 151–52 Geys v Societe General [2012] UKSC 63, [2013] 1 AC 523 (Geys)������������������ 71–72, 78, 125, 143

xxvi  Table of Cases International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3, (2008) 234 CLR 151 (IATA vAnsett)�������������������viii, 29, 86, 135, 143, 188, 191–95 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) (ICS)�������������������������������������������������viii, 5–8, 22, 30–31, 38, 45, 63, 67, 78–79, 85, 87, 101–02, 111, 114–38, 141, 147, 151, 155, 157, 177, 179, 181–84, 186–87, 199–200, 220 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (HL) (Schuler)������������������������������ 40, 56–57, 61, 65, 76, 88, 120, 125–31, 134–35, 177, 181–83, 245–46 Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70, (2001) 210 CLR 181 (Maggbury)��������������������������������������� 31, 38, 59–63, 143, 213 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (HL) (Mannai)������������������������8, 38, 45, 79, 88, 90, 111, 120, 131 McCann v Switzerland Insurance Australia Ltd [2000] HCA 65, (2000) 203 CLR 579 (McCann)�������������������������������viii, 57, 63, 122, 125–26, 141, 143, 147, 152, 159, 173–77, 233–34 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, (2015) 256 CLR 104 (Mount Bruce)��������������������������� vii–viii, 7, 58, 60, 120–22, 126–27, 158, 163–67, 188–91 MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Ltd [2017] UKSC 59, [2017] Bus LR 1610��������������������������39, 57, 69–70, 77 Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47, [2011] SLT 184 (Multi-Link)����������������������������70, 79, 118, 143 Pioneer Shipping v BTP Tioxide Ltd [1982] AC 724 (HL) (The Nema)����������������������������������������������������������������������������������������34, 38, 133, 208 Prenn v Simmonds [1971] 1 WLR 1381 (HL)�������������������������� viii, 22, 36, 60–61, 74, 87, 92, 97, 100, 104, 111–14, 117, 119, 121, 124–28, 133, 135, 143 Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 (Rainy Sky)�������������������������������������������������� ix, 36, 42, 61–62, 67, 75, 101, 126, 128–29, 135, 147–49, 180, 188, 199–200 Re Sigma Finance Corp [2009] UKSC 2, [2010] BCC 40 (Re Sigma)������������������������������������������������������������������������ ix, 4, 42, 77, 111, 121–22, 152, 155–59, 188 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (HL) (The Diana Prosperity)����������������������������� viii, 2, 28, 33, 58–61, 64–65, 119, 122, 143–45, 232 Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13, (2019) 93 ALJR 582����������������������������������������������������������������������������������������vii, 58, 71, 147

Table of Cases  xxvii Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45 (Royal Botanic)�������������� viii, 46, 59–60, 101, 127, 158, 161–63, 165, 176 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51, (1979) 144 CLR 596 (Secured Income)����������� 122, 125, 129–30, 158, 169–71, 175, 210 Thompson v Goblin Hill Hotels Ltd [2011] UKPC 8, [2011] 1 BCLC 587 (Goblin Hill)����������������������������������������������������������������������������� ix, 101, 128, 132–33, 152, 177–80, 187 Victoria v Tatts Group Ltd [2016] HCA 5, (2016) 90 ALJR 392 (Victoria v Tatts)�������������������������������������������������������������������������� vii–viii, 5, 36, 159, 171–73, 234 Watson v Phipps (1985) 63 ALR 321 (PC)�����������������������������������������8, 62, 85, 90, 177 Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45, (2011) 86 ALJR 1���������������������������������������������������������������������������������������������������152 Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54, (2012) 247 CLR 129����������������������������������������������������29, 158–59 Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173 (Wood)��������������������������������������������������������������ix, 4–5, 27, 36, 39, 42–43, 48–49, 70, 74, 85, 102, 104, 137, 147, 158, 165–67, 176, 188, 200 Part B – Leading English and Australian Cases on Related Techniques Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56, [2012] SLT 205 (Aberdeen)���������������������������������������������������������������������������� 215–17 Ali v Petroleum Co of Trinidad and Tobago [2017] UKPC 2, [2017] ICR 531 (Ali)������������������������������������������������������������� 104, 217, 231–32, 234 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15, (1987) 162 CLR 549 (Ankar)��������������������������������������71, 245–47 Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25, (2002) 202 CLR 588����������������������������������������������������������������������������������������������217 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988 (Belize)���������������������������������������������������������9, 59, 71, 212–13, 217–18, 245 Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467 (NSWSC)��������������������������������������������������� 221, 223 Bank Line Ltd v Arthur Capel and Co Ltd [1919] AC 435 (HL)����������������������������250 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 (PC)����������������������������������������������������������������������������������215–16, 224 Budgett &Co v Binnington & Co [1891] 1 QB 35 (CA)������������������������������������������249 Carmichael v National Power Plc [1999] 1 WLR 2042 (HL)��������������������������� 208–09

xxviii  Table of Cases Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24, (1982) 149 CLR 337 (Codelfa)���������������������������������������2, 46, 56, 58–59, 65–66, 85, 212, 251 Commonwealth Bank of Australia v Barker [2014] HCA 32, (2014) 253 CLR 169 (Barker)����������������������������������������������������������������210–12, 216 Coulls v Bagot’s Executor and Trustee Co Ltd [1967] HCA 3, (1967) 119 CLR 460��������������������������������������������������������������������������������������� 227–28 Devani v Wells [2019] UKSC 4, [2019] 2 WLR 617������������������������ 208–09, 212, 217 Edwards v Skyways [1964] 1 All ER 494 (QB)�������������������������������������������������� 240–41 Equitable Life Assurance Society v Hyman [2002] 1 AC 408 (HL) (Hyman)������������������������������������������������������������������������������������26, 90, 210, 215, 217 Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8, (2002) 209 CLR 95�������������������������������������������������������������������������������239, 241, 243 Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450 (CA)�������������������������������������������������������������������������������������������224 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10, (2008) 234 CLR 237�������������� 205, 245 Homburg Houtimport BV v Agrosin Private Ltd [2003] UKHL 12, [2004] 1 AC 715 (The Starsin)���������������������������������������������������������������������� 226–28 Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57, [2017] AC 73 (Impact Funding)�������������������������27, 29, 71, 216 J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 (CA)������������������������������������������������������������������������������������������ 208–09 Joscelyne v Nissen [1970] 2 QB 86 (CA)������������������������������������������������������������� 221–23 Kleinwort Benson Ltd v Malaysia Mining Corpn Berhad [1989] 1 WLR 379 (CA)����������������������������������������������������������������������������������������������������242 Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70, (2001) 210 CLR 181 (Maggbury)��������������������������������������� 31, 38, 59–63, 143, 213 Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, [2016] AC 742 (Marks and Spencer)�������� 4, 9, 31, 207, 210, 212, 214–18 Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119 (HL)������ 249, 251 Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, (2004) 218 CLR 451 (Pacific Carriers)�������������������������������������������������������31, 226–27, 229 Radaich v Smith [1959] HCA 45, (1959) 101 CLR 209����������������������������������� 235–37 Regional Development Australia Murraylands and Riverland Inc v Smith [2015] SASCFC 160, (2015) 251 IR 317�������������������������������������� 248, 252 Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445 (HL)������������������������241 Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 (CA)��������������������������214 Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919����������83, 226–27 Simic v New South Wales Land and Housing Corp [2016] HCA 47, (2016) 260 CLR 85 (Simic)�������������������������������������������������������������vii, 26, 138, 219, 222–23, 227 Street v Mountford [1985] AC 809 (HL)������������������������������������������������������������ 236–37

Table of Cases  xxix Part C – Other Cases 400 George Street (Qld) Pty Ltd v BG International Ltd [2010] QCA 245, [2012] 2 Qd R 302�������������������������������������������������������������������������������������������������239 A Roberts & Co v Leicestershire County Council [1961] Ch 555 (Ch)������������������219 A & J Inglis v John Buttery (1878) 3 App Cas 552���������������������������������������������� 54, 65 Achille Lauro Fu Gioacchino & C v Total Societa Italiana per Azioni [1969] 2 Lloyd’s Rep 65�����������������������������������������������������������������������������������������249 Adamastos Shipping Co Ltd v Anglo-Saxon Petroleum Co Ltd [1959] AC 133����������������������������������������������������������������������������������������������������������78 Administration of Territory of Papua and New Guinea v Guba [1973] HCA 59, (1973) 130 CLR 353�������������������������������������������������������������������79 Agip SpA v Navigazione Atla Italia SpA [1984] 1 Lloyd’s Rep 353 (The Nai Genova)�������������������������������������������������������������������������������������������������������������������222 Agnew v Inland Revenue Commissioner [2001] UKPC 28, [2001] 2 AC 710���������������������������������������������������������������������������������������������� 235–36 Ailakis v Olivero (No 2) [2014] WASCA 127, (2014) 100 ACSR 524��������������������243 Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964�������������131 Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309������������������������������������������������������������������������������������������������� 38, 243 Air Tahiti Nui Pty Ltd v McKenzie [2009] NSWCA 429, (2009) 77 NSWLR 299������������������������������������������������������������������������������������������������������226 Akici v LR Butlin Ltd [2005] EWCA Civ 1296, [2006] 1 WLR 201������������������ 55, 57 Al Jadeed TV v United Broadcasting International Pty Ltd (2011) [2011] FCA 983, [2011] 283 ALR 205�����������������������������������������������������������������������������120 Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349�����������������������������������������211 Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd [2008] WASCA 119, (2008) 66 ACSR 594�����������������������������������������������������������61 Ambatielos v Anton Jurgens Margarine Works [1922] 2 KB 185������������������������������75 Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27, (2000) 22 WAR 101�����������������������������������������������������������������������������������������������239 Appleby v Pursell [1973] 2 NSWLR 879����������������������������������������������������������������������56 Arbuthnott v Fagan [1995] CLC 1396������������������������������������������������������ 39, 56, 58, 60 Ashton v Pratt [2015] NSWCA 12, (2015) 88 NSWLR 281�������������������������� 241, 243 Associated Japanese Bank (International) Ltd v Crédit du Nord SA [1989] 1 WLR 255�������������������������������������������������������������������������������������������������249 Associated Newspapers Ltd v Bancks [1951] HCA 24, (1951) 83 CLR 322����������246 Athlam’s Case (1610) 8 Co Rep 150; 77 ER 701�������������������������������������������������� 67, 77 Auburn Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd [2017] NSWSC 1230���������������������������������������������������������������������������������������������������������217 Australasian Medical Insurance Ltd v CGU Insurance Ltd [2010] QCA 189, (2010) 271 ALR 142�����������������������������������������������������������������������������66 Australian Medic-Care Co Ltd v Hamilton Pharmaceutical Pty Ltd [2009] FCA 1220, (2009) 261 ALR 501����������������������������������������������������������������������������61

xxx  Table of Cases Australia and New Zealand Banking Group Ltd v Compagnie D’Assurances Maritimes Aeriennes et Terrestres [1966] 1 VR 561���������������������������������������������65 Australian Aviation Underwriting Pty Ltd v Henry (1988) 12 NSWLR 121����������69 Australian Broadcasting Corp v Australasian Performing Rights Association Ltd [1973] HCA 36, (1973) 129 CLR 99����������������������������� 62, 64, 87 Australian Broadcasting Corp v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540����������������������������������������������������������������������������������� 99, 244 Australian Casualty Co Ltd v Federico [1986] HCA 32, (1986) 160 CLR 513�������41 Australian Guarantee Corp Ltd v Balding [1930] HCA 10, (1930) 43 CLR 140���������������������������������������������������������������������������������������������������������������77 Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385���������������������235 Bache v Proctor (1780) 1 Doug 382; 99 ER 247���������������������������������������������������������79 Bacon v Chesney (1816) 1 Stark 192; 171 ER 443������������������������������������������������������71 Balfour v Balfour [1919] 2 KB 571�����������������������������������������������������������������������������240 Baltic Shipping Co v Dillon [1993] HCA 4, (1993) 176 CLR 344��������������������������239 Bangladesh Export Import Co Ltd v Sucden Kerry SA [1995] 2 Lloyd’s Rep 1�����250 Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657�������������������66 Bank Line Ltd v Arthur Capel and Co [1919] AC 435���������������������������������������������250 B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227������������������������������������������������������������������������������65 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622������������������������������������������������������������������������������������������243 Beaufort Developments (NI) Ltd v Gilbert-Ash (NI) Ltd [1999] 1 AC 266 (Beaufort Developments)��������������������������������������������������57, 69–70, 205 Behn v Burness (1863) 3 B & S 751; 122 ER 281������������������������������������������������������208 Belize [2009] UKPC 10, [2009] 1 WLR 1988��������������������������������������71, 213, 217–18 Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274��������������������������������������� 245–47 Bettini v Gye (1876) 1 QBD����������������������������������������������������������������������������������������245 Biggin Hill Airport Ltd v London Borough of Bromley [2001] EWCA Civ 1089������������������������������������������������������������������������������������������������������68 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130�����������������������������103 Blue v Ashley [2017] EWHC 1928 (Comm)���������������������������������������������208–09, 235 Bowes v Chaleyer [1923] HCA 15, (1923) 32 CLR 159������������������������������������ 245–47 Brennan v Permanent Trustee Co of NSW Ltd [1945] HCA 17, (1945) 73 CLR 404�������������������������������������������������������������������������������������������������������� 56, 87 British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166��������������������������������������������������������������������������������������������������������248 Bromarin AB v IMD Investments Ltd [1999] STC 301��������������������������� 28, 36, 41, 76 Brooks v NSW Grains Board [2002] NSWSC 1049�������������������������������������������� 39, 41 Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711������� 245–47 Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187, (2001) 69 NSWLR 558������������������������������������������������������������������������������������������������������211 Burton v Palmer [1980] 2 NSWLR 878���������������������������������������������������������������������238 Butt v M’Donald (1896) 7 QLJ 68������������������������������������������������������������������������������210

Table of Cases  xxxi Byrne v Australian Airlines Ltd (1995) 185 CLR 410����������������������������������������������217 Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253���������������������������������������������64 C & J Clark International Ltd v Regina Estates Ltd [2003] EWHC 1622 (Ch)������������������������������������������������������������������������������������������������5, 45 C&P Syndicate Pty Ltd v Reddy [2013] NSWSC 643, (2013) 16 BPR 31,771����������������������������������������������������������������������������������������������������������71 Caledonian Railway Co v North British Railway Co (1881) 6 App Cas 114����������������������������������������������������������������������������������������������������������77 Canada Steamship Lines Ltd v The King [1952] AC 192�������������������������������������������72 Carminco Gold & Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd (2007) 243 ALR 472��������������������������������������������� 226, 229 Casson v Ostley PJ Ltd [2001] EWCA Civ 1013�����������������������������������������������������4, 76 Cavendish Square Holdings BV v Makdessi [2015] UKSC 67, [2016] AC 1172��������������������������������������������������������������������������������������������� 237, 239 Central Exchange v Anaconda Nickel Ltd [2002] WASCA 94, (2002) 26 WAR 33�������������������������������������������������������������������������������������������������211 CGU Workers Compensation (NSW) Ltd v Garcia [2007] NSWCA 193, (2007) 69 NSWLR 680������������������������������������������������������������������������������������������211 Chacmol Holdings Pty Ltd v Handberg [2005] FCAFC 40, (2005) 215 ALR 748�������������������������������������������������������������������������������������������������������������77 Chatenay v Brazilian Submarine Telegraph Co Ltd [1891] 1 QB 79����������������� 33, 55 Christopher Hill Ltd v Ashington Piggeries Ltd [1972] AC 441������������������������� 34, 38 Clift v Schwabe (1846) 3 CB 437; 136 ER 175������������������������������������������������������������67 Clough Engineering Ltd v Oil & Natural Gas Corp Ltd [2008] FCAFC 136, (2008) 249 ALR 458�������������������������������������������������������������������������57 Cohen v Cohen [1929] HCA 15, (1929) 42 CLR 91�������������������������������������������������240 Cohen & Co v Ockerby & Co Ltd [1917] HCA 58, (1917) 24 CLR 288����������� 61, 64 Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36, (1996) 186 CLR 389������������������������������������������������������������������������������������������������33 Concut Pty Ltd v Worrell [2000] HCA 64, (2000) 176 ALR 693����������������������������205 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14, (1986) 160 CLR 226���������������������������������������210 Co-operative Wholesale Society Ltd v National Westminster Bank Plc [1995] 1 EGLR 97����������������������������������������������������������������������������������������������������62 Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, (2016) 260 CLR 1����������������������������������������������������������������������������������208 Dann v Spurrier (1803) 3 Bos & P 399; 127 ER 218��������������������������������������������������76 Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82, (1986) 161 CLR 500��������������������������������������������������������������������������������������� 71, 205 Daventry DC v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333�������������������������������������������������154, 219–23 Davis v Pearce Parking Station Pty Ltd [1954] HCA 44, (1954) 91 CLR 642����������������������������������������������������������������������������������������� 72, 131 Davis Contractors Ltd v Fareham Urban DC [1956] AC 696������������������248–49, 252

xxxii  Table of Cases Dockside Holdings Pty Ltd v Rakio Pty Ltd [2001] SASC 78, (2001) 79 SASR 374�������������������������������������������������������������������������������������������������������������62 Doe d Hiscocks v Hiscocks (1839) 5 M & W 363; 151 ER 154����������������������������������65 Driver v War Service Homes Commissioner (No 2) [1924] VLR 535���������������� 40, 43 Durham Tees Valley Airport Ltd v BMI Baby Ltd [2009] EWHC 852 (Ch), [2009] 2 Lloyd’s Rep 246; [2010] EWCA Civ 485, [2011] 1 Lloyd’s Rep 68�������������������������������������������������������������������������������������������������������56 East v Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111��������������������������������������������������78 Eastern Health v MIA Victoria Pty Ltd [2009] VSC 105, (2009) 22 VR 502����������87 Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd [2007] EWCA Civ 547 (The Sea Angel)�������������������������248–49, 252 EGL Management Services Pty Ltd v Northern SEQ Distributor-Retailer Authority [2011] NSWSC 1234�����������������������������������������������������������������������������52 EJR Lovelock Ltd v Exportles [1968] 1 Lloyd’s Rep 163 (CA)�������������������������� 90, 103 Empresa Exportadora De Azucar v Industria Azucarera Nacional SA [1983] 2 Lloyd’s Rep 171 (The Playa Larga)����������������������������������������248–49, 251 Environmental Systems Pty Ltd v Peerless Holdings Ltd [2008] VSCA 26, (2008) 19 VR 358���������������������������������������������������������������������������������������������������233 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55, (2004) 218 CLR 471���������������������������������������������������������������������������34, 64, 93, 208 Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228���������������������������������������������������������������������������������������������������211 Etablissements Georges Et Paul Levy v Adderley Navigation Co Panama SA [1980] 2 Lloyd’s Rep 67 (The Olympia Pride)�������������������������������������219, 222–23 Extra MSA Services Cobham Ltd v Accor UK Economy Hotels Ltd [2011] EWHC 755 (Ch)������������������������������������������������������������������������������ 216, 219 F & D Normoyle Pty Ltd v Transfield Pty Ltd [2005] NSWCA 193, (2005) 63 NSWLR 502��������������������������������������������������������������������������������������������������������68 FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397��������������������������������������������������������������������������������� 248–49 Ferella v Otvosi [2005] NSWSC 962, (2005) 64 NSWLR 101��������������������������� 57, 71 Finucane v NSW Egg Corp (1988) 80 ALR 486��������������������������������������������������������208 Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420����������������������8, 62, 77–79, 90, 103 Foo Jong Peng v Phua Kiah Mia [2012] SGCA 55, [2012] 4 SLR 1267�����������������216 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 76 NSWLR 603�������������������������������������������������������������������4, 54, 60–61, 221 FSHC Group Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361��������������������������������������������������������������������������������������������� 222–23 Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047, [2001] CLC 1103��������������������������������������������������������������� 33, 43 Gate Gourmet Australia Pty Ltd v Gate Gourmet Holding AG [2004] NSWSC 149��������������������������������������������������������������������������������������������������������������66

Table of Cases  xxxiii Geipel v Smith (1872) LR 7 QB 404���������������������������������������������������������������������������250 Generalia specialibus non derogant: Athlam’s Case (1610) 8 Co Rep 150; 77 ER 701����������������������������������������������������������������������������������������������������������� 67, 77 Generate Group Pty Ltd v Sea-Tech Automation Pty Ltd [2007] NSWSC 226, (2007) 71 IPR 640����������������������������������������������������������������������������53 George v Cluning (1979) 28 ALR 57 (HCA)������������������������������������������54, 77–78, 120 Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689��������������������������������������������������������������������������������������������������������������������205 Gilberto v Kenny (1983) 48 ALR 620������������������������������������������������������������������������227 Gissing v Gissing [1971] AC 886��������������������������������������������������������������������� 34, 38, 40 Glaholm v Hays (1841) 2 Man & G 257; 133 ER 743����������������������������������������������246 Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, [2016] 1 CLC 712���������������������������������������������������������������������100 Glynn v Margetson & Co [1893] AC 351����������������������������������������������������������� 87, 158 Godecke v Kirwan [1973] HCA 38, (1973) 129 CLR 629���������������������������������������239 Goss v Lord Nugent (1833) 5 B & Ad 58; 110 ER 713������������������������������������������������65 GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631��������������������������������������������������������������������������������� 226, 244 Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112��������������������������������������������71 Grey v Pearson (1857) 6 HLC 61��������������������������������������������������������29, 54, 61, 77–78 Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43, [2014] Hous LR 35 (Grove Investments)�������������������������������������������� 48, 60, 64, 75 Guthrie v News Ltd [2010] VSC 196, (2010) 27 VR 196�����������������������������������������219 Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145 (Ex)������������������������������������������233 Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216, (2012) 45 WAR 29�������������������������������������������������������������� 54, 58, 75 Hare v Nicoll [1966] 2 QB 130�������������������������������������������������������������������������������������71 Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310������������������������������������������������������������������������������������������������� 64, 88 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 CLC 358���������������������������������������������������������������������131 Hillas & Co Ltd v Arcos Ltd (1932) 43 Lloyd’s Rep 359����������������������������� 64, 72, 207 Hirsch v Zinc Corp Ltd [1917] HCA 55, (1917) 24 CLR 34�������������������������������������72 HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228, (2012) 290 ALR 372������������������������������������������������������������������������������������������������������ 34, 71 Hope v RCA Photophone of Australia Pty Ltd [1937] HCA 90, (1937) 59 CLR 348��������������������������������������������������������������������������������������������64–65, 75–76 Hospital Products Ltd v United States Surgical Corp [1984] HCA 64, (1984) 156 CLR 41��������������������������������������������������������������������������������������������������57 Howe v Smith (1884) 27 Ch D 89������������������������������������������������������������������������������239 Hoyt’s Pty Ltd v Spencer [1919] HCA 64, (1919) 27 CLR 133�������������������������� 54, 74 Hume v Rundell (1824) 2 S & S 174; 57 ER 311���������������������������������������������������������54 Hume Steel Ltd v A-G Vic [1927] HCA 24, (1927) 39 CLR 455�������������������������������77

xxxiv  Table of Cases Intertradex SA v Lesieur-Tourteaux SARL [1978] 2 Lloyd’s Rep 509����������� 250, 252 Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] CLC 348������������������������������������������������������������������������������������������������ 7, 116 J Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep 1 (The Super Servant Two)����������������������������������������������������������������������������������������������������������249 Jackson v Union Marine Shipping Co Ltd (1874) LR 10 CP 125 (Ex)����� 39, 248, 250 James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583����������������������������������������������������������������������������������������������������������65 Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137�����������������������������������������������������������������������������������������������������������152 John v Price Waterhouse [2002] EWCA Civ 899������������������������������������������������� 43–44 Johnson v American Home Assurance Co [1998] HCA 14, (1998) 192 CLR 266�������������������������������������������������������������������������������������������������������������57 Jones v Padavatton [1969] 1 WLR 328����������������������������������������������������������������������240 Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154��������������������������������������������������������������������������������������������������������250 Jumbo King Ltd v Faithful Properties Ltd [1999] 3 HKLRD 757����������������������� 58–59 K/S Victoria Street v House of Fraser (Stores Managements) Ltd [2011] EWCA Civ 904, [2012] Ch 497�����������������������������������������������������������������73 Kellogg Brown & Root Inc v Concordia Maritime AG [2006] EWHC 3358 (Comm)���������������������������������������������������������������������������������������������55 Khan v Khan [2007] EWCA Civ 399����������������������������������������������������������������� 208–09 Kingston v Preston (1773) 2 Doug 689; 99 ER 437 (KB)�����������������������������������������238 Kriketos v Livschitz [2009] NSWCA 96, (2009) 14 BPR 26,717�����������������������������239 Kirin-Amgen Inc v Hoechst Marion Roussel Ltd [2005] RPC 9��������������������������������85 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61, (2007) 233 CLR 115 (Koompahtoo)��������������������������������������������� 245–46 Kuwait Supply Co v Oyster Marine Management [1994] 1 Lloyd’s Rep 637 (The Safeer)������������������������������������������������������������������������������������ 250, 252 Larrinaga and Co Ltd v Société Franco-Américaine des Phosphates de Medulla, Paris [1923] 14 Lloyd’s Rep 457�����������������������������������������������������252 Leader v Duffy (1888) 13 App Cas 294�����������������������������������������������������������������������26 Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1����������������������������������������������219 Lend Lease Real Estate Investments Ltd v GPT RE Ltd [2006] NSWCA 207���������68 Letang v Cooper [1965] 1 QB 232��������������������������������������������������������������������������������69 Leveraged Equities Ltd v Goodridge [2011] FCAFC 3, (2011) 191 FCR 71����������239 Lewis v Great Western Railway Company (1877) 3 QBD 195����������������������������������59 Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18, (1925) 36 CLR 60��������������������������������������������������������������������������������������� 33, 75–76 Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095������������������������250 Liverpool City Council v Irwin [1977] AC 239���������������������������������������������������������210 Lombard North Central Plc v Butterworth [1987] QB 527�������������������������������������245 Lovell & Christmas Ltd v Wall (1911) 104 LT 85���������������������������������������������� 26, 207 Lucke v Cleary [2011] SASCFC 118, (2011) 111 SASR 134�����������������������������������239

Table of Cases  xxxv Lyall v Edwards (1861) 6 H & N 337; 158 ER 139���������������������������������������������������150 Macdonald v Longbottom (1860) 1 El & El 977; 120 ER 1177�������������������������� 65, 76 Mackenzie v Coulson (1869) LR 8 Eq 368����������������������������������������������������������������219 Maggs v Marsh [2006] EWCA Civ 1055������������������������������������������������������������ 208–09 Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184, (2014) 89 NSWLR 633������������������������������������������������������������������������� 25, 56, 61, 91 Mancorp Pty Ltd v Baulderstone Pty Ltd (No 2) (1992) 60 SASR 120������������������205 Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23, (1973) 128 CLR 336�����������������������������������������������������������������������������������������������������������223 Marley v Rawlings [2014] UKSC 2, [2015] AC 129�������������������� 9, 27–29, 52, 58–59, 64, 70, 84, 111, 136, 219 Masstores (Pty) Ltd v Murray & Roberts Construction Pty Ltd 2008 (6) SA 654�����������������������������������������������������������������������������������������������������������������58 Masters v Cameron [1954] HCA 72, (1954) 91 CLR 353�������������������������������� 243–44 Matthews v Smallwood [1910] 1 Ch 777�������������������������������������������������������������� 54, 78 Maye v Colonial Mutual Life Assurance Society Ltd [1924] HCA 26, (1924) 35 CLR 14����������������������������������������������������������������������������������������������������54 MBF Investments Pty Ltd v Nolan [2011] VSCA 114, (2011) 37 VR 116���������������60 McCowan v Baine [1891] AC 401������������������������������������������������������������� 36, 41, 64, 90 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125�����������������������������������������34 McKay v Dick (1881) 6 App Cas 251�������������������������������������������������������������������������210 Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc [2009] EWCA Civ 531, [2009] 1 CLC 909 (The Reborn)���������������������������������257 Meehan v Jones [1982] HCA 52, (1982) 149 CLR 571����������������������������������������������72 Mellon Bank NA v Aetna Business Credit Inc, 619 F 2d 1001�����������������������������������93 Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd [1976] HCA 30, (1976) 133 CLR 671�����������������������������������������������������������������250 Merritt v Merritt [1970] 1 WLR 1211�����������������������������������������������������������������������243 Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119���������������� 249, 251 MGICA Ltd v United City Merchants (Australia) Ltd (1986) 4 ANZ Ins Cas 60–729���������������������������������������������������������������������������������������������������������������28 Milne v Municipal Council of Sydney [1912] HCA 25, (1912) 14 CLR 54������� 36, 57 Miramar Maritime Corp v Holborn Oil Trading Ltd [1984] AC 676�����������������������88 Missing Link Network Integration Pty Ltd v Olamte Pty Ltd [2005] NSWSC 430��������������������������������������������������������������������������������������������������������������77 Modern Building (Wales) Ltd v Limmer & Trinidad Co Ltd [1975] 1 WLR 1281�������������������������������������������������������������������������������������������������������������77 Moore v Garwood (1849) 4 Exch 681; 154 ER 1388������������������������������������������������208 Morrell v Fisher (1849) Ex 591; 154 ER 1350�������������������������������������������������������������79 Morrells of Oxford Ltd v Oxford United Football Club Ltd [2001] Ch 459����������������������������������������������������������������������������������������������� 5, 37, 44 Mourmand v Le Clair [1903] 2 KB 216�����������������������������������������������������������������������78 MT Højgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd [2015] EWCA Civ 407��������������������������������������������������������������������������������������������39

xxxvi  Table of Cases National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365���������������������������������������������������������������������103, 207, 221, 225 National Bank of Australasia Ltd v J Falkingham & Sons [1902] AC 585��������������65 National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675������������������������248 National Roads and Motorists Association v Whitlam [2007] NSWCA 81, (2007) 25 ACLC 688�����������������������������������������������������������������������������������������������88 New Zealand Shipping Co Ltd v Societe des Ateliers et Chantiers de France [1919] AC 1��������������������������������������������������������������������������������������������������������������73 Norman v FEA Plantation Ltd [2011] FCAFC 99, (2011) 195 FCR 97����������������242 North v Marina [2003] NSWSC 64, (2003) 11 BPR 21,359�������������������������������������73 Norwich Union Life Assurance Society v British Railways Board [1987] 2 EGLR 137������������������������������������������������������������������������������������������������������� 44–45 Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44, [2011] 1 AC 662�������������������������������������������������������������������������������������������������������66 OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27, (2013) 85 NSWLR 1������������������������������������������7, 36, 44, 76, 87, 136 Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd [2011] VSCA 116, (2011) 32 VR 255��������������������������������������������������������������������� 248, 252 Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17������211 Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, (2004) 218 CLR 451 (Pacific Carriers)�������������������������������������������������������������������������������31, 226–27, 229 Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50, (2015) 236 FCR 199��������������������������������������������������������������viii, 9, 235 Paciocco v Australia & New Zealand Banking Group Ltd [2016] HCA 28, (2016) 258 CLR 525��������������������������������������������������������������������������������������� 235–37 Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601������������������������������������244 Parker v Clark [1960] 1 WLR 286�����������������������������������������������������������������������������243 Partenreederei MS Karen Oltmann v Scarsdale Shipping Co [1976] 2 Lloyd’s Rep 708 (The Karen Oltmann)���������������������������������������������������������������56 Patching v Dubbins (1853) Kay 1; 69 ER 1�����������������������������������������������������������������69 Patersons Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321, (2015) 108 ACSR 483�����������������������������������������������������������������������233 Pavlovic v Universal Music Australia Pty Ltd [2015] NSWCA 313, (2015) 90 NSWLR 605������������������������������������������������������������������������������������������������������244 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114, (2004) 12 BPR 22,879���������������������������������������������������������������������73 Perri v Coolangatta Investments Pty Ltd [1982] HCA 29, (1982) 149 CLR 537�������������������������������������������������������������������������������������������������������������72 Persimmon Homes Ltd v Ove Arup & Partners Ltd [2015] EWHC 3573���������������42 Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472��������������������������������������������������������������������������������������������������������������213 Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64��������������������������������������������������������������������������������������������������55 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827��������������������� 71, 205

Table of Cases  xxxvii Popiw v Popiw [1959] VR 197������������������������������������������������������������������������������������243 Prestcold (Central) Ltd v Minister of Labour [1969] 1 WLR 89�������������������������������68 Prime Sight Ltd v Lavarello [2013] UKPC 22, [2014] AC 436, 450���������������� 14, 203 Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462�������������203 Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541������������������������������������������������������������������������������56 Pukallus v Cameron [1982] HCA 63, (1982) 180 CLR 447����������������������������� 222–23 Purcell v Bacon [1914] HCA 86, (1914) 19 CLR 241, (1916) 22 CLR 307������������������������������������������������������������������������������������������������������ 238–39 R v Lord Chancellor’s Department, Ex parte Nangle [1991] ICR 743����������� 240, 242 Raffles v Wichelhaus (1864) 2 Hurl & C 906; 159 ER 375��������������������������������� 75–76 Rankin v Scott Fell & Co [1904] HCA 42, (1904) 2 CLR 164�����������������������������������65 Re Bond Worth Ltd [1980] Ch 228����������������������������������������������������������������������������235 Re Calf & Sun Insurance Office [1920] 2 KB 366�������������������������������������������������������57 Re Golden Key Ltd [2009] EWCA Civ 636���������������������������������������������������������������134 Re Interwest Hotels Pty Ltd (1993) 12 ACSR 78�������������������������������������������������������229 Re Lehman Brothers International (Europe) (in administration) (No 4) [2017] UKSC 38, [2018] AC 465���������������������������������������������������������������������������69 Re Lehman Brothers International (Europe) [2009] EWHC 2545 (Ch)����������������219 Re Mento Developments (Aust) Pty Ltd [2009] VSC 343, (2009) 73 ACSR 622����������������������������������������������������������������������������������������������������������229 Re North Stafford Steel, Iron and Coal Company (Burslem) Ltd; Ex parte Ward (1868) LR 3 Exch 172�������������������������������������������������������������������69 Re Sassoon; Commissioners of Inland Revenue v Raphael [1933] Ch 858���������������56 Re Sigma Finance Corp [2008] EWCA Civ 1303, [2009] BCC 393������ 42, 53, 61, 88 Re Wedgwood Coal & Iron Co (1877) 7 Ch D 75 (Anderson’s Case)���������������� 74, 77 Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 199�����������������127 Regional Power Corp v Pacific Hydro Group Two Pty Ltd [No 2] [2013] WASC 356, (2013) 46 WAR 281��������������������������������������������������������������������������233 Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592��������������207 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234������������������������������������������������������������������������������������������������������211 Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd [2012] VSCA 134, (2012) 37 VR 486��������������������������������������������������4, 64 Riches v Hogben [1986] 1 Qd R 315��������������������������������������������������������������������������243 Riley v Cocco [2001] NSWCA 379�������������������������������������������������������������������������������44 Rinehart v Welker [2012] NSWCA 95, (2012) 95 NSWLR 221�������������������������������71 Robertson v French (1803) 4 East 130; 102 ER 779�������������������������������������������� 77, 87 Roufos v Brewster (1971) 2 SASR 218�����������������������������������������������������������������������243 RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [2010] UKSC 14, [2010] 1 WLR 753�������������������������������������� 243–44 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65, (2007) 69 NSWLR 603���������������������������������������������������������������������������������������������������� 56, 223 Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149��������244

xxxviii  Table of Cases Sahade v BP Australia Pty Ltd [2004] NSWSC 512, (2004) 12 BPR 22,149����������56 Sandra Investments Pty Ltd v Booth [1983] HCA 46, (1983) 153 CLR 153�����������69 Sattva Capital Corp v Creston Moly Corp 2014 SCC 53, [2014] SCR 633��������������58 Saunderson v Piper (1839) 5 Bing NC 425; 132 ER 1163�����������������������������������������77 SCN Pty Ltd v Smith [2006] QCA 360������������������������������������������������������������������������69 Scottish Amicable Life Assurance Society v Reg Austin Insurances Pty Ltd (1985) 9 ACLR 909������������������������������������������������������������������������������������������������229 Scottish Power UK plc v BP Exploration Operating Co Ltd [2015] EWHC 2658 (Comm)���������������������������������������������������������������������������������������������49 Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 638, (1993) 45 FCR 84��������������������������������������������������������������������210 Shahid v Australasian College of Dermatologists [2008] FCAFC 72, (2008) 168 FCR 46������������������������������������������������������������������������������������������������241 Sheng Siong Supermarket Pte Ltd v Carilla Pte Ltd [2011] SGHC 204�������������������58 Shepherd v Felt & Textiles of Australia Ltd [1931] HCA 21, (1931) 45 CLR 359�������������������������������������������������������������������������������������������������������������210 Shore v Wilson (1842) 9 Cl & F 355; 8 ER 450���������������������������������������������������� 27, 29 Sion v NSW Trustee Guardian [2013] NSWCA 337�����������������������������������������������241 Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732������������������������������������������������������������������������������������������������������63 Smith v Chadwick (1882) 20 Ch D 27�������������������������������������������������������������������������54 Smith v Hughes (1871) LR 6 QB 597���������������������������������������������������������������������������99 Smith v Lucas (1881) 18 Ch D 531������������������������������������������������������������������������������27 Smith v South Wales Switchgear Ltd [1978] 1 WLR 165�����������������������������������������131 Smith v Wilson (1832) 3 B & Ad 728; 110 ER 266�����������������������������������������������������55 Snelling v John G Snelling Ltd [1973] QB 87�������������������������������������������������������������243 Society of Lloyd’s v Robinson [1999] 1 WLR 756��������������������������������������������������������53 Software AG (Australia) Pty Ltd v Racing and Wagering Western Australia [2009] FCAFC 36, (2009) 175 FCR 121���������������������������������������������������������������61 Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290�������������������������������������������34 Stirnemann v Kaza Investments Pty Ltd [2011] SASCFC 77����������������������������������244 Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27��������������������������������������������������������������������������������������������������� 205–06 Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574���������������������������205 Sunrock Aircraft Corp Ltd v Scandinavian Airlines System Denmark–Norway–Sweden [2007] EWCA Civ 882, [2007] 2 Lloyd’s Rep 612���������������������������������������������������������������������������������������������� 57, 65 Suttor v Gundowda Pty Ltd [1950] HCA 35, (1950) 81 CLR 418���������������������������73 Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560, [2002] 2 EGLR 71��������������������������������������������������������������������������������������������������222 Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140����������������������������������������������������������������������������� 8, 76, 90, 213 Tartsinis v Navona Management Co [2015] EWHC 57 (Comm)������������������������������������������������������������������������������������������ 219, 222–23, 225

Table of Cases  xxxix Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 (KB)��������������������������248–49, 252 Taylor v Johnson [1983] HCA 5, (1983) 151 CLR 422����������������������������������������������99 Thames & Mersey Marine Insurance Co v Hamilton, Fraser & Co (1887) 12 App Cas 484�������������������������������������������������������������������������������������������68 The Moorcock (1889) 14 PD 64������������������������������������������������������������������������� 212, 216 Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776������������������������������������������208 Thornley v Tilley [1925] HCA 13, (1925) 36 CLR 1��������������������������������������������������56 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, (2004) 219 CLR 165 (Toll)������������������������������������������������������������������������������� 29, 34, 38, 86 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632��������������������������������������������������������������������������������������������������246 Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48, [2009] 1 AC 61 (The Achilleas)����������������������������������������������������������������������������239 Transocean Drilling UK Ltd v Providence Resources plc [2016] EWCA Civ 372, [2016] 2 Lloyd’s Rep 51������������������������������������������������������������233 Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326������������������������������������������������������������������������������������������������������122 Trump International Golf Club Scotland Ltd v Scottish Ministers [2015] UKSC 74, [2016] 1 WLR 85��������������������������������������������������������������������207 Tsolon Investments Pty Ltd v Waffle Pod Footing Systems NSW Pty Ltd [2002] NSWCA 302������������������������������������������������������������������������������������������������77 United Scientific Holdings Ltd v Burnley BC [1978] AC 904��������������������������� 72, 247 Universal Steam Navigation Co Ltd v James McKelvie & Co [1923] AC 492�������229 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8, (1968) 118 CLR 429��������������33, 40, 72, 76, 232 Vantage Systems Pty Ltd v Priolo Corp Pty Ltd [2015] WASCA 21, (2015) 47 WAR 547�����������������������������������������������������������������������������������������������244 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444������������������������������������������������������������������������������������������������� 38, 58, 66 W & R Pty Ltd v Birdseye [2008] SASC 321, (2008) 102 SASR 477����������������������206 Wall Street Enterprises Pty Ltd v Spooner [2009] QSC 28, [2009] 2 Qd R 392������64 Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40, [2010] 1 AC 180�����������������������������������������������������������������������90 Wasa International Insurance Co Ltd v Lexington [2008] EWCA Civ 150, [2008] Bus LR 1029�������������������������������������������������������������������������������� 92, 132, 257 Watcham v Attorney-General of the East African Protectorate [1919] AC 533����������������������������������������������������������������������������������������������������������65 Watchorn v Langford (1813) 3 Camp 422; 170 ER 1432������������������������������������������68 Watford Electronics Ltd v Sanderson Cfl Ltd [2001] EWCA Civ 317��������������������233 Weardale Coal & Iron Co Ltd v Hodson [1894] 1 QB 598����������������������������������������88 Webb v Plummer [1819] 2 B & Ald 746; 106 ER 537������������������������������������������������71 Westacott v Hahn [1918] 1 KB 495������������������������������������������������������������������������������36 Westfield Management Ltd v Perpetual Trustee Company Ltd [2007] HCA 45, (2007) 233 CLR 528������������������������������������������������������������������������������������������������71

xl  Table of Cases Westpac Banking Corp v Tanzone Pty Ltd [2000] NSWCA 25, (2000) 9 BPR 17,521��������������������������������������������������������������������������������������������������� 62, 129 Wickman Machine Tool Sales Ltd v L Schuler AG [1972] 1 WLR 840������������ 182–83 William Sindall Plc v Cambridgeshire CC [1994] 1 WLR 1016������������������������� 77–78 Wilson v Anderson [2002] HCA 29, (2002) 213 CLR 401��������������������������� 28, 38, 86 Wilson v Wilson (1854) 5 HLC 40; 10 ER 811���������������������������������������������������� 61, 79 Wong Mee Wan v Kwan Kin Travel Services Ltd [1996] 1 WLR 38������������ 9, 234–35 Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111, [2013] 1 CLC 662��������������������������������������������������������������������������������������������������211 Youell v Bland Welch & Co Ltd [1992] 2 Lloyd’s Rep 127�����������������������������������������73 Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR 1029��������������������������������������������������������������31

1 Introduction 1.1.  An Overview [1-01]  This book advances a unified approach to contract interpretation. It  claims that interpretation is a four-stage process – a process through which objective intention is inferred from the choice of words in a contract. The proposed approach is a unified one for at least three reasons: it fits as a matter of theory; it can be seen in action in seminal cases; and it defines the role of interpretation in contract law. In essence, the aim of the book is to explain the cognition of interpretation, that is, what is actually involved in construing a contract.1 [1-02]   As established in this book, contract interpretation (also described as contract construction) is a technique employed to infer objective intention. The intention is ‘objective’ because it is inferred from the choice of words in a contract, taking into account background, purposive, consequentialist and normative considerations. The interpretive process consists of four steps: 1.

The definition of a question regarding the agreement made by the parties (the ‘question of interpretation’ or ‘question of construction’). 2. The identification of competing answers to the question (each being a potential ‘interpretation’ or ‘construction’). 3. The formulation of arguments in support of each interpretation from the admissible materials, namely, the potential meanings for the words, the contract as a whole, the background to the transaction, the objects served by the contract, the consequences of the competing interpretations, and normative factors, such as business common sense. 4. The evaluation of the competing arguments to arrive at the interpretation that was probably intended. The product of the interpretive exercise is the definition of the agreement. What is usually defined is in the nature of a rule – a rule that is subsequently applied, in accordance with contract doctrine, so as to define rights and obligations.

1 For a similar approach, see R McDougall, ‘Construction of Contracts: The High Court’s Approach’ (2016) 41 Australian Bar Review 103, 114 (explaining ‘what it is [courts] are doing [when interpreting contracts]’). See also A Burrows, A Restatement of the English Law of Contract (Oxford University Press, 2016) 86 §14(2) (‘clarify[ing] how, in practice, [the approach to interpretation] should be applied’).

2  Introduction [1-03]   Interpretation is a practical exercise. Hence, the easiest way to explain interpretation is to describe how it works in action. For example, consider a simple contract: Party A agrees to sell 50kg of apples to party B for $100.

If party A delivers green apples and party B claims that the contract was for sale of red apples, the question of what type of apples was sold is resolved through interpretation. Party A’s construction is that a sale of any type of apple was intended. Party B’s construction is that a sale of red apples was intended. Party A can point to a simple linguistic argument: the word ‘apples’ denotes any kind of apple. Party B can also point to a linguistic argument, namely, ‘apples’ can denote red apples. Without more, party A would probably succeed: the parties objectively intended a sale of any type of apple. However, interpretive disputes are not resolved purely by reference to linguistic considerations.2 ‘[T]here is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning’.3 Hence, party B may prevail if it advances a convincing argument by relying on either the contract as a whole or the background to the transaction.4 For example, looking to background, party B could argue that a sale of red apples was objectively intended if, at the time of sale, the market price of red apples was $2 per kg and green apples were much cheaper. However, party B’s interpretation is more persuasive if it is grounded in the contract text. Hence, if the contract stated that ‘A and B are committed to local fruit production’ and if red apples were the only locally produced apples, party B could advance a rather convincing purposive argument – one that is derived from the contract text, taken as a whole. [1-04]   An interpretive dispute is determined by evaluating the arguments advanced in favour of each construction. The court assesses the strength of each argument, that is, the extent to which each argument establishes the objective intention of the parties. The court then weighs and balances the arguments as a whole so as to arrive at the construction that was probably intended. It follows that an interpretive dispute can be understood in terms of the composition of arguments in favour of each interpretation. Some disputes are one-sided: all or most arguments point in favour of one interpretation, or a particularly persuasive argument clearly dictates the outcome. Other disputes are more finely balanced

2 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 995–96 (Lord Wilberforce) (HL) (The Diana Prosperity). 3 Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24, (1982) 149 CLR 337, 348 (Mason J). 4 Party B can also rely on any evidence of subjective intention, assuming that the contract is ambiguous as to its subject matter: see [3-31] (n 156).

The Problems  3 because one party can reasonably rely on the meaning of a key word or phrase and the other can reference the object of the transaction or the practicalities of the competing interpretations. Often, in such a dispute, the interpretation that succeeds is the one that fits best with the contract as a whole. Hence, referring back to our hypothetical sale of apples, party B succeeds if it can rely on a purposive argument drawn from the contract text. But, short of absurdity, party B fails if party B merely relies on a coincidence between the contract price and the market price of apples at the time of sale. The parties are bound by the choice of words in the contract. [1-05]  The role of interpretation in contract law is that of a technique employed to define what was agreed in a contract. Usually, what is defined is in the nature of a rule. For example, in the hypothetical above, interpretation is employed to define the rule dictating the type of apples to be delivered under the contract of sale. The problem is that the terms ‘interpretation’ and ‘construction’ are used interchangeably in contract law, and the term ‘construction’ is also used to denote techniques other than the interpretive technique that is the focus of this book. By defining interpretation, this book differentiates between the range of ‘constructional’ techniques that are employed in contract law. It shows that each technique is engaged to apply contract doctrine – each technique fulfils a particular purpose. Interpretation is the most prominent technique: it is the tool engaged to infer what was agreed from the choice of words in a contract. It is the central means through which the court gives effect to the principle of freedom of contract. However, other techniques are also employed to define the content of a contract, namely, implication, rectification and the unique approach applied in the case of oral or partly oral contracts. In addition, contract law involves a number of techniques that are not directed to the definition of rules in a contract, but nonetheless resemble interpretation, namely: the approach applied to identify a party to a contract or the capacity in which a party has contracted; the processes of factual and legal characterisation, which determine whether factual or legal components in a rule (once defined) are satisfied; and the non-interpretive means through which intention is established for the purpose of applying doctrinal rules, such as the rules regarding termination for breach at common law. In short, this book not only explains the nature and cognition of contract interpretation – it also defines the role of interpretation in contract law.

1.2.  The Problems [1-06]   There are two related problems regarding contract interpretation. The first is that the nature of interpretation itself is unclear. The second is that interpretation is often confused with other techniques in contract law.

4  Introduction

The Nature of the Interpretive Task [1-07]   Contract interpretation is commonly cited as a critical component in the law of contract.5 It is ‘a topic of vital importance’:6 ‘the most important part of contract law’.7 This is demonstrated by the fact that it is constantly the subject of litigation8 (albeit on the facts rather than principles).9 ‘[M]ost contractual disputes turn on [the interpretation of the contract]’.10 As McMeel notes, ‘issues concerning construction represent an unavoidable source of potential dispute’.11 To similar effect, McLauchlan remarks: Contract interpretation disputes continue to take up more judicial time than all other areas of the law of contract put together. A perusal every few weeks of the main English, Australian and New Zealand databases will reveal scores of new cases.12

In fact, in the month of June 2017 alone, the ‘construction’ or ‘interpretation’ of a contract featured in 18 decisions of the High Court of England and Wales and 21 decisions of the Supreme Court of New South Wales (including decisions of the Court of Appeal). [1-08]   Despite its ubiquity, the essential character of interpretation remains a matter of debate.13 It is often said that the principles of interpretation are well established.14 However, as Calnan has noted, ‘[f]or practically every statement 5 See, eg, R Goff, ‘Commercial Contracts and the Commercial Court’ [1984] LMCLQ 382, 385 (‘the staple diet … of the Commercial Court’); A Burrows, ‘Construction and Rectification’ in A Burrows and E Peel (eds), Contract Terms (Oxford University Press, 2007) 77–78; Burrows, A Restatement of the English Law of Contract (n 1) 85 §14; D McLauchlan, ‘Contract Interpretation: What is it About?’ (2009) 31 Sydney Law Review 5, 5; JW Carter, W Courtney and G Tolhurst, ‘“Reasonable Endeavours” in Contract Construction’ (2014) 32 JCL 36, 40; G Leggatt, ‘Making Sense of Contracts: The Rational Choice Theory’ (2015) 131 LQR 454, 454. See also M Furmston, Cheshire, Fifoot, and Furmston’s Law of Contract, 17th edn (Oxford University Press, 2017) 170 (‘much of the time of the courts is taken up with the process of deciding what the words used by the parties mean’). 6 C Staughton, ‘How do the Courts Interpret Commercial Contracts?’ (1999) 58 CLJ 303, 303. 7 Carter (2013) 3 [1-02]. 8 See, eg, JJ Spigelman, ‘Contractual Interpretation: A Comparative Perspective’ (2011) 85 Australian Law Journal 412, 412; Calnan (2017) 6 [Pr.30] (‘an unprecedentedly large number of cases’). 9 See, eg, Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173, 1183 [24] (Lord Hodge) (Wood). 10 Burrows, A Restatement of the English Law of Contract (n 1) 85 §14. 11 McMeel (2017) 6 [1.02]. 12 D McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ [2015] LMCLQ 406, 406. 13 See, eg, Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, [2016] AC 742, 756 [25]–[26] (Lord Neuberger), 769 [76] (Lord Clarke) (Marks and Spencer); D McLauchlan, ‘Construction and Implication: In Defence of Belize Telecom’ [2014] LMCLQ 203, 207; Mitchell (2019) 1, 6. See also Casson v Ostley PJ Ltd [2001] EWCA Civ 1013, [31] (Sedley LJ) (‘to construe’ or ‘to construct’). 14 See, eg, Re Sigma Finance Corp [2009] UKSC 2, [2010] BCC 40, 48 [9] (Lord Mance) (‘not in doubt’); Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd [2012] VSCA 134, (2012) 37 VR 486, 515 [104] (the Court) (‘well settled’); Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 76 NSWLR 603, 619 [23] (Allsop P); D Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 LQR 577, 577 (‘largely settled’). See also McLauchlan (n 12) 408 (cases set out at n 13).

The Problems  5 about how to interpret contracts, you will find a contradictory one’.15 For this reason, along with the vague nature of the rules themselves, ‘the principles are not as clear or as easy to apply as is sometimes hoped’.16 As a result, ‘judges regularly disagree’ on points of interpretation.17 ‘[C]ourts at various levels often repeat a similar list of principles of construction, yet reach radically different results when these are applied to an individual document’.18 As McLauchlan remarks: The different opinions concerning core principles of the law of contract interpretation … might reasonably be viewed with some alarm. There surely ought to be more agreement by now as to the basic approach to the interpretative task.19

In short, three decades after Atiyah’s Essays on Contract, there is still no clear answer to the critical question: ‘What is it that a court does when it embarks on the process of construction?’20 [1-09]   This book advances a unified approach to contract interpretation. This is a lofty objective.21 For some, it is viewed as impossible.22 For example, Lord Steyn, writing extra-curially, has stated that ‘[t]he subject is too elusive to be encapsulated in a theory’.23 To similar effect, Carter, Courtney and Tolhurst deny that a ‘“one size fits all” approach’ is viable ‘[e]xcept at the highest level of generality’.24 However, a unified approach to contract interpretation, expressed with some degree of sophistication, is clearly warranted considering the everyday applications of the process in contract law. ‘[T]he parties are entitled to the best explanation [that] the judge can give’ on a question of interpretation.25 In many cases, very large sums of money are at stake. To reference but a few well-known cases, Wood v Capita Insurance Services Ltd26 involved a £2.43m dispute; Chartbrook Ltd v Persimmon Homes Ltd,27 a £3.5m claim; Victoria v Tatts Group Ltd,28 a $490m dispute; and Arnold v 15 Calnan (2017) 8 [Pr.36]. 16 Borrowed from PS Davies, ‘Interpreting Commercial Contracts: A Case of Ambiguity?’ [2012] LMCLQ 26, 29. 17 D McLauchlan, ‘Common Intention and Contract Interpretation’ [2011] LMCLQ 30, 30. 18 RC Connal, ‘Has the Rainy Sky Dried Up? Arnold v Britton and Commercial Interpretation’ (2016) 20 Edinburgh Law Review 71, 76. cf HG Beale, Chitty on Contracts, 33rd edn (Sweet & Maxwell, 2018) 1037, [13-041]. 19 D McLauchlan, ‘The ICS Principles: A Failed “Revolution” in Contract Interpretation?’ (2016) 27 New Zealand Universities Law Review 263, 293. 20 PS Atiyah, Essays on Contract (Clarendon, 1990) 269. 21 See, eg, CA Wright (1944) 22 Canadian Bar Review 477, 477 (interpretation is ‘undoubtedly … one of the most difficult subjects in law’). 22 See, eg, Morrells of Oxford Ltd v Oxford United Football Club Ltd [2001] Ch 459, 469 [28] (Robert Walker LJ) (CA) (‘any description of the requisite mental process is likely to be metaphorical and inexact’) (statutory interpretation). cf Mitchell (2019) 1. 23 J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 123. 24 Carter, Courtney and Tolhurst, ‘“Reasonable Endeavours” in Contract Construction’ (n 5) 40. 25 See, eg, C & J Clark International Ltd v Regina Estates Ltd [2003] EWHC 1622 (Ch), [24] (Neuberger J). 26 Wood [2017] UKSC 24, [2017] AC 1173 (as discussed at [6-55]–[6-56]). 27 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 (as discussed at [6-28]–[6-30]). 28 Victoria v Tatts Group Ltd [2016] HCA 5, (2016) 90 ALJR 392 (as discussed at [6-69]–[6-71]).

6  Introduction Britton,29 a claim regarding contingent annual liabilities that, on a modest calculation, must have exceeded several billion pounds. The parties to such disputes are entitled to a sophisticated explanation – something more than a statement that ‘it is what the words mean’. [1-10]   Many scholars and jurists have grappled with the nature of contract interpretation.30 It has been the subject of several substantial treatments in England and Australia. However, Carter is the only scholar to put forward a comprehensive theoretical account of the process.31 The other major texts either focus on general principles32 or explore discrete interpretive issues.33 This book is different. It puts forward a unified approach to interpretation that is justified both as a matter of theory and through an empirical analysis of leading authorities. [1-11]   What is the current state of knowledge? In the English and Australian cases and commentary, contract interpretation is described in two ways. Primarily, it is explained in terms of its ultimate aim or object. Under English law, the aim is to determine ‘objective meaning’ or to ascertain objective intention by focusing on the meaning of the words.34 Likewise, under Australian law, the goal is to ascertain the meaning of the terms in a contract,35 with such meaning representing the parties’ objective intention.36 Looking beyond judicial statements of principle, contract law scholars appear divided as to the aim in contract interpretation. Some advocate intention as the key guide. Others claim that linguistic meaning is the focus. In addition, academics from both camps support a two-stage approach: the aim is to ascertain meaning or intention and then apply or give effect to the contract. Distinct from these abstract conceptions, some scholars claim that the goal of contract interpretation is pragmatic, namely, the resolution of disputed issues or the definition of promises, rights, liabilities or obligations. [1-12]  Contract interpretation is not only described in terms of its aim or object. It is also conceptualised as a matter of method or thought process. The 29 Arnold v Britton [2015] UKSC 36, [2015] AC 1619 (as discussed at [6-100]). 30 JD Heydon, Heydon on Contract (Thomson Reuters, 2019) 249 [8.10], fn 1 (‘the contributions of scholars rival the sands of the seashore’). 31 Carter (2013). But see also Leggatt (n 5) (critiqued in D McLauchlan, ‘A Better Way of Making Sense of Contracts?’ (2016) 132 LQR 577). 32 Calnan (2017); Lewison (2015); Lewison and Hughes (2012); McMeel (2017). See also Heydon (n 30) chs 8–9; P Herzfeld, T Prince and S Tully, Interpretation and Use of Legal Sources: The Laws of Australia (Thomson Reuters, 2013) 487–582 [25.3.10]–[25.3.830]. 33 McMeel (2017); Mitchell (2019). David McLauchlan has also produced a comprehensive series of articles dealing with interpretive issues: see, eg, McLauchlan, ‘Contract Interpretation’ (n 5); McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ (n 12); McLauchlan, ‘Construction and Implication’ (n 13); McLauchlan, ‘Common Intention and Contract Interpretation’ (n 17); McLauchlan, ‘The ICS Principles’ (n 19); McLauchlan, ‘A Better Way of Making Sense of Contracts?’ (n 31); D McLauchlan, ‘A Construction Conundrum’ [2011] LMCLQ 428; D McLauchlan, ‘Commonsense Principles of Interpretation and Rectification?’ (2010) 126 LQR 8. 34 See [2-06]. 35 See [2-06]. 36 See [2-10].

The Problems  7 authoritative position is that a contract is construed from the perspective of the reasonable person. Yet, what this involves is rarely explained or explored. Instead, much of the discussion has focused on the traditional debate whether construction is literal, textual, contextual or purposive – a debate that barely scratches the surface in terms of understanding interpretation.37 There are more complex accounts of the thought process involved in construing a contract. However, the different explanations seem to be inconsistent. Some claim that interpretation is intuitive and beyond explanation, while others assert that it is logical and guided by inference. For some, the process is ‘partly logical and partly intuitive (though rational)’.38 For others, construction is a linguistic process or one that involves a balancing of various factors. For one judge of the High Court of England and Wales, it depends on ‘rational choice’.39 For the Supreme Court of the United Kingdom, it is a ‘unitary’ and ‘iterative’ exercise.40 [1-13]   The fact that contract interpretation is conceptualised in a number of different ways is problematic.41 Judges lack a clear consensus regarding the object of interpretation. This gives rise to uncertainty and inconsistency in judicial reasoning. Judges come to different conclusions by conceptualising interpretation in different ways. For example, a case that is resolved as a matter of meaning may be decided differently if it is resolved as a matter of inferred intention. The consecutive successful appeals in Investors Compensation Scheme Ltd v West Bromwich Building Society42 can be explained on this basis. The trial judge and a majority of the House of Lords approached the task as a matter of inferred intention. By agreeing to exclude ‘any claim (whether sounding in rescission for undue influence or otherwise)’ from an assignment of claims, the parties had objectively intended an exclusion that was limited to claims in rescission. Taking into account all the relevant circumstances, including in particular the ‘very strange’43 words in parentheses, this was what the parties had objectively intended by choosing the words in the contract. As Lord Hoffmann famously concluded, ‘something seemed to have gone wrong [with the language]’.44 By contrast, the Court of Appeal dealt with the case as a matter of linguistic meaning. ‘Any claim’ could only mean ‘all possible claims’.45 Hence, all claims, including claims in damages, were excluded from the 37 cf Mitchell (2019) 4 (‘What exactly does ‘contextualism’ mean? What does it require and what distinguishes it from other interpretation methods (literalism, textualism, objectivism, subjectivism and so on)?’). 38 OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27, (2013) 85 NSWLR 1, 20 [61] (Allsop P). 39 See [2-45]. 40 See [2-34] (nn 142–45). 41 For a full exposition of the different accounts of interpretation, see ch 2. 42 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) (ICS). 43 ibid 912A (Lord Hoffmann). 44 ibid. 45 Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] CLC 348, 369 (Leggatt LJ) (overruled) (CA). See also [1998] 1 WLR 896, 904 (Lord Lloyd) (HL) (dissenting).

8  Introduction assignment. Looking only at this example, it is easy to see how uncertainty regarding interpretation is a key factor driving increased litigation.46 [1-14]  Another problem with the current theory of contract interpretation concerns the orthodox theory: the notion that interpretation simply involves ascertaining the meaning of words. It is deficient in several respects. In particular, it fails to account for the role of interpretation in circumstances where the contract text only references the disputed issue in broad terms.47 For example, how is the exclusivity of a services contract established as a matter of meaning when the contract merely states that the contractor is ‘engage[d] … to provide the Service’?48 To similar effect, a focus on meaning gives rise to artificial reasoning when interpretation is employed to resolve cases of inconsistency or error.49 For example, how can ‘any claim’ mean ‘claims in rescission’,50 ‘inconsistent’ mean ‘consistent’,51 ‘offer’ mean ‘option’,52 and ‘12 January’ mean ‘13 January’?53 [1-15]   In summary, a unified approach to interpretation is necessary because the current understanding is confused and because this confusion gives rise to inconsistent decision-making and increased litigation. To put it plainly, the practitioner who ‘is in the business of arguing about the best interpretation of a document … needs to understand what he or she is arguing about’.54 To echo the words of the famous American Jurist, Oliver Wendell Holmes: [A]lthough practical men generally prefer to leave their major premises inarticulate … even for practical purposes theory generally turns out the most important thing in the end.55

In short, ‘[w]e need to determine the logic of interpretation’.56 For contract interpretation and for contract law, theory is all-important. It is through a theoretically robust and an empirically justified approach to interpretation that consistency and transparency in judicial decision-making can be achieved.

46 cf WW Cook, ‘Scientific Method and the Law’ (1927) 13 American Bar Association Journal 303, 303 (‘The law grows more and more uncertain; delays in its administration multiply’). 47 See [3-51]. 48 See Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140 (discussed at [3-51] (text at n 249); [4-17] (text at n 82) and [7-19] (text at n 105)). 49 See [3-53]–[3-60] and [4-16]. 50 ICS [1998] 1 WLR 896 (HL). 51 Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420. 52 Watson v Phipps (1985) 63 ALR 321 (PC). 53 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (HL). 54 A Kramer, ‘Common Sense Principles of Contract Interpretation (and how we’ve been using them all along)’ (2003) 23 OJLS 173, 196. 55 OW Holmes, ‘The Theory of Legal Interpretation’ (1899) 12 Harvard Law Review 417, 420 (a comment made regarding legal interpretation). 56 Borrowed from GL Bruns, ‘Law and Language: A Hermeneutics of the Legal Text’ in G Leyh (ed), Legal Hermeneutics: History, Theory, and Practice (University of California Press, 1992) 26 (describing the ‘analytical tradition’ of legal interpretation).

The Problems  9

Interpretation and Related Techniques in Contract Law [1-16]  The lack of clarity regarding the interpretive task, aside from being unsatisfactory in itself, contributes to further confusion in contract law because it is often difficult to distinguish between interpretation and related techniques. As Atiyah noted in his Essays on Contract, many controversies in contract law ‘appear … to be largely, though not necessarily exclusively, about the use of techniques’.57 Likewise, Mitchell has recently stated: One of the more intractable issues surrounding contract interpretation is its relationship to other contract law doctrines.58

The confusion has a lot to do with terminology. In particular, the terms ‘interpretation’ and ‘construction’ are used interchangeably to refer to the interpretive process: the process through which objective meaning or intention is ascertained by analysing words in a contract.59 However, ‘construction’ is also applied in a ‘broad sense’60 to encompass other techniques in contract law, such as the implication of terms,61 the characterisation of contracts and contractual provisions,62 the application of certain doctrinal rules,63 and the rebuttal of presumptions of intention.64 In short, ‘construction’ is ‘not a homogenous concept’.65 [1-17]   The terminological issue highlights a broader problem regarding the composition of contract law. In orthodox terms, contract law consists of a range of ‘doctrines’ directed to different issues: formation, performance, discharge, enforcement, and so on. However, an often overlooked aspect of contract law is that it includes a range of techniques, such as interpretation, implication, rectification,

57 cf Atiyah (n 20) 245. 58 Mitchell (2019) 97. 59 See, eg, Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [18] (Lord Neuberger); McMeel (2017) 13 [1.20]; Carter (2013) 5 [1-05]; McLauchlan, ‘Construction and Implication’ (n 13) 207. By comparison, under American law, the distinction embodies the two-stage model: see MN Kniffin, ‘Interpretation of Contracts’ in JM Perillo (ed), Corbin on Contracts, rev edn (Lexis Law Publishing, 1998) vol 5, 7–11 §24.3 (see further [2-15]–[2-19], [2-17]). 60 Marks and Spencer [2015] UKSC 72, [2016] AC 742, 769 [76] (Lord Clarke). cf M Furmston and GJ Tolhurst, Contract Formation: Law and Practice, 2nd edn (Oxford University Press, 2016) 200 [9.08] (‘The word “construction” is capable of wide import’). 61 See, eg, Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988, 1993 [16] (Lord Hoffmann); Marks and Spencer [2015] UKSC 72, [2016] AC 742, 756 [25]–[26] (Lord Neuberger), 769 [76] (Lord Clarke); McMeel (2017) 13 [1.20]; McLauchlan, ‘Construction and ­Implication’ (n 13) 207. 62 Wong Mee Wan v Kwan Kin Travel Services Ltd [1996] 1 WLR 38, 42–43 (Lord Slynn) (PC); ­Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50, (2015) 236 FCR 199, 233 [95] (Allsop CJ). 63 Carter (2013) 6 [1-06]; JW Carter and W Courtney, ‘Unexpressed Intention and Contract Construction’ (2017) 37 OJLS 326, 334. 64 Carter and Courtney (n 63) 334. See further Mitchell (2019) 107. 65 W Courtney and JW Carter, ‘Implied Terms: What is the Role of Construction?’ (2014) 31 Journal of Contract Law 151, 157.

10  Introduction and characterisation. The main problem is that the principles governing the different techniques are incoherent; that is, the law is inconsistent.66 This inconsistency arises in two ways. [1-18]   First, as already noted, many of the techniques employed in contract law are described as ‘matters of construction’. For example, implication in fact has been conceptualised as constructional in nature. Yet, interpretation and implication are also described by reference to their own unique principles. The result is confusion regarding the nature of the judicial task. [1-19]   Second, interpretation and related techniques in contract law ‘overlap’ in the sense that more than one of them can apply in a given scenario. For example, interpretation, implication or rectification can be employed in the same case to define the content of a contract. Likewise, it is often not clear whether the resolution of a dispute is a matter of interpretation or a question of characterisation. In short, different techniques can be applied in the same situation with the potential for different outcomes. [1-20]   A unified approach to contract interpretation is needed so that judges and lawyers can more readily differentiate between the range of techniques that are applied in contract law. One needs to know what he or she is doing when interpreting a contract, implying a term, or characterising a contractual provision. But this does not mean that we need a clear dividing line between, for example, cases of interpretation and cases of implication. There can be overlap. However, what is required of each technique must be understood. Interpretation is the most important technique in contract law: it is how the court determines what the parties intended by choosing the words in the contract. Hence, gaining an understanding of interpretation unlocks the path to a clearer understanding of contract law. If we understand the interpretive process, we can outline how related processes are different.

1.3.  The Proposed Approach to Contract Interpretation [1-21]   This book puts forward a unified approach to contract interpretation. It describes interpretation as a matter of cognition; that is to say, it explains what is actually involved in construing a contract. It also defines the role of interpretation in contract law. [1-22]   In summary, contract interpretation is a technique employed to infer objective intention from the choice of words in a contract. It is the primary means

66 cf A Fell, ‘The Concept of Coherence in Australian Private Law’ (2018) 41 Melbourne University Law Review 1160.

The Proposed Approach to Contract Interpretation  11 through which the rules in a contract are defined. It is how the court determines what the parties intended by choosing the words in the contract. The interpretive process involves four steps. It begins with the definition of a disputed question regarding what was agreed by the parties. Next, competing answers to the question are put forward. Each answer constitutes a potential definition of what was agreed: a potential ‘interpretation’ or ‘construction’. Most time and energy in contract interpretation is spent in the following stage. It involves the formulation of arguments in support of each interpretation. These arguments are built from the relevant materials, namely, the contract as a whole, the potential meanings for the words, the background to the contract, the purpose of the transaction, the potential consequences of the competing interpretations, and normative factors, such as business common sense. The arguments are composed as a matter of propositional logic and driven by inferences of intention. For example, a party may allege that its construction was probably intended because a key word or phrase ordinarily bears a particular meaning. Conversely, a party may advance its interpretation by pointing to the unreasonable consequences that would or could flow from a competing interpretation. In the final stage, the correct construction is chosen by evaluating the competing arguments to arrive at the construction that was probably intended. This involves assessing the relative strength of the arguments, that is, the extent to which each argument makes a construction more or less probable as a matter of objective intention. It also depends on an evaluation of the competing clusters of arguments taken as a whole. Hence, an interpretive dispute can be understood in terms of the composition of arguments in support of each construction. Disputes involving a similar argument composition are decided in a similar way. [1-23]   The approach to interpretation advanced in this book is novel.67 Most accounts of interpretation are rooted in either discrete and often conflicting statements of principle68 or simple descriptions of the aim or nature of the process.69 By comparison, the proposed approach to interpretation is detailed and pragmatic. Interpretation is explained in cognitive terms. It is conceptualised as a four-stage process: define the question; identify potential answers; formulate arguments; and choose the correct interpretation. The book offers step-by-step guidance for a judge or practitioner working through an interpretive problem. The proposed approach to interpretation is articulated at a level of sophistication that is warranted by the complexity of the process. It promises to be a useful aid for judges and practitioners who deal with interpretation and related techniques. In particular, its benefits are twofold. First, it offers a way to understand how interpretive disputes are determined. Second, it assists in explaining the relationship between interpretation and the rest of contract law.

67 However, for a similar view, see ZX Tan, ‘Beyond the Real and the Paper Deal: The Quest for Contextual Coherence in Contract Interpretation’ (2016) 79 MLR 623, 637. 68 See [1-06] (in particular, text at n 15). 69 See [1-11]–[1-12].

12  Introduction

The Resolution of Interpretive Disputes [1-24]   The first benefit of the proposed approach is that it presents a sophisticated yet comprehensible way to understand interpretation. It explains judicial decision-making in cases of construction. It demonstrates that a principled approach is applied in the resolution of interpretive disputes. The correct interpretation is determined by evaluating the relative strength of the competing arguments; the construction that is established to the highest degree of probability is the one that prevails. Of course, the arguments in each case are unique to the parties and to the dispute. However, interpretive disputes come in common forms. That is to say, contract interpretation involves recurring argument patterns (ie, cases involving arguments of a similar nature and type) and cases involving a similar argument composition are decided in a similar way. [1-25]  The case may be a clear one in which all tenable arguments support one interpretation. Or it may be that one prominent argument clearly dictates the outcome of the case. Alternatively, the dispute may involve a ‘strict literal interpretation’: an interpretation advanced exclusively by an argument based on the apparent meaning of a key word or phrase. Modern courts rarely interpret contracts in a strict literal manner. Instead, courts prefer an interpretation that is in line with the contract as a whole, the objects it serves, and the practical consequences of the competing interpretations. If a court needs to overlook the apparent meaning of key words in a contract, the judicial conclusion is usually that the contract contains an obvious error – one that must be corrected through interpretation. [1-26]   The types of interpretive dispute discussed above are relatively straightforward. More difficult disputes often boil down to a tension between a ‘linguistic’ interpretation (ie, an interpretation advanced predominantly by an argument about the meaning of words) and a ‘purposive’ or ‘consequentialist’ construction (ie, a construction supported primarily by an argument about the purpose of the contract or the practical consequences of the competing interpretations). Such a dispute is determined like any other: the interpretation that is established to the highest degree of probability is the one that succeeds. Hence, the linguistic interpretation prevails if the meaning of the words is a better indicator of intention, and the purposive or consequentialist construction succeeds if the purposive or consequentialist considerations are more persuasive. However, it must be noted that a purposive or consequentialist construction is stronger if it is grounded in the text, for example, if the relevant contractual objective is evident from the contract as a whole. This is because the aim in construction is to infer objective intention from the choice of words in the contract. That said, if the rival linguistic and purposive or consequentialist factors are evenly matched, the conflict is resolved by analysing the auxiliary justification for each interpretation. For example, the linguistic interpretation usually prevails if it can be rationally explained on a purposive or consequentialist basis.

The Proposed Approach to Contract Interpretation  13 [1-27]  Looking beyond the tension between linguistic interpretation and purposive or consequentialist construction, the most challenging form of interpretive dispute is textual conflict. These are cases where each interpretation is firmly anchored by a part (or parts) of the contract text. Sometimes, the dispute can be determined by identifying the set of textual indicators that is more persuasive. However, a textual conflict is often resolved by analysing purposive and consequentialist considerations. For example, one party may succeed by pointing to purposive justification for textual indicators that are adverse to its case. [1-28]   In summary, the proposed approach to interpretation is useful because it explains conclusions that are usually simply expressed as a matter of meaning or intention. It demonstrates that the outcome of an interpretive dispute depends on the particular arguments in support of each construction and how the competing clusters of arguments are taken into account. Critically, the book advances a principled approach to the balancing exercise in interpretation. The principles have been discussed above and they are explored extensively in chapter six. They are also set out below: Principle 1: An interpretive dispute is determined by identifying the collection of arguments that establishes the objective intention of the parties to the highest degree of probability. Principle 2: An interpretation that is supported by a range of persuasive arguments prevails against an interpretation that is supported by fewer and weaker arguments. Principle 3: If the arguments in favour of each interpretation are otherwise evenly balanced, a particularly cogent argument is often determinative. Principle 4: A strict literal interpretation (ie, an interpretation that is advanced solely by the meaning of the words) fails against a construction that is supported by a range of persuasive arguments. Principle 5: A linguistic interpretation (ie, an interpretation advanced predominantly by a linguistic argument) prevails against a purposive construction (ie, a construction supported primarily by a purposive argument) if the meaning of the words is a better indicator of intention than the purposive considerations. Principle 6: A purposive construction prevails against a linguistic interpretation if the purposive considerations are a better indicator of intention than the meaning of the words. Principle 7: A purposive construction is more persuasive if the alleged contractual objective is evident from the contract text. Principle 8: If the linguistic and purposive factors are evenly matched, a dispute between linguistic interpretation and purposive construction is resolved by analysing the auxiliary justification for each interpretation, including, in particular, whether the linguistic interpretation can be rationally explained.

14  Introduction Principle 9: A linguistic interpretation prevails against a consequentialist construction (ie, a construction supported primarily by a consequentialist argument) if the meaning of the words is a better indicator of intention than the consequences of the competing interpretations. Principle 10: A consequentialist construction prevails against a linguistic interpretation if the consequences of the competing interpretations are a better indicator of intention than the meaning of the words. Principle 11: A consequentialist construction is more persuasive if the allegedly unintended consequences are evident from the contract text. Principle 12: If the linguistic and consequentialist factors are evenly matched, a dispute between linguistic interpretation and consequentialist construction is resolved by analysing the auxiliary justification for each interpretation, including, in particular, whether the linguistic interpretation can be rationally explained. Principle 13: A textual conflict is resolved, in the first instance, by identifying the set of textual indicators that establishes the objective intention of the parties to the highest degree of probability. Principle 14: If the textual indicators are evenly matched, the dispute is resolved by analysing purposive and consequentialist factors. The principles that guide the balancing exercise in contract interpretation offer clear and pragmatic assistance for judges and lawyers that deal with interpretive disputes.

The Role of Interpretation in Contract Law [1-29]   The second benefit of the proposed approach to contract interpretation is that it defines the role of interpretation in contract law – it provides a means to distinguish between interpretation and related techniques in contract law. This book argues that interpretation is a technique employed to infer what was agreed, as a matter of objective intention, from the choice of words in the contract. A key premise underlying this argument is the notion that the law of contract is made up of: (i) doctrinal (and statutory) rules, namely, the traditional rules making up contract law, such as those regarding formation, performance, discharge, and so on; and (ii) a range of techniques that are employed to apply doctrinal (and statutory) rules, such as interpretation, implication, rectification, and characterisation. [1-30]  As envisaged in this book, interpretation is the most important technique in contract law. This is because the most fundamental doctrinal rule is the principle of freedom of contract: subject to limited exceptions, the court must give effect to the contract.70 Interpretation is critical in contract law because it is the 70 See, eg, Prime Sight Ltd v Lavarello [2013] UKPC 22, [2014] AC 436, 450 [47] (Lord Toulson) (for the Board) (a case focusing on estoppel by convention).

The Proposed Approach to Contract Interpretation  15 primary means through which the court defines the content of a contract – it is the tool used to infer objective intention from the choice of words in a contract. What is defined is usually in the form of a rule. Once defined, the rule is applied in accordance with the principle of freedom of contract, so as to define rights and obligations. [1-31]   Beyond interpretation, contract law includes a range of other techniques that are distinct from the interpretive process. First, there are non-interpretive techniques employed to define the content of a contract, namely, implication, rectification and the unique approach applied in the case of oral or partly oral contracts. Second, the determination of the identity of a party, although similar to interpretation, is a factual enquiry. Third, the processes of factual and legal characterisation focus on the application of rules, rather than the definition of rules. Factual characterisation involves the determination whether a factual component in a rule is satisfied, such as whether $100 has in fact been paid under a sale of goods. Legal characterisation, on the other hand, is directed to the satisfaction of legal components in doctrinal and statutory rules. For example, it is a matter of legal characterisation whether a contract amounts to a ‘lease’ such that certain doctrinal and statutory rules apply. Finally, often as part of the process of legal characterisation, contract doctrine requires conclusions regarding the objective intention of the parties. Occasionally, such conclusions are derived through interpretation, that is, by inference from the choice of words in the contract. However, in most cases, intention is established as a matter of presumption or as a matter of fact because there are no words addressing the relevant issue. [1-32]   The role of interpretation in contract law, and the points of distinction between interpretation and related processes, are summarised by way of principle in chapter seven. The principles are also set out below: Principle 1: The law of contract comprises doctrinal (and statutory) rules and a range of techniques that are employed to apply those rules. Principle 2: The contractual relationship is effectively governed by a combination of rules: doctrinal rules, a few statutory rules, and the rules making up the contract. Principle 3: The principle of freedom of contract requires that, subject to narrow exceptions, the contract be enforced. Principle 4: The content of a contract is defined through interpretation, implication, rectification, and the approach applied in the case of oral and partly oral contracts. Principle 5: The rules agreed in an oral or partly oral contract are defined as a question of fact, although the process is interpretive to the extent that it involves the inference of intention from any choice of words by the parties. Principle 6: Implication in fact is distinct from interpretation because: (i) it is employed when the contract does not address a disputed issue; and (ii) it involves a different approach to establishing intention.

16  Introduction Principle 7: Common mistake rectification is distinct from interpretation because: (i) it is a process through which a mistake in a contractual document is rectified; (ii) it involves greater scope to correct error; and (iii) it involves a different approach to establishing intention. Principle 8: Establishing the identity of a contract party is a factual enquiry. It is not an intentional or interpretive process. Principle 9: Establishing the capacity in which a party contracted is usually a factual enquiry. It is only an interpretive process if the contract text addresses the issue of capacity and the question of capacity is not also a question of identity. Principle 10: Factual characterisation is a process through which it is determined whether the factual components in a rule are triggered. To the extent that factual characterisation is employed to apply a rule in a contract, it is distinct from, and logically follows, the definition of the rule through interpretation (or some other means). Principle 11: Legal characterisation is a process through which it is determined whether a legal component in a doctrinal (or statutory) rule is triggered. It involves a combination of factual, interpretive and policy-based reasoning. Principle 12: Contract doctrine occasionally requires a conclusion regarding the objective intention of the parties, usually as part of the process of legal characterisation. If the contract text addresses the relevant issue, intention can be inferred as a matter of interpretation. If the contract text does not address the issue, intention is established on a non-interpretive basis, that is, as a question of fact or by presumption. [1-33]   As the above principles demonstrate, the proposed approach to interpretation defines the role of interpretation in contract law because it distinguishes between interpretation and related techniques. It demonstrates that interpretation is a key component in contract law. But it is only one of a number of techniques that are needed to give effect to contract doctrine, so as to thereby regulate the contractual relationship.

1.4.  Research Method [1-34]   This book explains contract interpretation as a matter of theory and in practical terms. It seeks to bridge the divide between the theory of interpretation and its practice.71 Hence, it involves a blend of theoretical analysis and empirical 71 cf EW Thomas, The Judicial Process: Realism, Pragmatism, Practical Reasoning and Principles (Cambridge University Press, 2005) 12–14 (‘Bridging the divide’ between ‘judicial practice and legal theory’).

Research Method  17 investigation. The empirical research focuses almost exclusively on English and Australian cases. A similar emphasis is applied in the theoretical analysis. However, other jurisdictions are occasionally referenced as a means of comparison or confirmation. To similar effect, jurisprudence, philosophy, logic, linguistics and contract theory are also taken into account where appropriate. [1-35]  The research involves five steps. First, a theory of interpretation is constructed by examining the core features of interpretation, taking into account judicial and academic descriptions of the process. Second, through a close analysis of the reasoning evident in leading cases, the cognition of contract interpretation is explained by setting out what is required in each stage of the process. Third, again by analysing reasoning in key cases, it is shown how interpretive disputes are resolved. Fourth, by comparing the reasoning evident in cases of interpretation with the reasoning employed in cases applying related techniques, interpretation is distinguished from other ‘constructional’ processes in contract law. Finally, taking into account the preceding analysis, the relationship between contract doctrine and underlying techniques, such as interpretation, is explored.

Theoretical Analysis [1-36]   Theoretical analysis is the focus of the first part of the book. The analysis is theoretical because it involves hypothesising about the nature of legal reasoning. The first part of the book demonstrates that the proposed approach to contract interpretation makes sense as a matter of theory. It makes sense for two reasons. First, it is an amalgam of the different theories of interpretation recognised in the cases and commentary. Second, it not only fits with the key features of ­interpretation – it also follows from an analysis of those features. In particular, an analysis of the key features clarifies the aim and method of contract interpretation. The goal is to infer objective intention from the choice of words in the contract. The method involves four steps: define the question; identify competing answers; formulate arguments; and choose the correct answer. [1-37]   Theoretical analysis is also employed, in the second part of the book, to define the role of interpretation in contract law. Through empirical research, the cognition of interpretation is explained and it is distinguished from the cognition of related techniques in contract law. From this starting point, a theory of contract law is put forward, with interpretation at its core. The essence of the theory is that contract law consists of doctrinal rules and a range of techniques that are employed to apply those rules. The most important doctrinal rule is the principle of freedom of contract: subject to narrow limits, the court must give effect to what the parties agreed. Hence, interpretation is the most prominent technique because it is the primary means through which the agreement of the parties is defined.

18  Introduction

Empirical Research [1-38]   The second part of the book is based on empirical research. The empirical research did not involve field work, interviews with judges, and so on.72 Nor did it consist of statistical quantitative analysis.73 Instead, the research was ‘empirical’ in a rudimentary quantitative and qualitative sense because it involved the analysis of judgments as evidence of judicial reasoning.74 The focus was those parts of judgments in which judges were applying principles – not the parts in which judges were stating principles.75 A sample data set of leading cases was analysed to explain the cognition of interpretation and to distinguish interpretation from related ‘constructional’ techniques. From this analysis, an inference was drawn regarding the cognition of interpretation and related techniques in a broader data set, namely, the numerous other cases involving application of those techniques.76 As the preceding discussion suggests, the empirical investigation had two elements: an investigation of the interpretive process and an investigation of related techniques. [1-39]   The main goal of the empirical research was to explain the interpretive process by analysing what judges are doing when construing a contract. Hence, the primary data set was leading English and Australian judgments on interpretation.77 The focus was those parts of the judgments in which judges were dealing with interpretive problems. That is to say, the cases were used as ‘instructive examples of the construction process in action’.78 The research involved quantitative and qualitative investigation. The quantitative research confirmed the theoretical analysis in the first part of the book. A rigorous investigation of the reasoning evident in each case confirmed that contract interpretation is a four-stage process – a process through which objective intention is inferred from the choice of words in a contract. The qualitative research, on the other hand, was exploratory in nature.

72 For a summary of such qualitative research methods, as used in law, see further L Webley, ‘Qualitative Approaches to Empirical Legal Research’ in P Cane and HM Kritzer (eds), The Oxford Handbook of Empirical Legal Research (Oxford University Press, 2010). 73 As to the nature of quantitative legal research, see further L Epstein and AD Martin, ‘Quantitative Approaches to Empirical Legal Research’ in P Cane and HM Kritzer (eds), The Oxford Handbook of Empirical Legal Research (Oxford University Press, 2010) 904. 74 cf Webley (n 72) 938–39 (‘qualitative document analysis’); Epstein and Martin (n 73) 904 (empirical analysis of ‘the decisions of judges in concrete cases’). 75 A similar (albeit statistical) approach has been applied in understanding the law of contributory negligence: see J Goudkamp and D Nolan, ‘Contributory Negligence in the Court of Appeal: An Empirical Study’ (2017) 37 Legal Studies 437, 438 (an empirical investigation of 112 appellate decisions to understand ‘the way in which [the law] is applied in the courts’). 76 Epstein and Martin (n 73) 904–05 (quantitative empirical research involves research design, the collection of sample data, the analysis of the sample data, and the drawing of inferences from the sample data about a broader data set). 77 See Table of Cases, ‘Leading English and Australian Cases on Contract Interpretation’ (35 decisions of the Supreme Court of the United Kingdom, the House of Lords and the High Court of Australia). 78 McDougall (n 1) 114 (applying a similar research approach).

Research Method  19 A close analysis of the reasoning evident in seminal interpretation cases revealed a great deal about the cognition of contract interpretation, that is, what is involved in each stage of the process. In particular, it established that an interpretive dispute can be understood in terms of its argument composition: the nature and types of argument advanced in favour of each interpretation. More significantly, it showed that contract interpretation involves recurring argument patterns and that cases involving a similar argument composition are resolved in a similar way. Hence, a key finding of the research was that interpretive disputes come in common forms that give rise to common resolutions. The balancing exercise is a principled one.79 Despite academic suggestions to the contrary, leading cases demonstrate a consistent approach to interpretation. [1-40]   The selection and size of the primary data set was justified on at least three bases. First, due to the sheer number of interpretation cases, it would be practically infeasible to analyse every case in detail.80 Second, it is the seminal judgments that are regularly cited in lower courts as establishing the correct approach to interpretation. Finally, relying on key authorities ensured that a cross-section of interpretation cases was analysed. This is because, among the seminal cases, there are decisions that deal with: (i) the different types of interpretive problem (ambiguity, inconsistency and error); and (ii) the different types of interpretive dispute (one-sided disputes, textual conflicts and disputes between linguistic interpretation and purposive or consequentialist construction). [1-41]   The second aim of the empirical investigation was to define the role of interpretation in contract law by analysing what judges are doing when employing related ‘constructional’ techniques, such as implication, rectification, characterisation, and so on. Hence, the secondary data set was leading cases demonstrating the application of each technique.81 Again, the focus was those parts of the judgments in which judges were applying each technique (rather than those parts in which judges were stating principles). And, again, the research was both quantitative and qualitative in nature. First, quantitative analysis was employed to confirm the theory that interpretation is distinct from related techniques. Second, qualitative investigation revealed exactly how each technique is distinct from interpretation.82 In summary, interpretation involves a different cognitive process from that embodied in related techniques. What a judge does when construing a contract is different from what a judge does when implying a term, rectifying a document, characterising a provision, and so on.

79 The key findings of the qualitative research are summarised as principles: see [1-28] and ch 6. 80 cf McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ (n 12) 406 (‘considerable time and mental energy’). 81 For a selection of the key cases, see Table of Cases, ‘Leading English and Australian Cases on Related Techniques’ (35 decisions) (many more cases were the subject of analysis as part of the empirical study, but, in the interests of brevity, those cases are not listed). 82 The key findings of the qualitative research are summarised as principles: see [1-32] and ch 7.

20  Introduction

Justification for Research Method [1-42]   Broadly speaking, the research method that underpins this book is justified on three bases. The first basis for justification is that the research involves the use of empirical analysis to verify and elaborate on a theoretical vision of the interpretive process. This is similar to the scientific method. A unified theory of interpretation is constructed by analysing established features of the process. The theory is then verified and extrapolated through ‘empirical’ or ‘experimental’ analysis: a detailed analysis of the reasoning evident in seminal cases.83 [1-43]   The second justification for the research method is that law can be explained by analysing judgments to determine the thought process involved. Oliver Wendell Holmes made as much clear over a century ago when he emphasised that the law is about prediction – it is about predicting what judges will do.84 One way to predict what a judge will do is to analyse prior decisions so as to understand the cognition of legal reasoning. MacCormick, in particular, has sought to explain the law by reference to ‘the process of reasoning which is revealed to us in published decisions of Courts of Law’.85 This involves what he describes as ‘rational reconstruction’: [R]ational reconstruction means the production of clear and systematic statements of legal doctrine, accounting for statute law and case law in terms of organizing principles, relating actual or hypothetical decisions both to their factual bases and to governing norms elaborated out of the authoritative materials.86

Rational reconstruction is an appropriate way to analyse contract interpretation for at least four reasons. First, interpretation is said to be guided by vague and simplistic statements of principle. This causes confusion in applying the principles. Second, interpretation lacks an adequate ordered explanation. Third, in judgments on interpretation, there is a disjunction between what judges say they are doing and what they are actually doing. A typical judgment on interpretation consists of a brief orthodox statement of principle, followed by an often quite lengthy and complex consideration of the competing arguments. The statement of principle does not explain how the competing considerations are weighed and balanced to reach a conclusion. Finally, interpretation sits at a crossroad between legal theory, philosophy, logic, linguistics and cognitive science, to name but a few fields. Hence, it makes sense to explain the process by analysing what it is that judges are doing when construing a contract.

83 See TS Ulen, ‘A Nobel Prize in Legal Science: Theory, Empirical Work, and the Scientific Method in the Study of Law’ [2002] University of Illinois Law Review 877. See also J Dewey, ‘Logical Method and Law’ (1924) 10 Cornell Law Review 17, 19–20. cf Goudkamp and Nolan (n 75). 84 See, eg, OW Holmes, ‘The Path of the Law’ (1897) 10 Harvard Law Review 457. 85 N MacCormick, Legal Reasoning and Legal Theory (Oxford University Press, 1994) 8. 86 N MacCormick, ‘Reconstruction after Deconstruction: A Response to CLS’ (1990) 10 OJLS 539, 556.

The Structure of this Book  21 [1-44]   The final justification for the research method is based on explanatory power. The explanatory power of a legal theory is measured against four criteria: (1) the simplicity and intricacy of the theory, (2) the range and complexity of the phenomena that the theory seeks to explain, (3) the specificity and generality of the theory’s explanations in relation to those phenomena, and (4) the capacity of the theory to be integrated with other theories or to unify the explanations provided by them.87

The research method is justified, as a matter of explanatory power, because it seeks to explain interpretation by reference to its phenomena. It accepts leading decisions as correct. It aims to account for them within a holistic approach. It also explains the relationship between interpretation and related theories, namely, the theories that apply to other ‘constructional’ techniques, such as implication and rectification. [1-45]   In summary, the book presents a coherent vision of interpretation and its role in contract law through a detailed analysis of seminal decisions. It builds on leading scholarship in the field and in related areas of study. It aims to provide useful guidance to practitioners, judges and legal theorists who seek to understand contract interpretation and its place in contract law.

1.5.  The Structure of this Book [1-46]   This book consists of two parts presented in six substantive chapters. The first part addresses the theory of interpretation. It demonstrates that the proposed approach to interpretation follows from an analysis of its key features. It shows that the proposed approach is an amalgam of the different theories of interpretation recognised in the cases and literature. The theoretical analysis begins in chapter two. It summarises judicial and academic descriptions of interpretation. Chapter three then outlines recognised features of interpretation, namely, the materials that must be considered, the textual problems that are addressed, and the discrete principles that guide the process. It shows that the proposed approach to interpretation fits with, and explains, those key features. Finally, chapter four demonstrates that the proposed approach follows from an analysis of the key features of interpretation. The aim of interpretation is the inference of objective intention from the choice of words in the contract. The court arrives at the relevant intention through a four-stage process: define the question; identify potential answers; formulate arguments; and choose the correct interpretation. [1-47]   The second part of the book analyses contract interpretation in practice. It explains in detail the four-stage interpretive process. It explores how interpretive

87 N Aroney, ‘Explanatory Power, Theory Formation and Legal Interpretation: Some Preliminaries’ (2013) 38 Australian Journal of Legal Philosophy 1, 2.

22  Introduction disputes are resolved and it investigates the relationship between interpretation and related techniques. Chapter five explains the cognition of contract interpretation. It describes what is required in each stage of the process and it illustrates the interpretive process in action through an analysis of two landmark English decisions: Prenn v Simmonds88 and Investors Compensation Scheme Ltd v West Bromwich Building Society.89 Chapter six and chapter seven explore the benefits of the proposed approach. Chapter six explains how interpretive disputes are resolved. It proves that the balancing exercise in construction is not without principle. Chapter seven demonstrates that interpretation can be distinguished from related techniques. To a limited extent, it also explains the cognition of contract law, in particular, the relationship between contract doctrine and underlying techniques. [1-48]  As a whole, the book is structured so as to demonstrate the transition from theoretical investigation to detailed empirical analysis. The book aims to explain the interpretive process in action: what it is that judges are doing in construing a contract. To this end, although the proposed approach is developed as a matter of theory, it is ultimately justified on a pragmatic and empirical basis.



88 Prenn 89 ICS

v Simmonds [1971] 1 WLR 1381 (HL). [1998] 1 WLR 896 (HL).

part i The Theory of Contract Interpretation

24

2 Theories of Contract Interpretation 2.1. Introduction [2-01]   Interpretation is a key aspect of contract law. Yet, it is described in a multitude of ways: a search for meaning, a matter of intention, a balancing act, and so on. This book advances a unified approach to contract interpretation. It explains interpretation in cognitive terms; that is, it describes what a judge or lawyer is doing when construing a contract. The interpretive process is structured in a sequential manner. It begins with the definition of a specific question of construction. Competing interpretations and supporting arguments are then formulated. In the end, the correct construction is chosen by weighing and balancing the rival considerations. The aim is to infer objective intention from the choice of words in the contract. [2-02]   The proposed approach to interpretation has a theoretical and pragmatic foundation. The purpose of the first part of this book is to explore the former: the theory of contract interpretation. It demonstrates that the proposed approach makes sense as a matter of theory. It makes sense for the following reasons. First, as is demonstrated in this chapter, the proposed approach is an amalgam of the theories of interpretation recognised in the cases and commentary. Second, as is shown in chapters three and four, the proposed approach not only fits with and explains the key features of interpretation – it also follows from an analysis of those features. [2-03]   The theoretical investigation starts in this chapter with an outline of the different ways in which interpretation is described in the authorities and literature. Contract interpretation is not a ‘hard’ doctrine; it is not a doctrine consisting of deductive rules that dictate a clear outcome if triggered. Instead, interpretation is in the nature of a judicial technique or ‘process’.1 Hence, it is conceptualised in two ways. First and foremost, it is described by reference to its ultimate aim or object (for example, ascertain meaning or intention). Second, it is explained in terms of its underlying method or thought process (for example, logic or intuition). This chapter summarises the different judicial and academic views of interpretation. 1 JW Carter, ‘Commercial Construction and Contract Doctrine’ (2009) 25 Journal of Contract Law 83, 84 (‘Construction is always a process’); Lewison (2015) 27 [2.01]; Lewison and Hughes (2012) 1 [1.01]; Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184, (2014) 89 NSWLR 633, 654 [77] (Leeming JA).

26  Theories of Contract Interpretation It demonstrates that each description of contract interpretation is correct to an extent. That is to say, each theory explains a key aspect of the interpretive process.

2.2.  The Aim of Contract Interpretation [2-04]   Judges usually describe interpretation as a technique directed to ascertaining objective intention, the meaning of words, or the meaning of the contract. Most scholars, on the other hand, think that there is something more to the process. In particular, ‘construction’ is said to involve two stages: (i) ascertain meaning; and (ii) apply or give effect to the contract. There is also support for the view that the interpretive process has a pragmatic focus – the ultimate aim is to define rights and obligations or to resolve disputed issues. To an extent, each of these descriptions is accurate. Through interpretation, a specific aspect of the agreement is defined, and the rights and obligations of the parties are effectively determined. A question of interpretation is resolved by inferring objective intention from the contract text – the potential meanings for the words being the focus in drawing the required inference.

The Meaning of Words [2-05]  Judges often describe interpretation as a process through which the meaning of words in a contract is ascertained.2 Perhaps the clearest judicial statement to this effect was enunciated by Lord Steyn in Equitable Life Assurance Society v Hyman:3 The purpose of interpretation is to assign to the language of the text the most appropriate meaning which the words can legitimately bear.4

To similar effect, in Simic v New South Wales Land and Housing Corp,5 French CJ described construction as involving [the] determination of the meaning of the words of the contract defined by reference to its text, context and purpose.6

To a degree, these statements reflect the view of interpretation expressed in many of the early English authorities. However, in those cases, the aim was ‘to construe the document according to the ordinary grammatical meaning of the words’.7 2 As to the nature of ‘meaning’, see further [3-08], [4-09]–[4-11] and [4-31]–[4-36]. 3 Equitable Life Assurance Society v Hyman [2002] 1 AC 408 (HL). 4 ibid 458 (Lord Steyn) (distinguishing interpretation from implication). 5 Simic v New South Wales Land and Housing Corp [2016] HCA 47, (2016) 260 CLR 85. 6 ibid 95 [18] (French CJ) (distinguishing construction from rectification). 7 Lovell & Christmas Ltd v Wall (1911) 104 LT 85, 88 (Cozens-Hardy MR) (CA). See also Leader v Duffy (1888) 13 App Cas 294, 301 (Lord Halsbury LC) (HL); Carter (2013) 18–19 [1-25]; McMeel (2017) 28–30 [1.39]–[1.44].

The Aim of Contract Interpretation  27 That is, the enquiry was focused on ‘the strict, plain, common meaning of the words’8 – ‘the meaning of the words used, not what one may guess to be the ­intention of the parties’.9 [2-06]  In modern seminal statements of principle, the search for linguistic meaning remains a focus. For example, in Wood v Capita Insurance Services Ltd,10 Lord Hodge described the enquiry as follows: The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement.11

Likewise, in Electricity Generation Corp v Woodside Energy Ltd,12 a plurality of the High Court remarked: [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.13

[2-07]  The recent judicial emphasis on linguistic meaning is reflected in contract law scholarship; several scholars describe interpretation as a process through which the court ascertains the meaning of the language or terms in a contract.14 The difficulty is that such a description does not adequately account for the complexity of the process or its scope.15 Hence, most commentators

8 Shore v Wilson (1842) 9 Cl & F 355, 565; 8 ER 450, 532 (Lord Tindal CJ) (HL). 9 Smith v Lucas (1881) 18 Ch D 531, 542 (Jessel MR) (Ch). 10 Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173 (Wood). 11 ibid 1179 [10] (Lord Hodge) (Lord Neuberger, Lord Mance, Lord Clarke and Lord Sumption agreeing). See also Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [18]–[19] (Lord Neuberger) (Lord Clarke, Lord Sumption, Lord Carnwath and Lord Hodge agreeing); Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1627–28 [15] (Lord Neuberger) (Lord Sumption and Lord Hughes agreeing); Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57, [2017] AC 73, 79 [6] (Lord Hodge) (Lord Mance, Lord Sumption and Lord Toulson agreeing) (Impact Funding). 12 Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7, (2014) 251 CLR 640 (Electricity Generation). 13 ibid 656 [35] (French CJ, Hayne, Crennan and Kiefel JJ). See also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, (2015) 256 CLR 104, 116 [47] (French CJ, Nettle and Gordon JJ); Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12, (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ), 571 [73] (Nettle J) (Ecosse). But note [2-10] (in ­particular, text at nn 32–33). 14 See, eg, HG Beale, Chitty on Contracts, 33rd edn (Sweet & Maxwell, 2018) 1036 [13-041] (‘“Construction” denotes the process (sometimes referred to as interpretation) by which a court arrives at the meaning to be given to the language used by the parties’) (emphasis in original) (compare with Chitty at [2-11] (n 35) and [2-13] (n 48)); JD Heydon, Heydon on Contract (Thomson Reuters, 2019) 249 [8.10] (‘The words “construction” or “interpretation” describe the methods by which a court determines the meaning of the language used in a contract’); A Burrows, A Restatement of the English Law of Contract (Oxford University Press, 2016) 84 §14(1) (‘The correct approach to interpreting a term of a contract is to ask what the term, viewed in the light of the whole contract, would mean to a reasonable person’); Mitchell (2019) 8 (‘Interpretation is the process of ascribing meaning to an object’). 15 See [4-03]–[4-21].

28  Theories of Contract Interpretation tend to describe interpretation in terms of intention,16 impression,17 linguistic signification,18 or the ‘meaning of the document’.19 [2-08]   The potential meanings for the words in a contract are undoubtedly a central focus in construction. However, interpretation involves a more significant goal than simply ascertaining meaning. Construction is employed to deal with deficiencies in the contract text, such as ambiguity and inconsistency. The end result is the definition of what was agreed. The aim is to infer objective intention from the contract text.

Objective Intention [2-09]   Intention has always played a central role in the common law of contract. This is because contracts have traditionally been understood as an expression of will20 or an exchange of mutual promises.21 In construction, the common law takes an ‘objective’ approach to ascertaining intention.22 The parties’ actual or ‘subjective’ intentions are irrelevant.23 The aim is to establish the parties’ common intention by analysing the text and other relevant factors.24 It follows that objective intention is necessarily ‘artificial’:25 a ‘fiction’26 or ‘hypothetical’.27 It is ‘what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties’.28

16 See [2-11]. 17 See [2-37]. 18 See, eg, Lewison (2015) 10 [1.03]; Lewison and Hughes (2012) 3 [1.02]. 19 See [2-13]. 20 See eg, B Coote, Contract as Assumption: Essays on a Theme (Hart Publishing, 2010) 15–17. 21 See C Fried, Contract as Promise (Harvard University Press, 1981) 1. 22 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 996 (Lord Wilberforce) (HL) (The Diana Prosperity); Wilson v Anderson [2002] HCA 29, (2002) 213 CLR 401, 418 [8] (Gleeson CJ). See further [4-03]–[4-21]. 23 Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1627–28 [15] (Lord Neuberger); Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253, 284 [98] (Heydon and Crennan JJ). See further G Leggatt, ‘Making Sense of Contracts: The Rational Choice Theory’ (2015) 131 LQR 454, 460–65. Contrast D McLauchlan, ‘Common Intention and Contract Interpretation’ [2011] LMCLQ 30, 30–31; International Institute for the Unification of Private Law, UNIDROIT Principles of International Commercial Contracts (2016), art 4.1-4.3 (UNIDROIT Principles). See further [3-29]–[3-31]. 24 See, eg, Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [18]–[19] (Lord Neuberger). 25 Bromarin AB v IMD Investments Ltd [1999] STC 301, 310 (Chadwick LJ) (CA). See also MGICA Ltd v United City Merchants (Australia) Ltd (1986) 4 ANZ Ins Cas 60–729, 74,350 (Kirby P) (NSWSC). 26 McMeel (2017) 44 [1.71]. See also Leggatt (n 23) 467; MGICA Ltd v United City Merchants (Australia) Ltd (1986) 4 ANZ Ins Cas 60–729, 74,350 (Kirby P) (NSWSC). 27 See G Rosen, ‘Textualism, Intentionalism and the Law of Contract’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011) 139 (‘hypothetical intentionalism’); N Stoljar, ‘Postulated Authors and Hypothetical Intentions’ in N Naffine, R Owens and J Williams (eds), Intention in Law and Philosophy (Ashgate, 2001) 271 (‘the hypothetical intentions of postulated – or fictitious – authors’). 28 The Diana Prosperity [1976] 1 WLR 989, 996 (Lord Wilberforce) (HL).

The Aim of Contract Interpretation  29 [2-10]   Recent judgments of the Supreme Court of the United Kingdom state that the aim of interpretation is to infer intention. However, the intention is established by ‘identifying’,29 ‘focussing on’30 or ‘look[ing] to’31 the meaning of the words. This reflects the fact that judges have, for a long time, conflated objective intention and linguistic meaning.32 For example, relatively recently, the High Court of Australia confirmed the notion that ‘the common intention of the parties’ equates to ‘the meaning of the terms of a contractual document’.33 [2-11]  It follows that ascertaining objective intention may be the object of ­interpretation under English and Australian common law.34 Hence, it is not surprising that this position is advanced by several prominent commentators.35 For example, Calnan states as his first principle of contract interpretation: The purpose of contractual interpretation is to establish the intention of the parties to the contract.36

To similar effect, Carter views intention as the guiding force in construction. On his theory, construction is ‘the process by which the intention of the parties to a contract is determined and given effect’.37 Sir Christopher Staughton put the

29 Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [18]–[19] (Lord Neuberger). 30 Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1627–28 [15] (Lord Neuberger). 31 Impact Funding [2016] UKSC 57, [2017] AC 73, 79 [6] (Lord Hodge). 32 See, eg, Grey v Pearson (1857) 6 HLC 61, 105–06 (Lord Wensleydale); Shore v Wilson (1842) 9 Cl & F 355, 517–18; 8 ER 450, 525 (Coleridge J); 9 Cl & F 355, 555; 8 ER 450, 528 (Parke B) (HL); RF Norton, A Treatise on Deeds (Sweet & Maxwell, 1906) 43. See also Lewison (2015) 43 (‘the intention of the parties is the meaning of the contract’). But see R McDougall, ‘Construction of Contracts: The High Court’s Approach’ (2016) 41 Australian Bar Review 103, 114. 33 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, (2004) 219 CLR 165, 176 [40] (the Court) (Toll) (quoted in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3, (2008) 234 CLR 151, 174 [53] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ)). See further [4-09]–[4-11]. See also Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54, (2012) 247 CLR 129, 139 [27] (French CJ, Crennan, Kiefel and Bell JJ); Heydon (n 14) 253–54 [8.120]; P Herzfeld, T Prince and S Tully, Interpretation and Use of Legal Sources: The Laws of Australia (Thomson Reuters, 2013) 489 [25.3.150]. 34 It is also the focus of interpretation in civil jurisdictions: Code Civil (France) art 1156; Bürgerliches Gesetzbuch [Civil Code] (Germany) §133; B Markesinis, H Unberath and A Johnston, The German Law of Contract, 2nd edn (Hart Publishing, 2006) 133–34; S Vogenauer, ‘Interpretation of Contracts: Concluding Comparative Observations’ in A Burrows and E Peel (eds), Contract Terms (Oxford University Press, 2007) 127–28; IH Schwenzer, P Hachem and C Kee, Global Sales and Contract Law (Oxford University Press, 2012) 293–94 [26.07]–[26.13]. 35 See, eg, J Beatson, AS Burrows and J Cartwright, Anson’s Law of Contract, 30th edn (Oxford University Press, 2016) 179; R Stone and J Devenney, The Modern Law of Contract, 12th edn (Routledge, 2017) 202–03 [6.5.4]; Beale, Chitty on Contracts, 33rd edn (n 14) 1038 [13-043] (‘the overriding aim of the court is to give effect to the intention of the parties, objectively ascertained’) (but note [2-07] (n 14)). See also McMeel (2017) 43 [1.69] (‘Giving legal effect to the parties’ manifested contractual intention remains for many the whole purpose of the law of contract’). 36 Calnan (2017) 13. 37 Carter (2013) 4 [1-04].

30  Theories of Contract Interpretation matter in even more affirmative terms. Writing extra-judicially, he described as ‘Rule One’ of his rules for contract interpretation: [T]he task of the judge when interpreting a written contract is to find the intention of the parties. In so far as one can be sure of anything these days, that proposition is unchallenged.38

Such an incontrovertible statement is not surprising. It is hard to understand ­interpretation otherwise than as a means through which the court infers intention from the choice of words in a contract.39 Nonetheless, the role of intention has been contested by leading scholars and jurists. In particular, Lewison remarks: The purpose of interpretation is not to find out what the parties intended, but what the language of the contract would signify to a properly informed ordinary speaker of English.40

McMeel adopts a similar linguistic focus: [C]onstruction is concerned with ascertaining the meaning which the document (or utterance) would convey to a reasonable person. It is not concerned with identifying some (fictional) common intention of the parties.41

Likewise, Collins states: [I]t is not the intention of the promisor which is relevant, but the impression that the words would form on the mind of the reasonable promisee.42

[2-12]  Hence, the most that the authorities and commentary reveal is that establishing intention or ascertaining meaning may be the object of interpretation or that, indeed, both may be the object of the process. Yet, if one considers each concept in the abstract, meaning and intention are distinct: what one intends by using a word is inferred by taking into account the potential meanings for the word.43 Nonetheless, the conflation of the two concepts may explain why construction is occasionally described as a process through which the ‘meaning of the document’ is established.44

The Meaning of the Contract [2-13]  In Investors Compensation Scheme Ltd v West Bromwich Building Society,45 Lord Hoffmann described interpretation as the ascertainment of the 38 C Staughton, ‘How do the Courts Interpret Commercial Contracts?’ (1999) 58 CLJ 303, 304. 39 See further [4-13]–[4-16]. 40 Lewison (2015) 10 [1.03]. See also Lewison and Hughes (2012) 7 [1.03]. 41 McMeel (2017) 32 [1.50]. 42 H Collins, ‘Objectivity and Committed Contextualism in Interpretation’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 196. 43 See further [4-09]–[4-11]. 44 cf Herzfeld, Prince and Tully (n 33) 489 [25.3.140]–[25.3.150], 545 [25.3.620]. 45 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) (ICS).

The Aim of Contract Interpretation  31 meaning of a contractual document.46 His Lordship drew a distinction between the meaning of the words in a contract and the meaning of the contract: The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.47

Following ICS, the notion that interpretation was directed to the ‘meaning of the document’ gained traction in contract law scholarship.48 In particular, McMeel describes as his leading principle of construction: [T]he aim of the exercise of construction of a contract or other document is to ascertain the meaning which it would convey to a reasonable business person.49

Likewise, Lewison defines interpretation as ‘the ascertainment of the meaning which the document would convey to a reasonable person’.50 [2-14]  The High Court of Australia has also, on occasion, embraced the notion that interpretation is directed to ascertaining the meaning of a contractual document.51 However, the concept is not a prominent feature in recent judgments of either the High Court of Australia or the Supreme Court of the United Kingdom.52 Nor has it been explored academically in any depth. This is probably because the ‘meaning of a contract’ can only denote either: (i) the cumulative meanings of the words used; (ii) the parties’ intention in choosing the words; (iii) both meaning and intention; (iv) the outcome of the interpretive process; or (v) the content of the contract. Indeed, on one view, the phrase was merely used by Lord Hoffmann to emphasise that the contract must be construed as a whole.53 That said, the moniker makes sense as a label describing the outcome of the interpretive process. Interpretation is employed to define rules in a contract, thereby establishing the content and ‘meaning’ of the contract. In short, construction is directed to ascertaining something more than simply what words mean. 46 ibid 912. 47 ibid 913 (Lord Hoffmann). For an early American formulation of construction along these lines, see S Williston, The Law of Contracts (Baker, Voorhis & Co, 1924) 1161 §602. 48 See, eg, HG Beale, Chitty on Contracts, 32nd edn (Sweet & Maxwell, 2015) 1038 [13-042] (‘The object of all construction … is to discover … the meaning of the agreement’) (but note [2-07] (n 14)). Contrast HG Beale, Chitty on Contracts, 29th edn (Sweet & Maxwell, 2004) 729 [12-042] (‘The object of all construction … is to discover … the intention of the parties to the agreement’). See also Heydon (n 14) 249–50 [8.20]; Herzfeld, Prince and Tully (n 33) 545 [25.3.620]. 49 McMeel (2017) 110 [1.190]. 50 Lewison (2015) 10 [1.03]. See also Lewison and Hughes (2012) 6 [1.03]. 51 Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70, (2001) 210 CLR 181, 188 [11] ­(Gleeson CJ, Gummow and Hayne JJ) (Maggbury); Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, (2004) 218 CLR 451, 461–62 [22] (the Court) (Pacific Carriers). See also Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR 1029, 1094–95 [131] (V K Rajah JA) (CA). 52 But see Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, [2016] AC 742, 769 [76] (Lord Clarke) (‘determining the scope and meaning of the contract’ is ‘part of construction … in a broad sense’). 53 See [3-07] (n 8).

32  Theories of Contract Interpretation

The Two-Stage Approach [2-15]   English and Australian commentators often describe ‘construction’ (and sometimes, ‘interpretation’) as involving two stages: (i) ascertaining the meaning of the words; and (ii) giving effect or ‘legal effect’ to the contract.54 This approach originates from American jurisprudence, both in contract law55 and legal theory.56 The second stage, in which the contract is given effect, is variously described. The dominant explanation is that it involves applying either the contract57 or rules derived therefrom.58 But it is also said to encompass the use of non-linguistic interpretive principles, doctrinal rules, or other rules of law.59 More broadly, the second stage is described as comprising ‘the drawing of conclusions respecting subjects, that lie beyond the direct expression of the text’.60 Put differently, it is ‘the process of attempting to understand the entire contractual relationship’.61 Under American law, it specifically includes the resolution of vagueness and omission.62 54 See, eg, Carter (2013) 7 [1-09] (‘construction’ is a three-stage process, consisting of ‘the preliminary stage’ (in which background is ascertained), ‘the meaning stage’ and ‘the application stage’); Lewison (2015) 28 [2.01]; Lewison and Hughes (2012) 2 [1.01]; McMeel (2017) 4–5 [1.01]–[1.02] (‘construction or interpretation [is] utilized by the courts in discerning the meaning and effect of the words’); Beale, Chitty on Contracts, 33rd edn (n 14) 1036 [13-041] (‘The word “construction” refers to the process by which a court determines the meaning and legal effect of a contract’) (but note [2-07] (n 14)). cf J Allsop, ‘Characterisation: Its Place in Contractual Analysis and Related Enquiries’ in S Degeling, J Edelman and J Goudkamp (eds), Contract in Commercial Law (Thomson Reuters, 2016) 108; Heydon (n 14) 251 [8.50]; M Furmston and GJ Tolhurst, Contract Formation: Law and Practice, 2nd edn (Oxford University Press, 2016) 296 [11.17] (‘finding the meaning of a term’ and ‘its application’); L Willmott, S Christensen, D Butler and B Dixon, Contract Law, 5th edn (Oxford Univesity Press, 2018) 311 [9.1] (the ‘meaning’ and ‘signficance’ of contract terms). 55 See, eg, AL Corbin, ‘Conditions in the Law of Contract’ (1919) 28 Yale Law Journal 739, 740–41; MN Kniffin, ‘Interpretation of Contracts’ in JM Perillo (ed), Corbin on Contracts, rev edn (Lexis Law Publishing, 1998) vol 5, 8 §24.3 (the second stage involves determining ‘the legal operation of the contract – its effect upon the rights and duties of the parties’); Williston (n 47) 1161 § 602; American Law Institute, Restatement (Second) of Contracts (1981) §200, Reporters Notes. cf EA Farnsworth, Farnsworth on Contracts, 2nd edn (Little, Brown and Company, 1990) 237–38 §7.7. 56 See, eg, F Lieber, Legal and Political Hermeneutics, Or Principles of Interpretation and Construction in Law and Politics: With Remarks on Precedents and Authorities (Charles C Little and James Brown, 1839) 56 (as discussed in J Farr, ‘The Americanization of Hermeneutics: Francis Lieber’s Legal and Political Hermeneutics’ in G Leyh (ed), Legal Hermeneutics: History, Theory, and Practice (University of California Press, 1992) 91–97). See also [2-15] (n 60) and [2-16] (n 65). 57 Carter (2013) 361 [11-05] (‘ultimately, the legal effect of a contract is the result achieved when it is applied to a particular factual situation’). See also Carter (2013) 7 [1-09], 11–12 [1-16]–[1-17], ch 15; A Scalia and BA Garner, Reading Law (Thomson West, 2012) 13–14, 53 (‘Every application of a text to particular circumstances entails interpretation’); Furmston and Tolhurst (n 54) 296 [11.17]. 58 McMeel (2017) 8 [1.07]. 59 cf Lewison (2015) 28 [2.01]; Lewison and Hughes (2012) 2 [1.01]. See also Carter (2013) 6 [1-06], 360 [11-05] (‘The legal effect of a contract is the sum of the rights that the contract confers, as determined by construction and the application of doctrine’); W Courtney and JW Carter, ‘Implied Terms: What is the Role of Construction?’ (2014) 31 Journal of Contract Law 151, 161. 60 E Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths, 2003) 24 [2.14], quoting Lieber (n 56) 56. See also A Robertson, ‘The Foundations of Implied Terms: Logic, Efficacy and Purpose’ in S Degeling, J Edelman and J Goudkamp (eds), Contract in Commercial Law (Thomson Reuters, 2016) 150. 61 Mitchell (2019) 107. 62 Kniffin (n 55) 9 §24.3. cf EA Farnsworth, ‘Disputes Over Omission in Contracts’ (1968) 68 ­Columbia Law Review 860.

The Aim of Contract Interpretation  33 [2-16]   As regards the central concept of ‘application’, it seems to derive from legal theory and the notion that law consists of rules that are applied by judges.63 McMeel embraces this notion in the context of contract construction: Construction generally involves identifying in a document a rule for future cooperative behaviour from the language of the instrument, and then applying that rule to subsequent facts or situations.64

Carter takes a slightly different approach. He proposes three standards of application: literal, strict and commercial.65 Literal and strict application confine the scope of a contractual provision. In the case of the former, the words are read literally. In the case of the latter, the provision is given the narrowest meaning possible.66 Commercial application, by comparison, is less rigid. Primarily, it involves the use of construction preferences and presumptions.67 [2-17]   Despite widespread academic support, the two-stage approach is not an established feature of English or Australian law.68 It is rarely mentioned in seminal statements of principle.69 However, when engaging in the interpretive process, courts often resort to concepts of legal effect or application.70 This reflects the fact that courts are often ‘seeking to resolve a puzzle about the application of the instrument to a particular case’.71 [2-18]  The notion that the rules in a contract must be applied as part of contract law is undoubtedly correct. However, application is a separate process from interpretation. Through interpretation, the rules in a contract are defined. Once defined, such rules must be applied. This involves a process of factual characterisation: the determination whether the components of the rule are satisfied such that the rule is triggered.72

63 See, eg, HLA Hart, The Concept of Law, first published 1961, 3rd edn (Oxford University Press, 2012) 124–26; N MacCormick, Legal Reasoning and Legal Theory (Oxford University Press, 1994) 45, 65–68, 231; B Bix, Law, Language and Legal Determinacy (Oxford University Press, 1995) 7–8, 19–25. 64 McMeel (2017) 5 [1.02]. See also Robertson (n 60) 150 (‘meaning in its applicative sense’). 65 Carter (2013) 500 [15-11]. This approach is not dissimilar to Francis Lieber’s conceptualisation of different ‘species’ of construction, namely, ‘close’, ‘comprehensive’, ‘transcendent’, or ‘extravagant’ construction: see Lieber (n 56) 77, 81. 66 See Carter (2013) 500 [15-12]. 67 See generally Carter (2013) ch 16. 68 See Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36, (1996) 186 CLR 389, 396 (the Court) (‘artificial, if not illusory’) (a case regarding statutory interpretation). 69 But see The Diana Prosperity [1976] 1 WLR 989, 995 (Lord Wilberforce) (HL); Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8, (1968) 118 CLR 429, 436 (Barwick CJ); Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18, (1925) 36 CLR 60, 78 (Isaacs J). The authority usually cited by scholars as support for the two-stage approach is Chatenay v Brazilian Submarine Telegraph Co Ltd [1891] 1 QB 79, 85 (Lindley LJ). It is rarely cited in modern judgments. 70 See, eg, Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 661 [47], [49] (French CJ, Hayne, Crennan and Kiefel JJ); Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047, [2001] CLC 1103, 1119 [17] (Mance LJ). 71 Borrowed from Robertson (n 60) 150. 72 See further [7-45]–[7-48].

34  Theories of Contract Interpretation [2-19]  Another issue with the two-stage approach, as a model for contract interpretation, is that the definition of a rule in a contract involves more than simply ascertaining what the relevant words mean. Much is inferred by focusing on the use of the words in context. That said, the court can only go so far in inferring a rule from the contract text. Some work is always left in determining whether the rule is triggered by the facts at hand.73 Hence, while the two-stage approach certainly assists in understanding interpretation and its place alongside factual characterisation, it has its limitations. In particular, it leaves much to be explained in terms of how interpretation is employed to define the rules in a contract. To this end, ­pragmatic descriptions of the process offer some guidance.

The Definition of Promises, Rights, Liabilities or Obligations [2-20]   Contract interpretation is occasionally conceptualised as a mechanism engaged to define either promises, rights or obligations. Most notably, the High Court of Australia has framed interpretation such that, on one view, the object of the process is the determination of contractual rights and liabilities.74 The Supreme Court of the United Kingdom has steered clear of such language. However, Lord Diplock and Lord Reid described the interpretive process in similar terms in leading twentieth-century judgments. For example, Lord Diplock described construction as involving the definition of obligations or promises: The object sought to be achieved in construing any commercial contract is to ascertain what were the mutual intentions of the parties as to the legal obligations each assumed by the contractual words in which they (or brokers acting on their behalf) chose to express them; or, perhaps more accurately, what each would have led the other reasonably to assume were the acts that he was promising to do or to refrain from doing by the words in which the promises on his part were expressed.75

Lord Reid, on the other hand, framed the object of construction simply by reference to ‘what each [party] was reasonably entitled to conclude from the attitude of the other’.76

73 See further [4-41]–[4-44]. 74 See Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 656 [35] (French CJ, Hayne, ­Crennan and Kiefel JJ); Toll [2004] HCA 52, (2004) 219 CLR 165, 176 [40] (the Court); Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55, (2004) 218 CLR 471, 483 [34] (the Court). See also HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228, (2012) 290 ALR 372, 424 [263] (Emmett J); Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290, 299 (Santow J) (SC). 75 Pioneer Shipping v BTP Tioxide Ltd [1982] AC 724, 736 (Lord Diplock) (emphasis added) (HL) (The Nema). See also Christopher Hill Ltd v Ashington Piggeries Ltd [1972] AC 441, 502 (Lord Diplock) (HL); Gissing v Gissing [1971] AC 886, 906 (Lord Diplock) (HL). 76 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125, 128 (Lord Reid) (HL), quoting MW Gloag, The Law of Contract, 2nd edn (W Green & Son, 1929) 7.

The Aim of Contract Interpretation  35 [2-21]  The proposition that interpretation is directed to defining promises, rights or obligations also finds support in contract law scholarship. For example, Collins has described interpretation in promissory terms: The issue is … what a reasonable promisee would have understood by the promises being made in the contract.77

Smith has also directed attention to the agreement and what was promised: ‘Interpretation’ here refers to the process of determining the meaning of a contractual agreement – of determining, that is, what it is that contracting parties have in fact agreed or promised to do.78

Similarly, Endicott frames the enquiry in terms of perceived commitments: A court adjudicating a contract dispute, therefore, faces a central task of answering this objective question: ‘what commitments did each party give the other reason to think that they were assenting to?’79

Grabiner, on the other hand, has focused on the definition of contractual obligation through intention: [T]he court’s task is to ascertain the scope of [contractual] obligations by reference to what the parties intended.80

Mitchell has adopted a similar emphasis: The judicial role in contract interpretation is ultimately to determine what obligations the parties have undertaken to each other.81

Likewise, Carter, while advocating other conceptions of the object of construction,82 has also noted that every conclusion as to the ‘construction’ of a contract is a conclusion of law which involves, or leads to, a decision about legal rights.83

[2-22]   Interpretation obviously plays a fundamental role in defining the rights and obligations of contracting parties. But it does so through the definition of rules that make up the contract – the definition of what was agreed.84 Subject to narrow exceptions, the rules in a contract are given effect in accordance with

77 H Collins, The Law of Contract, 4th edn (LexisNexis, 2003) 228–29 (emphasis added). 78 SA Smith, Contract Theory (Oxford University Press, 2004) 271. 79 TAO Endicott, ‘Objectivity, Subjectivity, and Incomplete Agreements’ in J Horder (ed), Oxford Essays in Jurisprudence (Oxford University Press, 2000) 151. 80 Lord Grabiner, ‘The Iterative Process of Contract Interpretation’ (2012) 128 LQR 41, 41. See also NC Seddon and RA Bigwood, Cheshire & Fifoot Law of Contract, 11th Australian edn (LexisNexis Butterworths, 2017) 419 [10.1] (‘the process of determining the obligational content of a contract’). 81 Mitchell (2019) 12. 82 See [2-11] (n 37) (intention) and [2-16] (the two-stage approach). 83 Carter (2013) 13 [1-19] (emphasis added). See also Carter (2013) 360 [11-05]. 84 See further [4-20].

36  Theories of Contract Interpretation the principle of freedom of contract.85 The definition of each rule in a contract involves a discrete application of interpretation – one that is triggered by a dispute regarding the content of the contract.

A Dispute Resolution Mechanism [2-23]   Judges often commence the exercise of construing a contract by identifying the relevant question that needs to be resolved.86 Occasionally, the question is defined purely in terms of the disputed contractual right or obligation. For example, in Milne v Municipal Council of Sydney,87 Isaacs J set the interpretive enquiry as follows: The question we are called upon to decide is whether the respondents agreed to give certain repairs to the appellants, or whether they retained under the contract absolute liberty to give them to whomsoever they pleased or to effect them themselves.88

Ordinarily, however, a question of interpretation is framed through the prism of meaning89 or intention.90 Hence, in Victoria v Tatts,91 the High Court of Australia described the question before it in the following terms: Did the phrase ‘new gaming operator’s licence’ … mean a gaming operator’s licence granted under Pt 3 of the 1991 Act … or any statutory authority whose effect was to confer on the holder substantially the same rights?92

[2-24]   Despite this practical focus, only a few judges and academics define interpretation as a mechanism through which disputed issues are resolved. Justice Allsop, now the Chief Justice of the Federal Court of Australia, has described construction as involving a choice: the ‘correct answer’ is achieved by making a ‘choice’ through the ‘[a]nalysis of competing arguments’.93 Carter has also acknowledged that construction is issue driven. He notes that a contract is only

85 See further [7-05]. 86 See, eg, Wood [2017] UKSC 24, [2017] AC 1173, 1177 [1] (Lord Hodge) (‘This appeal raises a question of contract interpretation’). 87 Milne v Municipal Council of Sydney [1912] HCA 25, (1912) 14 CLR 54. 88 ibid 70 (Isaacs J). 89 See, eg, Westacott v Hahn [1918] 1 KB 495, 512 (Scrutton LJ) (CA); Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 381 (Lord Mustill) (HL); Prenn v Simmonds [1971] 1 WLR 1381, 1383 (Lord Wilberforce) (HL); Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, 2904–05 [9] (Lord Clarke) (Rainy Sky); Victoria v Tatts Group Ltd [2016] HCA 5, (2016) 90 ALJR 392, 400 [46] (the Court) (Victoria v Tatts). 90 See, eg, McCowan v Baine [1891] AC 401, 403 (Earl of Selborne) (HL) (‘probable intention’); Bromarin AB v IMD Investments Ltd [1999] STC 301, 310 (Chadwick LJ) (CA); Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, [2007] Bus LR 1719, 1724 [7] (Lord Hoffmann). 91 Victoria v Tatts [2016] HCA 5, (2016) 90 ALJR 392. 92 ibid 400 [46] (the Court). 93 OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27, (2013) 85 NSWLR 1, 20 [61] (Allsop P).

The Method of Contract Interpretation  37 construed to the extent necessary,94 and he also formulates the ultimate object of construction as being the achievement of ‘commercially sensible results’.95 Likewise, Mitchell has recognised the role of interpretation in the dispute resolution process: ‘Interpretation of the agreement may therefore be a necessary part of resolving the dispute’.96 [2-25]  The notion that interpretation involves a pointy practical focus has not received much further attention as a matter of theory, either at the hands of judges or scholars. Yet, this rudimentary view of construction is fundamental to understanding the nature of the process. The interpretive exercise is anchored by a particular question regarding a disputed aspect of the agreement. It is the question that guides the search for competing constructions and, more significantly, supporting arguments. The court looks for clues in the contract text, the background and the other relevant materials – clues that establish what was probably intended in relation to the disputed issue. This process is partly logical and partly intuitive. It is a complex form of reasoning.

2.3.  The Method of Contract Interpretation [2-26]  The method or ‘mental process’97 in interpretation is described in a number of ways. The authoritative position is that the exercise is undertaken from the perspective of the reasonable person. However, it is debated whether the process is textual or contextual, whether it is logical or intuitive, and whether linguistic theory is an appropriate means of explanation. For English judges, the process is ‘iterative’ and ‘unitary’; it involves a weighing or balancing exercise. For Leggatt J, in particular, it involves a ‘rational choice’.98 Like the different articulations of the aim or object of interpretation, each description of the method involved bears some truth. Construction is both textual and contextual. It is a logically structured process: define the question, identify competing interpretations, formulate arguments in support, and choose the correct interpretation. Yet interpretation is also intuitive in the sense that it is hard to explain aspects of interpretive reasoning. For example, it is not always easy to say how one arrives at a potential meaning for a word. Nor is it always clear how an interpretive dispute

94 Carter (2013) 493 [15-01]. 95 Carter (2013) 494 [15-01]. See also Carter (2013) 16 [1-22], 168 [5-17], 378 [11-21], 531 [16-01], 533 [16-03]. 96 Mitchell (2019) 8. See also A Kramer, ‘Common Sense Principles of Contract Interpretation (and how we’ve been using them all along)’ (2003) 23 OJLS 173, 192–93 (in cases of incomplete or uncertain meaning, an interpreter ‘will be unable to discover an intended meaning on a particular issue’) (emphasis added). 97 Morrells of Oxford Ltd v Oxford United Football Club Ltd [2001] Ch 459, 469 [24] (Robert Walker LJ) (CA) (describing statutory interpretation). 98 See [2-45].

38  Theories of Contract Interpretation should be determined.99 However, what is clear is that interpretation is based on the reasonable person’s understanding of what was meant or intended.

The Reasonable Person’s Understanding [2-27]   The notion that interpretation is to be undertaken from the perspective of the reasonable person was established through a series of leading twentieth-century judgments.100 It is now a trite feature of construction: the reasonable person’s understanding of what was meant or intended is determinative.101 If the relevant contract is a commercial one, the reasonable person is a business person.102 [2-28]  The role of the reasonable person is often simply explained as an ‘objective test’:103 the reasonable person’s understanding is the focus because the subjective intentions of the parties are irrelevant.104 However, the reasonable person test also imports the notion of perspective.105 On one view, a choice of perspective is required.106 That is to say, the reasonable person must be either a third-party observer,107 the reasonable promisee108 or even the reasonable promisor.109 Either way, he or she is attributed the common knowledge of the parties,110 including knowledge of background and purpose.111 He or she

99 See further [6-08]. 100 See Gissing v Gissing [1971] AC 886, 906 (Lord Diplock) (HL); Christopher Hill Ltd v Ashington Piggeries Ltd [1972] AC 441, 502–03 (Lord Diplock) (HL); The Nema [1982] AC 724, 736 (Lord Diplock) (HL); ICS [1998] 1 WLR 896, 912 (Lord Hoffmann) (HL). 101 See Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1627–28 [15] (Lord Neuberger); Ecosse [2017] HCA 12, (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ), 571 [73] (Nettle J); Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 656 [35] (French CJ, Hayne, Crennan and Kiefel JJ); Calnan (2017) 13 (Principle 1); Carter (2013) 128–29 [4-22] (the ‘perspective rule’). See further Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 775 (Lord Hoffmann) (HL) (Mannai). 102 See, eg, Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 656 [35] (French CJ, Hayne, Crennan and Kiefel JJ). 103 See, eg, Endicott (n 79) 163. 104 See, eg, Collins, ‘Objectivity and Committed Contextualism in Interpretation’ (n 42) 195–96. As to the exclusion of subjective intention, see further [3-29]–[3-31]. 105 See, eg, Ecosse [2017] HCA 12, (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ). 106 See Carter (2013) 380–83 [11-23]–[11-26]. 107 See, eg, Wilson v Anderson [2002] HCA 29, (2002) 213 CLR 401, 418 [8] (Gleeson CJ); Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444, 457 [19] (Tipping J) (SC); Lewison and Hughes (2012) 2 [1.02] (‘reasonable reader in the position of the parties’); Schwenzer, Hachem and Kee (n 34) 294 [26.11] (a person ‘to whom the contract is addressed’). 108 Toll [2004] HCA 52, (2004) 219 CLR 165, 176 [40] (the Court); Mannai [1997] AC 749, 774–75 (Lord Hoffmann) (HL); The Nema [1982] AC 724, 736 (Lord Diplock) (HL); Carter (2013) 128–29 [4-22]. 109 See Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, 336 (McHugh JA) (CA) (‘Support for each view can be found in the cases’) (discussing intention to contract). 110 See, eg, ICS [1998] 1 WLR 896, 912 (Lord Hoffmann) (HL); Maggbury [2001] HCA 70, (2001) 210 CLR 181, 188 [11] (Gleeson CJ, Gummow and Hayne JJ). See further [3-14]–[3-17]. 111 Ecosse [2017] HCA 12, (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ).

The Method of Contract Interpretation  39 is also presumed to have certain characteristics:112 some practical,113 others normative.114 In essence, the reasonable person acts as a hypothetical sounding board115 – the reasonable person is the reasonable interpreter of the bargain or agreement.116 It follows that interpretation is ‘neither uncompromisingly literal nor unswervingly purposive’.117 The reasonable interpreter is free to consider all relevant material.

Basic Interpretive Theories [2-29]   Much ink has been spilt over whether construction is textual and literal or contextual and purposive.118 However, most judges and commentators now accept that the exercise is not binary. All relevant and admissible material must be considered in the interpretive process.119 As Lord Hodge recently noted in Wood,120 ‘[t]extualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation’.121 Hence, on one view, the debate no longer has any relevance. As Palmer J remarked in the Supreme Court of New South Wales: [T]he controversy between the literalists and the contextualists has as much practical significance as the controversy between the Big-Endians and the Little-Endians recounted in Gulliver’s Travels: whichever end of the egg you start at, it all gets eaten up and it all tastes the same anyway.122

112 See further Sir George Leggatt’s ‘Rational Choice Theory’ (discussed at [2-45]). 113 cf UNIDROIT Principles, art 4.1, comment 2 (the ‘linguistic knowledge’, ‘technical skill’ and ‘business experience’ of the parties). 114 See [2-44], [3-25]–[3-28] and [5-50]. 115 See, eg, Endicott (n 79) 163 (‘what [would] a reasonable person … make of the conduct of the parties in its context’); MT Højgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd [2015] EWCA Civ 407, [87] (Jackson LJ) (the court ‘must postulate a reasonable person (X) having all the knowledge available to those two parties’) (overturned on proper interpretation: see [2017] UKSC 59, [2017] Bus LR 1610). cf RA Posner, ‘Law and Literature: A Relation Reargued’ (1986) 72 Virginia Law Review 1351, 1361–62 (statutory interpretation) (‘how [would] the legislators have answered the question of interpretation if it had been put to them’). 116 See further [4-07]. 117 Arbuthnott v Fagan [1995] CLC 1396, 1400 (Bingham MR) (CA). 118 See, eg, J Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433, 440–41; Collins, ‘Objectivity and Committed Contextualism in Interpretation’ (n 42) 189; Mitchell (2019) 6 (‘Debates over contract interpretation … generally manifest themselves between opposing camps’); JJ Spigelman, ‘Contractual Interpretation: A Comparative Perspective’ (2011) 85 Australian Law Journal 412, 412–14; Scalia and Garner (n 57) 15–28; Calnan (2017) 8–10 [Pr.36]–[Pr.48]. ‘Intentionalism’ is also postulated as a competing alternative: see Mitchell (2019) 6; SJ Burton, Elements of Contract Interpretation (Oxford University Press, 2008) 1–2 §1.1; Rosen (n 27). 119 See [3-05]–[3-06]. But note the Australian position regarding background: see [3-14]. 120 Wood [2017] UKSC 24, [2017] AC 1173. 121 ibid 1180 [13] (Lord Hodge). 122 Brooks v NSW Grains Board [2002] NSWSC 1049, [68] (Palmer J).

40  Theories of Contract Interpretation [2-30]  It is probably going too far to say that the literal-versus-contextual debate has no merit at all.123 The divide is essentially a matter of emphasis.124 There is ‘a spectrum of opinion, rather than a simple duality’.125 The textualists assert that greater weight should be given to the text in construction. The contextualists claim background, purpose and results should hold sway. This dichotomy plays out in the final stage of interpretation, that is, in the weighing and balancing of competing arguments to arrive at the correct construction. Many interpretive disputes can be understood as a conflict between a ‘linguistic’ interpretation (ie, an interpretation advanced primarily by an argument that a key word or phrase bears a particular meaning) and a ‘purposive’ or ‘consequentialist’ construction (ie, a construction advanced principally by an argument based on commercial purpose or the potential consequences of the competing constructions).126 Scholars claim that such disputes are resolved as a matter of judicial preference – the result depends on whether the relevant judge is more inclined to infer intention from the meaning of the words, rather than as a matter of commercial purpose or practical consequence.127 However, this book claims that a more principled approach is applied. The interpretation that is established to the highest degree of probability, as a matter of objective intention, is the one that succeeds. Often, the determination of the correct interpretation rests on a careful examination of the text as a whole.128 It follows that the debate between textualism and contextualism is relevant to understanding interpretation. It reflects a common tension between linguistic interpretation and purposive or consequentialist construction. However, the debate does not explain how such tension is resolved in the final stage of interpretation. Nor does it assist in understanding the structure of the interpretive process.

Logic and Inference [2-31]  Judges and commentators frequently describe construction in terms of logic or inference.129 Objective intention is said to be inferred or deduced,130 usually as a 123 See [4-38]–[4-40] and [5-71]. See also ZX Tan, ‘Beyond the Real and the Paper Deal: The Quest for Contextual Coherence in Contract Interpretation’ (2016) 79 MLR 623. 124 Mitchell (2019) 6, 9–12; E McKendrick, ‘The Interpretation of Contracts: Lord Hoffmann’s Re-Statement’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 139, 160. 125 Spigelman (n 118) 412. 126 See [6-06] and [6-35]–[6-106]. 127 See [4-38]–[4-39]. 128 See [5-63], [6-06] and [6-35]–[6-106] (in particular, [6-80] and [6-105]–[6-106]). 129 See, eg, Driver v War Service Homes Commissioner (No 2) [1924] VLR 535, 542 (Cussen ACJ) (SC); Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8, (1968) 118 CLR 429, 437 (Barwick CJ) (‘logically … worked out’). 130 See, eg, Gissing v Gissing [1971] AC 886, 906 (Lord Diplock) (HL); L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 255–56 (Lord Morris) (HL). See also Carter (2013) 68–77 [2-32]–[2-46].

The Method of Contract Interpretation  41 matter of probability.131 This is particularly so in cases of omission or ‘unforeseen circumstances’.132 More broadly, knowledge of context is inferred133 and inferences are drawn regarding ‘what the contract meant’.134 [2-32]  Logic is significant in interpretation, particularly with respect to its structure. As Grabiner has noted: Where the parties have taken the time to write down the terms of their bargain, the correct way to ensure that their chosen words are given appropriate weight is … to ensure that the analysis starts from the right place and follows a logical process.135

On his view, interpretation begins with an analysis of the disputed text, then it moves to the identification of contractual purpose from the contract as a whole, and it only involves resort to background and commercial common sense thereafter.136 By contrast, Carter has proposed that, in line with the interpretation of utterances in everyday life, background must be ascertained first.137 This book claims that the interpretive process follows a different structure. It does not begin with an analysis of the relevant materials that must be considered. Instead, it starts with the definition of a disputed question, which is followed by the formulation of competing answers and supporting arguments, leading to a choice between the rival interpretations. [2-33]   Beyond structure, logic and inference is also critical to argumentation in interpretation. The most time-consuming part of interpretation is the third stage in which competing arguments are composed from the admissible materials, namely, the text as a whole, the potential meanings for the words, the background, the objects served by the contract, and the consequences of the competing interpretations. These arguments are constructed as a matter of propositional inference and guided by inductive logic. For example, party A could argue that its construction was probably intended because: (i) word Y can bear meaning Z; and (ii) meaning Z aligns with party A’s construction.138 Even though interpretive arguments are composed logically, the process for weighing and balancing the arguments to arrive at the correct interpretation is not logical in a deductive or inductive sense.

131 See, eg, McCowan v Baine [1891] AC 401, 403 (Earl of Selborne) (HL); Australian Casualty Co Ltd v Federico [1986] HCA 32, (1986) 160 CLR 513, 520 (Gibbs CJ); Durham v BAI (Run Off) Ltd [2012] UKSC 14, [2012] 1 WLR 867, 878 [24] (Lord Mance). See also JB Thayer, A Preliminary Treatise on Evidence (Little, Brown and Company, 1898) 413. 132 See, eg, Bromarin AB v IMD Investments Ltd [1999] STC 301, 310 (Chadwick LJ) (CA); McMeel (2017) 60–61 [1.103]–[1.104] (‘Apparent incompleteness’). 133 Brooks v NSW Grains Board [2002] NSWSC 1049, [75] (Palmer J). 134 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, 1121 [42] (Lord Hoffmann) (Lord Hope, Lord Walker, Lord Rodger and Baroness Hale agreeing). 135 Grabiner (n 80) 45. 136 ibid 46. 137 Carter (2013) 6–12 [1-08]–[1-17]. 138 See further [4-29].

42  Theories of Contract Interpretation

An Iterative Balancing Act [2-34]  Particularly in recent English judgments, contract interpretation is described as an ‘iterative’139 and ‘unitary’140 exercise. In Re Sigma,141 Lord Mance stated, quoting Lord Neuberger in the decision below: [T]he resolution of an issue of interpretation in a case like the present is an iterative process, involving ‘checking each of the rival meanings against other provisions of the document and investigating its commercial consequences’.142

The court simultaneously considers the relevant materials to arrive at the correct conclusion. As Stuart-Smith J recently noted in the High Court of England and Wales: [A]lthough judgments have to be written in two dimensions, giving the appearance of a chronological approach to arguments, it is necessary to keep in mind and bring to bear all relevant considerations and to revisit them as necessary in the search for the correct meaning of the contract.143

Hence, in Wood,144 Lord Hodge remarked: Interpretation is … a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense … This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.145

To similar effect, in the Australian context, McDougall J has suggested extra-­ judicially that construction depends on ‘the skill of slowly and thoroughly reading contracts with one eye on the specific words chosen, and the other eye on the organising logic and internal structure of the contract at large’.146 [2-35]   The iterative conceptualisation of contract interpretation coincides with the view that the process involves a balancing act: ‘the assessment of disparate

139 Re Sigma Finance Corp [2009] UKSC 2, [2010] BCC 40, 50 [12] (Lord Mance) (Re Sigma) ­(quoting Re Sigma Finance Corp [2008] EWCA Civ 1303, [2009] BCC 393, 417–18 [98] (Lord Neuberger) (EWCA)); Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900, 2911 [28] (Lord Clarke); Wood [2017] UKSC 24, [2017] AC 1173, 1179–80 [12] (Lord Hodge). cf McMeel (2017) 8 [1.09] (a ‘somewhat modish’ description). 140 Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900, 2908 [21] (Lord Clarke); Wood [2017] UKSC 24, [2017] AC 1173, 1179 [11] (Lord Hodge). 141 Re Sigma [2009] UKSC 2, [2010] BCC 40. 142 ibid 50 [12] (Lord Mance). 143 Persimmon Homes Ltd v Ove Arup & Partners Ltd [2015] EWHC 3573 (TCC), [21] (Stuart-Smith J). Contrast Grabiner (n 80) 46 (as discussed at [2-32]). 144 Wood [2017] UKSC 24, [2017] AC 1173. 145 ibid 1179 [11]–[12] (Lord Hodge). 146 McDougall (n 32) 119.

The Method of Contract Interpretation  43 (and therefore incommensurable) factors to reach … [a] conclusion’;147 ‘a nice balancing of the considerations drawn either from the context or existing circumstances tending in favour of one construction or the other’;148 the striking of a balance ‘through the exercise of sound judicial discretion’;149 and ‘a careful balancing of internal textual considerations and external factors’.150 As Lord Hodge noted, again in Wood:151 [I]t does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.152

By comparison, for McMeel, the balancing exercise involves competing principles and it is essentially a matter of judgement: Loyalty to the text, the holistic principle, the relevance of the wider legal and factual matrix, commercial common sense, and regard to the commercial purpose of the parties are all essential principles guiding the technique of interpretation. The question arises: how are these potentially competing principles to be balanced? … Ultimately, it is a question of judgement how the different principles are traded off in a particular case.153

[2-36]  Contract interpretation is certainly a balancing act and an iterative process. The notion that it is iterative is evident in the third stage. Once the question of interpretation has been defined and the competing constructions have been formulated, much time is spent trawling through the materials to identify rival arguments. This is the most time-consuming part of the construction exercise. In the final stage, the competing considerations are evaluated to arrive at the correct interpretation. The relative strength of the underlying arguments is assessed; that is, the court determines the extent to which each argument makes a particular interpretation more probable. The rival arguments are then balanced against each other to determine which construction was probably intended. The arguments are unique to the contract and to the parties. However, the balancing exercise is not without principle.154 The correct interpretation is the one that represents the probable intention of the parties in choosing the words in the contract.

147 John v Price Waterhouse [2002] EWCA Civ 899, [94] (Robert Walker LJ). 148 Driver v War Service Homes Commissioner (No 2) [1924] VLR 535, 542 (Cussen ACJ) (SC). 149 Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047, [2001] CLC 1103, 1119 [16] (Mance LJ). 150 D McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ [2015] LMCLQ 406, 435. 151 Wood [2017] UKSC 24, [2017] AC 1173. 152 ibid 1179–80 [12] (Lord Hodge) (emphasis added). 153 McMeel (2017) 52 [1.88]. See also Beale, Chitty on Contracts, 33rd edn (n 14) 1037–38 [13-043]. 154 See generally, ch 6.

44  Theories of Contract Interpretation

Intuition and Impression [2-37]  Judges quite often describe construction as an ‘art’,155 an ‘intuitive’ process,156 or a matter of ‘impression’.157 For example, in the context of statutory interpretation, Robert Walker LJ remarked: [A]ny description of the requisite mental process is likely to be metaphorical and inexact. The judicial mind does not in practice proceed in an orderly series of immutable choices in order to reach a conclusion on a question of construction.158

In the field of contract interpretation, Collins and Lewison both embrace a similar approach. For them, the test of impression displaces traditional reliance upon notions of hypothetical or presumed intention.159 For Robert Walker LJ, on the other hand, the intuitive nature of the process derives from the complex interaction between relevant factors: The process of construction often … involves the assessment of disparate (and therefore incommensurable) factors to reach what is ultimately an intuitive (but not irrational) conclusion.160

In the Australian context, Allsop P (as he then was) embraced and elaborated on this conceptualisation: [T]he process of construction is not a process necessarily concluded by logical reasoning or a priori analysis. It involves the weighing of different considerations partly logical and partly intuitive (though rational) leading to a choice.161

Lord Hoffmann, on the other hand, thought that interpretation could be described in terms of impression because of the emphasis on linguistic meaning: The use of ordinary language to convey meaning often involves subtle discriminations which for most people are intuitive rather than capable of lucid explanation. An explanation of why ordinary English words in a particular context convey a 155 See, eg, J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 123; Calnan (2017) 1 [Pr.02]–[Pr.03]. 156 See, eg, Norwich Union Life Assurance Society v British Railways Board [1987] 2 EGLR 137, 138 (Hoffmann J) (Ch); John v Price Waterhouse [2002] EWCA Civ 899, [94] (Robert Walker LJ); D McLauchlan, ‘Contract Interpretation: What is it About?’ (2009) 31 Sydney Law Review 5, 6; Lewison (2015) 77 [2.12]; Lewison and Hughes (2012) 48 [2.11]. 157 See, eg, Norwich Union Life Assurance Society v British Railways Board [1987] 2 EGLR 137, 138 (Hoffmann J) (Ch); Riley v Cocco [2001] NSWCA 379, [49] (Heydon JA) (the interpretation of a judicial order); Lewison (2015) 77 [2.12]; Lewison and Hughes (2012) 48 [2.11]; D McLauchlan, ‘A Construction Conundrum’ [2011] LMCLQ 428, 448. 158 Morrells of Oxford Ltd v Oxford United Football Club Ltd [2001] Ch 459, 469 [28] (Robert Walker LJ) (CA). 159 Collins, ‘Objectivity and Committed Contextualism in Interpretation’ (n 42) 196; Lewison (2015) 10 [1.03]; Lewison and Hughes (2012) 3 [1.02]. 160 John v Price Waterhouse [2002] EWCA Civ 899, [94] (Robert Walker LJ). 161 OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27, (2013) 85 NSWLR 1, 20 [61] (Allsop P).

The Method of Contract Interpretation  45 given meaning is frequently more likely to confuse than to enlighten. Perhaps this is what judges mean when they say that questions of construction are often matters of impression.162

[2-38]   The notion that it is impossible to trace the mental process through which the ordinary meaning of a word is ascertained is hard to deny. But this does not mean that interpretation, as a whole, is indecipherable. As Kramer notes, ‘[d]econstructing the principally intuitive task of interpretation is not easy’.163 It is not easy, but through intellectual rigour and empirical analysis, it is possible. To properly understand interpretation, the process needs to be broken down step by step, and each stage needs to be carefully analysed. Some aspects of the process are intuitive or ‘untraceable’. For example, it is often difficult to articulate why a word can bear a particular meaning or exactly how a judge arrives at his or her conception of business common sense. Likewise, it is often challenging for a judge to express how he or she has weighed and balanced a collection of competing arguments to arrive at the correct interpretation. Nonetheless, interpretation can be explained as a logically structured exercise. Its argumentation can be understood in terms of inductive logic. And the process of inference that guides interpretation makes sense as a matter of linguistic theory.

Linguistics [2-39]  Linguistics is the study of language. Modern linguistics is broken down into: (i) semantics (‘the study of the meaning of words and sentences’); (ii) syntax (‘the rules for formulating proper sentences’); and (iii) pragmatics (‘the study of what speakers do with language’, including communication through implication).164 [2-40]   Linguistic theory rarely features in statements of principle regarding contract interpretation. Lord Hoffmann’s seminal judgments are a clear exception. His Lordship was evidently influenced by linguistics.165 In Bank of Credit and 162 Norwich Union Life Assurance Society v British Railways Board [1987] 2 EGLR 137, 138 (Hoffmann J) (Ch). cf C & J Clark International Ltd v Regina Estates Ltd [2003] EWHC 1622 (Ch), [24] (Neuberger J); Kramer (n 96) 195–96. 163 Kramer (n 96) 195. 164 AP Martinich and D Sosa, ‘Introduction’ in AP Martinich and D Sosa (eds), The Philosophy of Language, 6th edn (Oxford University Press, 2013) 2. See also generally R Cann, Formal Semantics (Cambridge University Press, 1993); N Chomsky, Syntactic Structures (Mouton de Gruyter, 1957). 165 See, eg, Mannai [1997] AC 749, 774–75 (Lord Hoffmann) (HL); ICS [1998] 1 WLR 896, 912–13 (Lord Hoffmann) (HL). See also Lord Hoffmann, ‘The Intolerable Wrestle with Words and Meanings’ (1997) 114 South African Law Journal 656, 658–60, 670, 673; PS Davies, ‘The Meaning of Commercial Contracts’ in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann: A Festschrift in Honour of Lord Leonard (Hart Publishing, 2015) 218, fn 20. Lord Hoffmann regularly cited the fictional Mrs Malaprop, a character referenced by prominent linguist, Donald Davidson: see D Davidson, ‘A Nice Derangement of Epitaphs’ in RE Grandy and R Warner (eds), Philosophical Grounds of Rationality (Oxford University Press, 1986) 157, 158, 166–67, 170, 172.

46  Theories of Contract Interpretation Commerce International SA v Ali,166 he even suggested that judicial techniques of construction had been assimilated with those used in ‘the interpretation of any serious utterance in ordinary life’.167 However, few judges have so openly and emphatically embraced linguistics in contract interpretation.168 [2-41]   Contract law scholars have been similarly hesitant in relying on linguistics to explain the interpretive process. The main objection to linguistics is that the philosophy of language involves the search for truth, whereas contract interpretation has a different objective.169 Carter also points to the fact that construction is governed by its own unique rules.170 Nonetheless, contract interpretation has been framed in semantic terms by some commentators. In particular, Lewison describes the aim of the process as ‘find[ing] out … what the language of the contract would signify to a properly informed ordinary speaker of English’.171 In the United States, Burton paints a more elaborate picture. He conceptualises the contract as creating an imaginary ‘world of the contract’:172 When used in a contract, language generally refers to classes of ideas, actions, events, states of affairs, persons, and other things in the imaginary world of the contract. This is what we shall mean when we speak of a contract terms’ meaning – its referents in the world of the contract.173

In the broader context of legal interpretation, the general consensus is that linguistic theory has had only a minor impact on the theory of interpretation.174 That said, scholars have employed linguistics to explain various phenomena, such as ambiguity and vagueness175 and the concept of meaning itself.176 166 Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251. 167 ibid 276 [62] (Lord Hoffmann). 168 But see Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24, (1982) 149 CLR 337, 401 (Brennan J) (‘the symbols of language convey meaning according to the circumstances in which they are used’) (quoted in Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45, 53 [10] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ)). 169 EA Farnsworth, ‘“Meaning” in the Law of Contracts’ (1967) 76 Yale Law Journal 939, 942; G McMeel, ‘Language and the Law Revisited: An Intellectual History of Contract interpretation’ (2005) 34 Common Law World Review 256, 275. See also Posner (n 115) 1361–62. 170 Carter (2013) 362 [11-07]. But see M Furmston, Cheshire, Fifoot, and Furmston’s Law of Contract, 17th edn (Oxford University Press, 2017) 170. 171 Lewison (2015) 10 [1.03]. See also Lewison and Hughes (2012) 3 [1.02]. 172 Burton (n 118) 3 [1.1.1]. 173 ibid 9 [1.2.1] (emphasis in original). 174 See Posner (n 115) 1361–62; M Freeman and F Smith, ‘Law and Language: An Introduction’ in M Freeman and F Smith (eds), Law and Language: Current Legal Issues Volume 15 (Oxford University Press, 2013) 5; K Greenawalt, Legal Interpretation: Perspectives from Other Disciplines and Private Texts (Oxford University Press, 2010) 14. cf A Marmor and S Soames, ‘Introduction’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011) 3; Rosen (n 27) 131. 175 G Williams, ‘Language and the Law-II’ (1945) 61 LQR 179; S Soames, ‘What Vagueness and Inconsistency Tell Us About Interpretation’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011). 176 Z Chafee, ‘The Disorderly Conduct of Words’ (1941) 41 Columbia Law Review 381; Williams (n 175); G Williams, ‘Language and the Law-III’ (1945) 61 LQR 293.

The Method of Contract Interpretation  47 [2-42]   The semantic concept of meaning clearly plays a role in contract interpretation: the meaning of a word is an abstract definition linking the word with its potential referents.177 However, the process through which meanings are ascertained in construction is quite different from that in linguistics. In construction, the search is not for what the speaker actually intended by the words in his or her mind. Instead, the approach is ‘objective’ – meanings are identified by reference to different categories.178 [2-43]   Looking beyond semantics, pragmatics also assists in understanding contract interpretation.179 In pragmatics, the focus is on what the audience can infer from a communication: ‘what is communicated is not wholly conveyed by what is said; much is implied’.180 For example, if a student is asked whether his teacher is a good lecturer and the student responds by saying that his teacher has a good line of sweaters, the ordinary implication is that the student does not believe the teacher to be a good lecturer.181 This is called ‘conversational implicature’.182 It is driven by ‘Gricean’ maxims. These are assumptions that underpin everyday communication: be as informative as required, be true, be relevant and be perspicuous.183 [2-44]   Kramer argues that pragmatic inference is used to supplement or replace linguistic meaning in contract interpretation.184 However, he acknowledges the limitations of this approach: Showing that interpretation (even contractual interpretation) involves pragmatic assumptions and a complex web of mutual beliefs requires these assumptions and beliefs to be identified.185

Kramer is undoubtedly correct: to understand construction, one must appreciate the pragmatic assumptions that guide the process. More fundamentally, one must recognise that the contract is essentially a communication between the parties and a person seeking to resolve a dispute regarding the contract. It is evidence of what was agreed. The judge or lawyer faced with an interpretive dispute analyses the choice of words as evidence of the parties’ objective intention. In this sense, the cognition of contract interpretation is similar to cognition in everyday communication. That is to say, contract interpretation can be understood through the lens of pragmatics and cognitive science. Shaer convincingly argues that such an approach

177 See [3-08]. 178 See further [3-08]–[3-13]. 179 See Kramer (n 96). cf Leggatt (n 23) 457. 180 Martinich and Sosa (n 164) 2. See also [4-04] (text at n 5). 181 Cann (n 164) 20–21. 182 ibid; HP Grice, ‘Logic and Conversation’ in P Cole and JL Morgan (eds), Syntax and Semantics Volume 3 (Academics Press, 1975) 43–44. 183 Grice (n 182) 45–46. 184 Kramer (n 96) 184–91. 185 ibid 195–96.

48  Theories of Contract Interpretation can be taken to the interpretation of legal documents, not simply contracts. This is because, in his words, legal interpretation involves an author, a text serving as a vehicle for the author to communicate a ‘speaker’s meaning’, and an interpreter seeking to recover this ‘speaker’s meaning’ by decoding the text and drawing further inferences about ‘speaker’s meaning’ from it.186

It is helpful to think of contract interpretation in similar terms: the parties are the ‘speakers’ who have made a statement in the form of the contract, and the ‘interpreter’ is the judge or lawyer construing the contract to resolve an interpretive dispute. In construing a contract, the judge or lawyer infers what was objectively intended by the choice of words in the contract, drawing inferences to reach such a conclusion. This involves making assumptions about the contracting parties. But these are not the same assumptions that guide everyday communication. This is because the contract is a different form of communication:187 it is a communication between the parties and the court;188 it is composed strategically,189 necessarily involving ‘trade offs’;190 and it is analysed with a particular focus.191 It is construed through ‘conscious effortful scrutiny’192 and it is often ‘made to yield a solution’.193 Hence, contract interpretation is guided by its own unique assumptions – ­assumptions that are tailored to the process.194 The court assumes that contracting parties are reasonable, that they desire certainty in commercial dealings, and that they seek a balance between linguistic focus and purposive interpretation. These assumptions are attributed to the hypothetical reasonable person – the reasonable interpreter.195 The assumptions assist in understanding what was meant by the choice of words in the contract, with the concept of ‘choice’ itself playing an important role. 186 B Shaer, ‘Toward a Cognitive Science of Legal Interpretation’ in M Freeman and F Smith (eds), Law and Language: Current Legal Issues Volume 15 (Oxford University Press, 2013) 290 (see also 274–75). 187 Contrast Leggatt (n 23) 468–69. 188 See [4-05]. 189 A Marmor, ‘Can the Law Imply More than it Says? On Some Pragmatic Aspects of Strategic Speech’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011) 94, 103–04. 190 See Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43, [2014] Hous LR 35, 38 [10] (Lord Drummond Young) (for the Court); L Macgregor, ‘Crossing the Line between Business Common Sense and Perceived Fairness in Contract Interpretation’ (2015) 19 Edinburgh Law Review 378, 383. See also Wood [2017] UKSC 24, [2017] AC 1173, 1179 [11] (Lord Hodge) (‘the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms’). 191 See [4-06]–[4-08]. 192 R Carston, ‘Legal Texts and Canons of Construction: A View from Current Pragmatic Theory’ in M Freeman and F Smith (eds), Law and Language: Current Legal Issues Volume 15 (Oxford University Press, 2013) 32 (a comment on legal interpretation). See also P Atiyah and SA Smith, Atiyah’s Introduction to the Law of Contract, 6th edn (Oxford University Press, 2005) 147 (‘judges should pay close attention to the actual words of a contractual document, including subtle linguistic distinctions that might be ignored in everyday speech, because this is what those who make and use such documents do themselves’). 193 Borrowed from McMeel (2017) 60 [1.103] (‘The contract is the governing instrument and must be made to yield a solution’). 194 See [3-25]–[3-28]. 195 See [2-28], [4-07], [4-14] and [5-50].

Conclusion  49

Rational Choice [2-45]   Sir George Leggatt, writing extra-curially, has advocated a theory of interpretation based on ‘rational choice’: [C]ontractual documents are interpreted as having the meaning which best explains why rational parties who were using the language of the contract to express a shared intention would have chosen that language.196

Under the theory, the court assumes that the parties deliberately chose the words of the contract to express a shared intention197 and that the parties are rational and reasonable people.198 From these assumptions, in combination with relevant interpretive materials, the court ‘makes a judgement about what intention rational parties … could be expected to have had’.199 The ‘rational choice’ theory has not yet been endorsed judicially.200 However, echoes of it can be seen in the judgment of Lord Hodge in Wood:201 The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement.202

[2-46]  The fact that contracting parties consummate their relationship by agreeing words in a contract is fundamental to understanding contract interpretation. It is the choice of words in the contract that reveals the agreement made by the parties. It is from this choice that the objective intention of the parties is inferred through the interpretive process.

2.4. Conclusion [2-47]   There are many different judicial and scholarly descriptions of contract interpretation. Apparent conflicts abound: the ascertainment of meaning as an alternative to the inference of intention; the textual in opposition to the contextual; and the logical as against the intuitive.203 This book claims that each description is correct to an extent. Contract interpretation is a process through which objective

196 Leggatt (n 23) 475. 197 ibid 466–67. 198 ibid 467–68; Scottish Power UK plc v BP Exploration Operating Co Ltd [2015] EWHC 2658 (Comm), [21] (Leggatt J). 199 Leggatt (n 23) 470. 200 For a critique of the theory, see D McLauchlan, ‘A Better Way of Making Sense of Contracts?’ (2016) 132 LQR 577. 201 Wood [2017] UKSC 24, [2017] AC 1173. 202 ibid 1179 [10] (Lord Hodge) (emphasis added). 203 As to logic and intuition, see further J Dewey, ‘Logical Method and Law’ (1924) 10 Cornell Law Review 17, 17; GL Bruns, ‘Law and Language: A Hermeneutics of the Legal Text’ in G Leyh (ed), Legal Hermeneutics: History, Theory, and Practice (University of California Press, 1992) 23, 26 (discussing criticism of hermeneutics in law – ‘[h]ermeneutics is too much in love with rhetoric, too suspicious of logic’).

50  Theories of Contract Interpretation intention is inferred from the choice of words in a contract. The potential meanings for the words are the primary material relied upon to draw the required inference. But contextual, purposive and consequentialist considerations are also taken into account. The end result is the definition of what was agreed. Usually, what is defined is a rule in the contract – a rule that is applied so as to define rights and obligations. The process is logical in its structure and argumentation. However, it is intuitive in its reliance upon the concept of meaning and evaluative standards, such as business common sense. It is a labour-intensive iterative exercise that is punctuated by a balancing act: the evaluation of rival arguments to arrive at the most probable interpretation.

3 The Key Features of Contract Interpretation 3.1. Introduction [3-01]   Contract interpretation is a unique legal tool. It is a process that is usually engaged to address deficiencies in the contract text: ambiguity, inconsistency and obvious error. It requires analysis of a prescribed set of materials, namely, the text as a whole, the potential meanings for words, the background, the objects served by the contract, the consequences of the competing interpretations, and normative factors, such as business common sense. And it is guided by discrete principles, such as the traditional linguistic maxims that have long been associated with legal interpretation. These are the key features of contract interpretation. This book explains the cognition of interpretation in light of those features. It demonstrates that interpretation is a four-stage process: first, a question of construction is identified; second, competing interpretations are put forward; third, arguments in support of each construction are composed from the permitted materials; and, finally, the correct interpretation is chosen as a matter of probable intention. The aim is to infer the objective intention of the parties by analysing the choice of words in the contract. But the enquiry takes a narrow focus – the ultimate object is the definition of a disputed aspect of the bargain. [3-02]   The first part of this book explores the theory of contract interpretation. Chapter two set the scene. It outlined judicial and academic theories of interpretation and it established that the proposed approach is an amalgam of those theories. The remainder of the first part of this book engages in more rigorous theoretical investigation. It analyses the key features of interpretation to explain the cognition that drives the process. It demonstrates that the proposed approach to interpretation is not only consistent with key features of the process – it also follows from an analysis of those features. [3-03]   This chapter outlines the key features of interpretation. Contract interpretation is not an orthodox ‘doctrine’; it is not constituted by deductive rules that

52  Key Features of Contract Interpretation are triggered by discrete factual situations. Instead, it is a judicial technique or ‘process’.1 Hence, its defining features are unique to the process: a. The materials that must be considered, namely, the text as a whole, the potential meanings for the words, the background, the objects served by the contract, the potential consequences, and normative considerations, such as business common sense. b. The various discrete principles that guide the process, namely, traditional linguistic maxims, principles specific to certain types of contract or clause, and principles specific to certain types of dispute. c. The textual problems that are resolved by employing the process, namely, ambiguity, inconsistency and obvious error. [3-04]   As is demonstrated in this chapter, the proposed approach to interpretation fits with and explains these essential characteristics. The proposed approach centres on the notion that interpretation involves reliance upon a prescribed set of materials – it is from these materials that interpretive arguments are constructed. The discrete maxims and principles said to guide the interpretive process simply act as argument templates; that is, the principles outline arguments that apply in certain circumstances. The proposed approach also explains how construction is employed to resolve textual deficiencies: the competing considerations are weighed and balanced to arrive at the interpretation that was probably intended. Hence, in any given case, an interpretive dispute is determined by reference to the composition of factors in favour of each construction.

3.2.  Interpretive Materials [3-05]   Contract interpretation requires analysis of the text and the meaning of its words, in light of background, purposive and consequentialist considerations. Although there is much debate about the nature of interpretation, this much is incontrovertible. Seminal statements of principle usually describe the object of interpretation (ie, ascertain meaning or intention) and then enumerate the materials that must be analysed to arrive at that object (ie, meaning, background, purpose, consequences, etc).2 In neither the cases nor the commentary is there much explanation of how the materials are taken into account.3 Instead, the focus 1 See [2-03] (n 1). 2 See, eg, Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [18]–[19] (Lord Neuberger); Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7, (2014) 251 CLR 640, 656–57 [35] (French CJ, Hayne, Crennan and Kiefel JJ) (Electricity Generation). See also Carter (2013) 4 [1-03] (construction is ‘the process by which the intention of the parties to a contract is “constructed”, or “built up”, from legally available material’); D McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ [2015] LMCLQ 406, 434–35; A Burrows, A Restatement of the English Law of Contract (Oxford University Press, 2016) 84 §14(2). 3 But see McMeel (2017) 52 [1.88], 104–09 [1.182]–[1.189].

Interpretive Materials  53 is on what constitutes admissible material.4 Hence, it is fair to say that the most elementary feature of contract interpretation is that it is a process through which conclusions are drawn from unique factors. [3-06]  In contract law, interpretive materials are defined prescriptively and proscriptively; that is, there are factors that must be considered in interpretation and there are factors that cannot be taken into account (otherwise than in very limited circumstances). The materials that must be considered are: a. b. c. d. e. f.

The text of the contract as a whole. The potential meanings for words, phrases or numerals in the contract. Background facts and assumptions.5 The purpose or objects of the contract (or one of its parts). The potential consequences of the competing constructions. Normative standards and objectives, such as reasonableness, business common sense and maintaining objectivity in contract law.

Material that is excluded in construction, subject to limited exceptions, consists of evidence of subjective intention, negotiations and subsequent conduct. Such materials are rarely admissible in contract interpretation. Instead, the objective intention of the parties is inferred by focusing on the prescribed materials. That is to say, the court arrives at the probable answer to the question of construction by evaluating arguments based on the text, the potential meanings for the words, the background, and so on. The aim is to infer what was probably intended by analysing the choice of words in the contract. Hence, the ‘point of departure’ is always the text.6

The Text as a Whole [3-07]   The obvious focus in interpretation is the text of the contract.7 But what makes up the contract text, for the purpose of construction, is broader 4 See, eg, Calnan (2017) chs 2–5; Lewison (2015) chs 3 and 5; Lewison and Hughes (2012) chs 3 and 5; McMeel (2017) chs 4–5. cf JD Heydon, Heydon on Contract (Thomson Reuters, 2019) chs 8–9; P Herzfeld, T Prince and S Tully, Interpretation and Use of Legal Sources: The Laws of Australia ­(Thomson Reuters, 2013) 487–582 [25.3.10]–[25.3.830]. 5 Under Australian law, ambiguity may be required before reference can be made to background: see [3-14]. 6 J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 125; Re Sigma Finance Corp [2008] EWCA Civ 1303, [2009] BCC 393, 417–18 [98] (Lord Neuberger). 7 See, eg, Society of Lloyd’s v Robinson [1999] 1 WLR 756, 763 (Lord Steyn) (HL) (‘Loyalty to the text’); Generate Group Pty Ltd v Sea-Tech Automation Pty Ltd [2007] NSWSC 226, (2007) 71 IPR 640, 655 [54] (Einstein J) (‘primacy’); G Leggatt, ‘Making Sense of Contracts: The Rational Choice Theory’ (2015) 131 LQR 454, 470 (the ‘main source of … information’); R McDougall, ‘Construction of Contracts: The High Court’s Approach’ (2016) 41 Australian Bar Review 103, 114; Calnan (2017) 27 (Principle 2) (‘it is the writing which is the primary source of the parties’ objective intention’); McMeel (2017) 48–49 [1.82].

54  Key Features of Contract Interpretation than one might think. This reflects the long-standing principle that a contract must be construed as a whole.8 The ‘whole contract’ in this sense extends to recitals,9 headings and marginal notes,10 counterparts11 and attachments, such as schedules, annexures or appendices.12 It also includes incorporated terms13 and potentially implied terms.14 Likewise, simultaneously executed documents15 and agreements cited in a contract16 may be regarded as part of the one ‘contract’. However, the better view is that such documents constitute part of the admissible background.17 Some components of the ‘whole contract’ are regarded as subordinate to others, such as recitals, headings and marginal notes. Nonetheless, the ‘whole contract’ principle means that the text is not only a primary source in interpretation – it is also a rather extensive one. Relevant factors may be buried in long documents.18 That said, the text itself is of no significance without another concept: meaning.

The Meanings of Words [3-08]   The potential meanings for words in a contract are obviously a central focus in construction. However, few judges or academics have sought to define what constitutes the ‘meaning’ of a word in this context.19 Ultimately, the essence of the concept must derive from the philosophy of language, in particular, semantics.20 That is, in simple terms, the meaning of a word represents the collection of tangible and intangible things to which the word may refer.21 Meaning

8 Hume v Rundell (1824) 2 S & S 174, 177; 57 ER 311, 312 (Leach V-C) (Ch); Grey v Pearson (1857) 6 HLC 61, 105–06 (Lord Wensleydale); Calnan (2017) 35 (Principle 3); Burrows (n 2) 86 §14(1). 9 See, eg, Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 76 NSWLR 603, 695 [380] (Campbell JA). 10 See, eg, George v Cluning (1979) 28 ALR 57, 61–62 (Mason J) (HCA) (heading of ‘great’ weight). 11 See, eg, Matthews v Smallwood [1910] 1 Ch 777, 783–86 (Parker J) (Ch). 12 See, eg, A & J Inglis v John Buttery (1878) 3 App Cas 552 (HL) (specification annexed to steamship repair contract detailing work, materials and cost); Carter (2013) 449 [13-43]. 13 Maye v Colonial Mutual Life Assurance Society Ltd [1924] HCA 26, (1924) 35 CLR 14; Carter (2013) 445 [13-36]. 14 See, eg, Carter (2013) 445 [13-36]. See further [7-13]–[7-25]. 15 See, eg, Smith v Chadwick (1882) 20 Ch D 27, 62–63 (Jessel MR) (CA); Hoyt’s Pty Ltd v Spencer [1919] HCA 64, (1919) 27 CLR 133, 144 (Isaacs J); Carter (2013) 443–44 [13-34]; Lewison (2015) 87–90 [3.03]; Lewison and Hughes (2012) 58–62 [3.03]. 16 See, eg, Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216, (2012) 45 WAR 29, 51 [81] (McLure P). 17 As to background, see further [3-14]–[3-17]. 18 See, eg, McDougall (n 7) 119. 19 But see Carter (2013) 362–63 [11-08]. 20 See further [2-39]–[2-42]. 21 R Cann, Formal Semantics (Cambridge University Press, 1993) 13 (‘The central core of meaning … is thus determined by the relation between linguistic expressions and the entities that they can be used to refer to’). See further [4-09]–[4-10] and [4-31]–[4-36].

Interpretive Materials  55 is therefore a distinct and abstract concept that performs the function of linking a word with its potential referents.22 In short, the meaning of a word in a contract is simply an available definition – a definition of ‘the object for which the word stands’.23 [3-09]  In contract interpretation, the traditional approach to ascertaining potential meanings for words involves reliance on various categories of meaning.24 Those categories can be loosely summarised as: a. b. c. d. e. f. g. h.

Ordinary meanings.25 Customary or trade meanings.26 Scientific or technical meanings.27 Meanings for foreign or invented terms.28 Party-specific meanings (ie, meanings for words that are unique to the parties).29 Statutory meanings, both presumed30 and contextual.31 Legal meanings (ie, legal terms of art).32 Meanings derived from precedent.33

This book does not analyse in detail what constitutes a meaning in each of these categories or how such meanings are ascertained.34 For present purposes, it suffices to note the following points.

22 Carter (2013) 362–63 [11-08]. 23 L Wittgenstein, Philosophical Investigations, 2nd edn (Basil Blackwell, 1958) 2. See also Z Chafee, ‘The Disorderly Conduct of Words’ (1941) 41 Columbia Law Review 381, 384, 386–87. 24 See Carter (2013) chs 11–13; Lewison (2015) ch 5; Lewison and Hughes (2012) ch 5. See also Heydon (n 4) 262–74 [8.310]–[8.550]; Herzfeld, Prince and Tully (n 4) 494–504 [25.3.170]–[25.3.240]. 25 See, eg, Carter (2013) 395 [12-09]; Lewison (2015) 235–41 [5.02]; Lewison and Hughes (2012) 164–68 [5.02]. 26 See, eg, Smith v Wilson (1832) 3 B & Ad 728, 732; 110 ER 266, 267 (KB) (‘1,000’ rabbits meant ‘1,200’ in a particular region); Lewison (2015) 264–66 [5.09]; Lewison and Hughes (2012) 190–93 [5.09]. 27 See, eg, Kellogg Brown & Root Inc v Concordia Maritime AG [2006] EWHC 3358 (Comm) (technical meaning of ‘Strake’, ‘Scantlings’, ‘Longitudinal bulkhead stiffeners’ and ‘Fatigue life’ in contracts for the purchase of two large capacity carriers); Lewison (2015) 253–55 [5.07]; Lewison and Hughes (2012) 181–84 [5.07]. 28 See, eg, Chatenay v Brazilian Submarine Telegraph Co Ltd [1891] 1 QB 79, 85 (Lindley LJ) (CA) (meaning of Portuguese language in a power of attorney); Lewison (2015) 250–53 [5.06]; Lewison and Hughes (2012) 178–80 [5.06]; Carter (2013) 402–03 [12-18], 413–14 [12-34]. 29 See [3-12]. 30 Meanings that, by statute, are presumed to apply: see, eg, Conveyancing Act 1919 (NSW) s 181 (‘month’ and ‘person’). See also Lewison (2015) 287–92 [5.16]; Lewison and Hughes (2012) 213–15 [5.16]. 31 Meanings that are not deemed to apply by statute, but form part of what is known by the parties at the time of contracting: see, eg, Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay­ Council [2010] NSWCA 64 [184]–[185] (Campbell JA) (‘general advertising structure’ in a government ordinance). 32 See, eg, Akici v LR Butlin Ltd [2005] EWCA Civ 1296, [2006] 1 WLR 201, 206–07 [17]–[26] (Neuberger LJ) (‘possession’). cf Carter (2013) 401 [12-16] (a matter of ‘legal effect’). 33 See [3-13]. 34 For such analysis, see, eg, Lewison (2015) ch 5; Lewison and Hughes (2012) ch 5.

56  Key Features of Contract Interpretation [3-10]   First, a given word, phrase or numeral in a contract may have a number of potential meanings.35 It may have several ordinary meanings,36 an ordinary meaning and a legal meaning,37 and so on. For example, the word ‘summer’ can bear several different meanings: an ordinary meaning referring to the three months constituting one of the seasons, an ordinary meaning referring to the sixmonth period opposite to winter, and a customary British meaning referring to the period spanning April to October.38 [3-11]   Second, ‘ordinary’ meanings are the clear focus.39 These are meanings in common use in the community at large.40 Such meanings are derived in a common sense manner by judicial notice41 or, occasionally, by reference to a dictionary or even precedent.42 On this basis, ordinary meanings are distinguished from the other types of meaning, which are usually proved by evidence.43 [3-12]   Finally, there are two particularly contentious categories of meaning that warrant discussion. The first is party-specific meanings. These are meanings unique to the parties.44 Such meanings are generally accepted if derived from the contract as a whole,45 its objects46 or background.47 Under Australian law, it may

35 See, eg, L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 256 (Lord Morris) (HL) (Schuler). 36 See, eg, Sahade v BP Australia Pty Ltd [2004] NSWSC 512, (2004) 12 BPR 22,149, 22,156 [31] (Campbell J) (dictionary meanings of ‘purchase’). 37 See, eg, Schuler [1974] AC 235 (HL) (legal meaning and ordinary meaning of ‘condition’) (discussed at [6-93]–[6-94]). 38 Durham Tees Valley Airport Ltd v BMI Baby Ltd [2009] EWHC 852 (Ch), [2009] 2 Lloyd’s Rep 246, 260 [79] (Davis J) (overturned on other grounds: see [2010] EWCA Civ 485, [2011] 1 Lloyd’s Rep 68, 76 [31]–[32] (Patten LJ)). See also EGL Management Services Pty Ltd v Northern SEQ Distributor-Retailer Authority [2011] NSWSC 1234, [75]–[77] (McDougall J) (ordinary and legal meanings of ‘account’). 39 Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1627 [15] (Lord Neuberger); Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184, (2014) 89 NSWLR 633, 654 [74] (Leeming JA). 40 Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541, 560 (Mahoney JA) (CA); Carter (2013) 395 [12-09], 407 [12-27]. 41 See, eg, Thornley v Tilley [1925] HCA 13, (1925) 36 CLR 1, 7 (Knox CJ); Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541, 560 (Mahoney JA) (CA). 42 See, eg, Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57, (2008) 238 CLR 570, 581 [32] (Gummow, Hayne and Kiefel JJ) (Gardiner) (ordinary meaning of ‘punctual’ confirmed by reference to dictionary and precedent) (discussed at [6-42]). See also Carter (2013) 396 [12-10]; McMeel (2017) 232–34 [5.124]–[5.128]. cf Arbuthnott v Fagan [1995] CLC 1396, 1402 (Steyn LJ) (CA) (‘Dictionaries never solve concrete problems of construction’). 43 See, eg, Appleby v Pursell [1973] 2 NSWLR 879, 889 (Reynolds JA), 892–93 (Bowen JA) (CA) (customary meaning for the phrase ‘push and stack’ in a rural timber lease). 44 See, eg, Partenreederei MS Karen Oltmann v Scarsdale Shipping Co [1976] 2 Lloyd’s Rep 708 (QB) (The Karen Oltmann) (‘after 12 months’ meaning ‘on the expiry of 12 months’); Carter (2013) 402 [12-18] (‘An association between symbol and referent which no-one else would make’). 45 See, eg, Re Sassoon; Commissioners of Inland Revenue v Raphael [1933] Ch 858, 890 (Romer LJ) (CA). 46 See, eg, Brennan v Permanent Trustee Co of NSW Ltd [1945] HCA 17, (1945) 73 CLR 404, 414 (Dixon J). 47 See, eg, Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65, (2007) 69 NSWLR 603, 656 [266] (Campbell JA).

Interpretive Materials  57 be the case that such meanings can be established through evidence of subjective intention or evidence of negotiations.48 However, in England, this is not possible.49 [3-13]   The other contentious category of meaning is precedential meanings. These are meanings derived from previous judicial decisions regarding the meaning of the same or similar words in usually similar contracts. Although several authorities proscribe the use of precedent in such a way,50 the majority merely caution that precedent is of doubtful utility.51 Further, there is specific authority providing that precedent can be relied upon to establish meaning if the language and context are the same,52 if the meaning is settled,53 or in the case of a contract using standard language, such as a lease,54 a policy of insurance,55 a building and construction contract,56 or a standard form contract.57 Hence, the dominant view is that precedent can be used to establish a potential meaning for a word, even if only in limited circumstances.58 One explanation for this phenomenon is that precedent forms part of the legal landscape against which a contract is construed; that is, it is part of the background to the transaction.59 48 See [3-29]–[3-31] (in particular, text at n 157). 49 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, 1121–22 [43]–[47] (Lord Hoffmann) (Chartbrook); Leggatt (n 7) 464. Contrast D McLauchlan, ‘Commonsense Principles of Interpretation and Rectification?’ (2010) 126 LQR 8, 11–13; D McLauchlan, ‘A Better Way of Making Sense of Contracts?’ (2016) 132 LQR 577, 586; A Berg, ‘Thrashing through the Undergrowth’ (2006) 122 LQR 354, 360. 50 See, eg, Deeny v Gooda Walker Ltd [1996] 1 WLR 426, 435 (Lord Hoffmann) (HL) (‘No case on the construction of one document is authority on the construction of another’); Milne v Municipal Council of Sydney [1912] HCA 25, (1912) 14 CLR 54, 70–71 (Isaacs J) (‘no decision upon a like question in any other contract can assist’). 51 See, eg, Hospital Products Ltd v United States Surgical Corp [1984] HCA 64, (1984) 156 CLR 41, 64 (Gibbs CJ) (‘must be viewed with caution’); Schuler [1974] AC 235, 256 (Lord Morris) (HL) (doubtful value). 52 See, eg, Re Calf & Sun Insurance Office [1920] 2 KB 366, 382 (Atkin LJ) (CA) (‘substantially identical’). 53 See, eg, Johnson v American Home Assurance Co [1998] HCA 14, (1998) 192 CLR 266, 273 [19] (Kirby J) (dissent) (‘well settled’); Akici v LR Butlin Ltd [2005] EWCA Civ 1296, [2006] 1 WLR 201, 207 [24] (Neuberger LJ) (‘standard phrases in standard contexts’). 54 See, eg, Ferella v Otvosi [2005] NSWSC 962, (2005) 64 NSWLR 101; Akici v LR Butlin Ltd [2005] EWCA Civ 1296, [2006] 1 WLR 201, 207 [24] (Neuberger LJ). Contrast Sunrock Aircraft Corp Ltd v Scandinavian Airlines System Denmark–Norway–Sweden [2007] EWCA Civ 882, [2007] 2 Lloyd’s Rep 612, 616 [17] (‘no assistance can be derived from looking at other leases’). 55 See, eg, McCann v Switzerland Insurance Australia Ltd [2000] HCA 65, (2000) 203 CLR 579 (McCann) (discussed at [6-75]–[6-79]). 56 See, eg, Beaufort Developments (NI) Ltd v Gilbert-Ash (NI) Ltd [1999] 1 AC 266, 274 (Lord ­Hoffmann) (HL) (Beaufort Developments); Clough Engineering Ltd v Oil & Natural Gas Corp Ltd [2008] FCAFC 136, (2008) 249 ALR 458, 479 [81] (French, Jacobson and Graham JJ). See also MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Ltd [2017] UKSC 59, [2017] Bus LR 1610, 1621–23 [37]–[44] (Lord Neuberger). 57 See, eg, Beaufort Developments [1999] 1 AC 266, 274 (Lord Hoffmann). cf McMeel (2017) 36–38 [1.58]–[1.59], 75–76 [1.133]–[1.134]. 58 Lewison (2015) 212–16 [4.07]; Lewison and Hughes (2012) 149–53 [4.07]; Herzfeld, Prince and Tully (n 4) 530–32 [25.3.430]. Contrast Carter (2013) 426 [13-09], 428–31 [13-12]–[13-15]. 59 See, eg, Clough Engineering Ltd v Oil & Natural Gas Corp Ltd [2008] FCAFC 136, (2008) 249 ALR 458, 479 [81] (French, Jacobson and Graham JJ).

58  Key Features of Contract Interpretation

Background [3-14]   In England60 and most other common law jurisdictions,61 background must be taken into account in contract interpretation; there is no need to identify ambiguity before referring to context.62 By comparison, under Australian law, there is some uncertainty regarding whether background can only be considered if the text is ‘ambiguous’ or ‘susceptible of more than one meaning’.63 In this regard, ambiguity may include vagueness or ‘ambiguity in application’, as well as lexical or syntactical ambiguity.64 [3-15]  In terms of what constitutes background, the concept is difficult to define.65 It goes by many descriptions: ‘context’, ‘surrounding circumstances’, ‘factual matrix’ or ‘factual and legal matrix’.66 However, in simple terms, it consists of things known or assumed at the time of contract formation by all the contracting parties.67 Usually, background relates to the nature of the transaction,68 the relevant industry or market in which the parties operate,69 the legal or regulatory

60 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 995–96 (Lord Wilberforce) (HL) (The Diana Prosperity); Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1627 [15] (Lord Neuberger). 61 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444, 459 [23] (Tipping J) (New Zealand); Sattva Capital Corp v Creston Moly Corp 2014 SCC 53, [2014] SCR 633, 657 [47] (Rothstein J) (SC) (Canada); Jumbo King Ltd v Faithful Properties Ltd [1999] 3 HKLRD 757, 773 (Lord Hoffmann NPJJ) (Court of Final Appeal) (Hong Kong); Sheng Siong Supermarket Pte Ltd v Carilla Pte Ltd [2011] SGHC 204, [31] (Andrew Ang J) (Singapore); Masstores (Pty) Ltd v Murray & Roberts Construction Pty Ltd 2008 (6) SA 654 (SCA), [7] (Lewis JA) (South Africa). 62 See Calnan (2017) 54–55 [4.26]–[4.28]. 63 Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24, (1982) 149 CLR 337, 352 (Mason J) (the ‘true rule’) (Codelfa); Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, (2015) 256 CLR 104, 116 [48] (French CJ, Nettle and Gordon JJ) (Mount Bruce). But see Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13, (2019) 93 ALJR 582, 592 [44] (Kiefel CJ, Gageler, Nettle and Gordon JJ), 600 [83] (Edelman J). See also McDougall (n 7) 107 (background is admissible (1) to define a descriptive term, (2) to explain the genesis of a transaction, or (3) to resolve ambiguity); J Eldridge, ‘“Surrounding Circumstances” in Contractual Interpretation: Where are we Now?’ (2018) 32 Commercial Law Quarterly 3. 64 See, eg, Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216, (2012) 45 WAR 29, 50 [76]–[77] (McLure P); Heydon (n 4) 359–60 [9.680]. As to ambiguity, see further [3-47]–[3-52]. 65 See, eg, The Diana Prosperity [1976] 1 WLR 989, 995 (Lord Wilberforce) (HL); Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251, 269 [39] (Lord Hoffmann) (BCCI v Ali). 66 Not much hinges on any distinction between the definitions: see Arbuthnott v Fagan [1995] CLC 1396, 1400 (Bingham MR) (CA); Carter (2013) 180–81 [6-04]. 67 Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [19] (Lord Neuberger); ­Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 656 [35] (French CJ, Hayne, Crennan and Kiefel JJ). 68 See, eg, Gardiner [2008] HCA 57, (2008) 238 CLR 570, 583 [38] (Gummow, Hayne and Kiefel JJ) (loan and indemnity agreements were ‘important constituent document[s] in a publicly marketed investment scheme’). 69 The Diana Prosperity [1976] 1 WLR 989, 995–96 (Lord Wilberforce) (HL).

Interpretive Materials  59 background,70 or matters specific to the parties, such as a party’s status71 or its terms of business.72 [3-16]   To be admissible in interpretation, background must be ‘objective’; it must consist of ‘objective facts’.73 What this means is that the admissible surrounding circumstances cannot include evidence of subjective intention, that is, evidence of what the parties meant by the contract.74 However, evidence of the negotiations between the parties can be used to establish what the parties knew or assumed.75 [3-17]   Background must also be relevant to play a role in construction.76 That said, background can be relevant in a number of ways:77 it can be used to establish a potential meaning for a word;78 it can be relied upon directly to arrive at the objective intention of the parties;79 or it can assist in ascertaining the object or purpose of a contract.80

Contractual Purpose [3-18]   Modern authorities emphasise that the aim or object of a transaction must be considered in interpretation.81 The purpose underlying a clause or part 70 Jumbo King Ltd v Faithful Properties Ltd [1999] 3 HKLRD 757, 773–74 (Lord Hoffmann NPJJ) (Court of Final Appeal); Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70, (2001) 210 CLR 181, 188 [11] (Gleeson CJ, Gummow and Hayne JJ) (Maggbury). 71 Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45, 53 [11] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ) (Royal Botanic) (status of parties as public authorities). 72 See, eg, Lewis v Great Western Railway Company (1877) 3 QBD 195, 202–03 (Bramwell LJ) (CA) (alternative rates for carrying goods). 73 See, eg, The Diana Prosperity [1976] 1 WLR 989, 997 (Lord Wilberforce) (HL); Codelfa [1982] HCA 24, (1982) 149 CLR 337, 352 (Mason J); Carter (2013) 214 [7-10]; Lewison (2015) 159 [3.17]; Lewison and Hughes (2012) 109 [3.14]. 74 See [3-30]. 75 See [3-31] (n 158). 76 See, eg, BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 269 [39] (Lord Hoffmann). 77 PS Davies, ‘The Meaning of Commercial Contracts’ in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann: A Festschrift in Honour of Lord Leonard (Hart Publishing, 2015) 223 (‘“relevance” is a malleable concept’). 78 See, eg, Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 391 (Lord Hoffmann) (HL) (Fagan) (contextual meanings of the word ‘pay’). cf Lewison (2015) 275–78 [5.12]; Lewison and Hughes (2012) 202–05 [5.12]. See further [5-40]. 79 See, eg, Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988, 1993 [16] (Lord Hoffmann) (Belize) (background can be used to establish the meaning of the document). See further [5-39]. 80 See, eg, Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 657 [35] (French CJ, Hayne, ­Crennan and Kiefel JJ); The Diana Prosperity [1976] 1 WLR 989, 995–96 (Lord Wilberforce) (HL); Codelfa [1982] HCA 24, (1982) 149 CLR 337, 350 (Mason J); Lewison and Hughes (2012) 33 [2.06]. See further [5-40]. 81 Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [19] (Lord Neuberger); Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 656–57 [35] (French CJ, Hayne, Crennan and Kiefel JJ). See also Carter (2013) 199–201 [6-25]–[6-26]; Lewison (2015) 50–63 [2.07]; Lewison and Hughes (2012) 32–40 [2.06]; McMeel (2017) 54–56 [1.93]–[1.95]; J Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433, 441.

60  Key Features of Contract Interpretation of a contract is also often taken into account.82 Under Australian law, in contrast to the position taken regarding background,83 ambiguity is not required before contractual purpose can be considered.84 [3-19]   The purpose of a contract (or one of its parts) can be understood as the state of affairs that the parties aimed to achieve by agreeing the contract text. For example, in the case of a shipbuilding contract, the relevant state of affairs may simply be the construction and delivery of a vessel ‘suitable for [a specified] use’.85 However, ordinarily, contract interpretation involves reliance upon more bespoke and specific contractual objectives. Hence, in Prenn v Simmonds,86 it was significant that a profit threshold in a share sale between a holding company and an employee of its subsidiary served the commercial object of incentivising the employee to generate profits. In particular, it demonstrated that profits produced by the subsidiary were meant to count towards the threshold.87 [3-20]  Although the focus in construction is commercial objectives, non-­ mercantile aims can also guide the interpretive process. Some contracts serve a predominantly legal purpose, such as a settlement deed,88 while others fulfil a public purpose, such as a long-term lease of a public car park between two public authorities.89 [3-21]   A contract or clause may serve multiple purposes.90 Practically ­speaking, a contract or clause usually serves different purposes for different parties.91 In this regard, it makes sense that the objective of one party can be considered, assuming that it is known or reasonably assumed by the other party92 and that it is not established by direct evidence.93 82 See, eg, Arbuthnott v Fagan [1995] CLC 1396, 1402 (Steyn LJ) (CA) (purpose of ‘pay now, sue later’ clause). See also Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 76 NSWLR 603, 618 [19] (Allsop P); McMeel (2017) 54 [1.93]. 83 See [3-14] (n 63). 84 Hence, to the extent that background is used to establish purpose, it would seem to be admissible: see Mount Bruce [2015] HCA 37, (2015) 256 CLR 104, 117 [49] (French CJ, Nettle and Gordon JJ). See further [3-22] (n 99). 85 See, eg, The Diana Prosperity [1976] 1 WLR 989, 997 (Lord Wilberforce) (HL); Carter (2013) 200 [6-25]. 86 Prenn v Simmonds [1971] 1 WLR 1381 (HL). 87 See [5-05]–[5-10]. 88 MBF Investments Pty Ltd v Nolan [2011] VSCA 114, (2011) 37 VR 116, 167 [203] (Neave, Redlich and Weinberg JJA). 89 Royal Botanic [2002] HCA 5, (2002) 240 CLR 45, 53 [11] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ). 90 See, eg, Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 657 [35] (French CJ, Hayne, Crennan and Kiefel JJ) (‘objects’). 91 See, eg, Maggbury [2001] HCA 70, (2001) 210 CLR 181, 188 [11] (Gleeson CJ, Gummow and Hayne JJ) (the aim of one party executing a confidentiality agreement was to obtain intellectual ­property protection). 92 cf Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43, [2014] Hous LR 35, 38 [11] (Lord Drummond Young) (for the Court) (‘benefits … to both parties’) (Grove Investments); F ­ ranklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 76 NSWLR 603, 618 [20] (Allsop P). Contrast Prenn v Simmonds [1971] 1 WLR 1381, 1385 (Lord Wilberforce) (HL) (‘totally … dangerous … to admit evidence of one party’s objective – even if that is known to the other party’); Carter (2013) 227 [7-25]; Leggatt (n 7) 470. 93 See [3-22] (n 102).

Interpretive Materials  61 [3-22]  The objects that a contract is meant to serve may be ‘evident’94 or ‘apparent’;95 that is, the objects are explicitly stated,96 clear from the nature of the agreement97 or clear from the contract as a whole.98 Conversely, the purpose of a contract or a clause may be established by inference from background,99 through expert evidence,100 or, in the case of a commercial contract, as a matter of ‘business common sense’.101 Although the object of a contract can be inferred from non-textual factors, it cannot be ascertained from evidence of subjective intention, that is, evidence of what the parties actually believed or intended.102 However, the potential consequences of the competing interpretations can assist in determining the aim or object of a specific provision.103

Potential Results [3-23]   It has long been held that a court must consider the ‘absurd’ or ‘irrational’ consequences that could flow from a potential construction.104 Modern courts also often take into account ‘unreasonable’, ‘uncommercial’ or ‘inconvenient’ results.105 The consequences of a potential interpretation are its practicalities: the actual consequences that would follow if the interpretation were accepted106 and the hypothetical consequences that could have followed on different facts.107 94 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 76 NSWLR 603, 618 [19] (Allsop P). 95 Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd [2008] WASCA 119, (2008) 66 ACSR 594, 619 [112] (Buss JA). 96 See, eg, Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184, (2014) 89 NSWLR 633, 651–52 [66], 657 [90] (Leeming JA); Schuler [1974] AC 235, 257 (Lord Morris) (purpose as stated in cl 7(a)). 97 See, eg, The Diana Prosperity [1976] 1 WLR 989 (HL) (discussed at [3-19] (n 85)). 98 See, eg, Fagan [1997] AC 313, 386 (Lord Mustill) (HL) (as discussed at [6-64]–[6-65]). 99 See [3-17] (n 80). 100 See, eg, Software AG (Australia) Pty Ltd v Racing and Wagering Western Australia [2009] FCAFC 36, (2009) 175 FCR 121, 129 [37] (the Court). 101 See, eg, Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 200–01 (Lord Diplock) (HL) (The Antaios); Cohen & Co v Ockerby & Co Ltd [1917] HCA 58, (1917) 24 CLR 288, 300 (Isaacs J); Lewison (2015) 50–63 [2.07]; Lewison and Hughes (2012) 32–40 [2.06]. See further [3-25]–[3-26]. 102 The Diana Prosperity [1976] 1 WLR 989, 996 (Lord Wilberforce) (HL); Prenn v Simmonds [1971] 1 WLR 1381, 1385 (Lord Wilberforce) (HL). Contrast Australian Medic-Care Co Ltd v Hamilton Pharmaceutical Pty Ltd [2009] FCA 1220, (2009) 261 ALR 501, 530 [121] (Finn J) (‘does sit rather oddly with the concept of party autonomy’). See further [3-30]. 103 See, eg, Chartbrook [2009] UKHL 38, [2009] 1 AC 1101 (as discussed at [6-30]). 104 See, eg, Wilson v Wilson (1854) 5 HLC 40, 69; 10 ER 811, 823 (Lord St Leonards); Grey v Pearson (1857) 6 HLC 61, 105–06; 10 ER 1216, 1234 (Lord Wensleydale). 105 See, eg, Schuler [1974] AC 235, 251 (Lord Reid) (HL) (‘unreasonable’); The Antaios [1985] AC 191, 201 (Lord Diplock) (HL) (‘a conclusion that flouts business commonsense’); Maggbury [2001] HCA 70, (2001) 210 CLR 181, 198 [43] (Gleeson CJ, Gummow and Hayne JJ) (‘a conclusion that flouts business commonsense’); Re Sigma Finance Corp [2008] EWCA Civ 1303, [2009] BCC 393, 418 [98] (Lord Neuberger) (‘commercially improbable’ results). 106 See, eg, Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 (Rainy Sky) (as discussed at [6-20]). 107 See, eg, Schuler [1974] AC 235 (as discussed at [6-95]–[6-97]).

62  Key Features of Contract Interpretation Potential results usually play a negative role in contract interpretation; that is, one party points to the negative consequences of an opponent’s construction so as to support its own construction.108 [3-24]   Whether the potential consequences of an interpretation can be considered in construction is said to depend on whether the relevant consequences are absurd or whether the consequences are merely unreasonable or uncommercial. In the case of the latter, ambiguity is said to be required:109 ‘a high threshold’.110 The distinction between absurd and unreasonable results is a matter of degree, if possible to delineate at all.111 For example, it would clearly be absurd for a standard form contract to incorporate ‘inconsistent’ rather than ‘consistent’ terms,112 a lease to grant a right to ‘offer’ rather than an ‘option’ to purchase land,113 and a rent review clause in a commercial lease to increase rent from $69,404 to $39,582,431 over a 14-year term.114 In contrast, a rent review clause that merely involves doublecounting is probably simply uncommercial.115 Ultimately, the distinction between absurdity and unreasonableness is difficult to define beyond illustrative examples. It reflects the uncertainty inherent in the normative standards and objectives that influence the interpretive process.

Normative Standards and Objectives [3-25]   Although not a common feature in statements of principle, normative standards and objectives play a key role in interpretation.116 The most prominent of such standards is reasonableness, along with business common sense.117 For 108 See further [5-46]–[5-49]. 109 See, eg, Australian Broadcasting Corp v Australasian Performing Rights Association Ltd [1973] HCA 36, (1973) 129 CLR 99, 109 (Gibbs J) (dissenting on the facts); Co-operative Wholesale Society Ltd v National Westminster Bank Plc [1995] 1 EGLR 97, 99 (Hoffmann LJ), 101 (Simon Brown LJ) (CA); Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900, 2908 [23] (Lord Clarke). 110 Davies, ‘The Meaning of Commercial Contracts’ (n 77) 224. 111 See McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ (n 2) 436 (‘distinguishing between an unduly favourable bargain and a commercially absurd bargain that was not intended is no easy task’). 112 Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420, 426–27 (Dixon CJ and Fullagar J). 113 Watson v Phipps (1985) 63 ALR 321, 324 (Lord Brightman) (PC). 114 Westpac Banking Corp v Tanzone Pty Ltd [2000] NSWCA 25, (2000) 9 BPR 17,521, 17,524–25 [28] (Priestly JA, Fitzgerald JA and Foster AJA). See further P Butt, Modern Legal Drafting, 3rd edn (Cambridge University Press, 2013) 49–50 [3.6]. 115 Dockside Holdings Pty Ltd v Rakio Pty Ltd [2001] SASC 78, (2001) 79 SASR 374, 378 [22], 387 [51] (Williams J). 116 cf C Mitchell, Contract Law and Contract Practice: Bridging the Gap between Legal Reasoning and Commercial Expectation (Hart Publishing, 2013) 247–48. 117 Maggbury [2001] HCA 70, (2001) 210 CLR 181, 198 [43] (Gleeson CJ, Gummow and Hayne JJ); Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900, 2907 [15], 2908–11 [21]–[30] (Lord Clarke). See further MP Furmston, ‘Current Issues in the Interpretation of Contracts’ (2011) 28 Journal of Contract Law 78, 83–84; E Lim, ‘Commercial Purpose and Business Common Sense in Contract Interpretation’ (2012) 23 King’s Law Journal 94; L Richardson, ‘Commercial Common Sense Revisited: Further Developments in Contract Interpretation and Commercial Leasing’ (2016) 20 Edinburgh Law Review 342.

Interpretive Materials  63 example, the court relies upon one or both of these standards to assess ‘results’118 and to ascertain the ‘commercial’ purpose of a business contract.119 In addition, these standards ultimately guide the process of interpretation itself: contracts are construed from the perspective of the ‘reasonable person’120 and in a ‘businesslike’ manner.121 [3-26]   This book does not comprehensively analyse the standards of reasonableness or commerciality. Indeed, a coherent explanation may not be possible.122 However, it suffices to say that each standard is essentially a construct. It is a construct that is invoked by a judge when relying upon his or her perception of how the ordinary person (or businessperson) would assess a particular proposition, be it the purpose of a contract, the time for performance, or the outcome of the interpretive process.123 Judicial perceptions of business common sense, in particular, vary.124 Hence, over-reliance on the standard is discouraged;125 there are clearly limits on its utility.126 [3-27]  Distinct from reasonableness and business common sense, fairness can be regarded as a separate interpretive standard underpinned by notions of honesty, not taking advantage, assisting others and foregoing self-interest.127 Unlike reasonableness, fairness is rarely overtly relied upon in construction and it is not generally regarded as a universal guiding factor.128 Instead, it underlies a number of discrete rules and principles, such as the contra proferentem rule.129 More broadly, fairness is embodied in the duty of good faith.130 [3-28]   Beyond standards of reasonableness or fairness, courts also occasionally rely upon normative goals or objectives in contract interpretation. These objectives may be general in nature, specific to the parties or specific to an industry. However, the normative aims that usually feature in construction are directed to

118 See [3-23]. 119 See [3-22] (n 101). 120 See [2-27]–[2-28]. 121 McCann [2000] HCA 65, (2000) 203 CLR 579, 589 [22] (Gleeson CJ); Electricity Generation [2014] HCA 7, (2014) 251 CLR 640, 657 [35] (French CJ, Hayne, Crennan and Kiefel JJ). 122 Maggbury [2001] HCA 70, (2001) 210 CLR 181, 198 [43] (Gleeson CJ, Gummow and Hayne JJ). 123 See Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1628 [19] (Lord Neuberger). 124 See Maggbury [2001] HCA 70, (2001) 210 CLR 181, 198 [43] (Gleeson CJ, Gummow and Hayne JJ). 125 See, eg, Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732, [22] (Neuberger LJ). 126 See Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1628 [17], [19] (Lord Neuberger); L Macgregor, ‘Crossing the Line between Business Common Sense and Perceived Fairness in Contract Interpretation’ (2015) 19 Edinburgh Law Review 378; Richardson (n 117) 346 (the court has ‘sought to set limits’ on the use of commercial common sense); D McLauchlan, ‘The ICS Principles: A Failed “Revolution” in Contract Interpretation?’ (2016) 27 New Zealand Universities Law Review 263, 281–83. 127 See the duty of good faith (as discussed at [7-15] (n 79)). 128 See Macgregor (n 126). 129 See [3-39] and [3-44]. 130 See [3-43] and [7-15].

64  Key Features of Contract Interpretation the ‘institution’ of contract law.131 In particular, the interpretive process is often guided by a desire to maintain certainty in commercial dealings132 and objectivity in contract law.133 That said, where necessary, the contract must be read ‘fairly and broadly’134 and in ‘no narrow spirit of construction’.135 These institutional objectives are occasionally relied upon directly in construction.136 However, each of them usually assumes an auxiliary role. For example, the notion that a contract should be construed liberally and flexibly emphasises the importance of factors other than the text and meaning.137 Certainty and objectivity, on the other hand, justify the opposite focus.138 Certainty also manifests itself in a number of presumptions directed to maintaining contract validity.139 And objectivity is the motivation behind the exclusionary rule – a rule that restricts reference to certain evidence in construction.

Excluded Materials [3-29]   Contract interpretation is defined as much by what can be considered in the process as by what is excluded from it.140 In particular, the ‘exclusionary’ or ‘parol’ evidence rule restricts reference to evidence of subjective intention, evidence of negotiations, and evidence of subsequent conduct.141

131 As to the institutional nature of contract law, see Lord Hoffmann, ‘The Intolerable Wrestle with Words and Meanings’ (1997) 114 South African Law Journal 656, 658–60, 664; Carter (2013) 44 [2-06]. 132 Hope v RCA Photophone of Australia Pty Ltd [1937] HCA 90, (1937) 59 CLR 348, 356 (Latham CJ); Grove Investments [2014] CSIH 43, [2014] Hous LR 35, 38 [11] (Lord Drummond Young) (for the Court) (‘commercial predictability’); Carter (2013) 21 [1-30]; Macgregor (n 126) 383. 133 The Diana Prosperity [1976] 1 WLR 989, 996 (Lord Wilberforce) (HL); Equuscorp Pty Ltd v ­Glengallan Investments Pty Ltd [2004] HCA 55, (2004) 218 CLR 471, 483 [34] (the Court); Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253, 275 [59] (Gummow and Hayne JJ). 134 Hillas & Co Ltd v Arcos Ltd (1932) 43 Lloyd’s Rep 359, 367 (Lord Wright) (HL) (quoted in ­Australian Broadcasting Corp v Australasian Performing Rights Association Ltd [1973] HCA 36, (1973) 129 CLR 99, 109 (Gibbs J) (dissenting on the facts)). 135 Cohen & Co v Ockerby & Co Ltd [1917] HCA 58, (1917) 24 CLR 288, 300 (Isaacs J). 136 See, eg, Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, [2007] Bus LR 1719 (Fiona Trust) (as discussed at [6-15] (n 44)); Wall Street Enterprises Pty Ltd v Spooner [2009] QSC 28, [2009] 2 Qd R 392, 400–01 [39]–[41] (Philippides J) (certainty). See further [5-50]–[5-51]. 137 See, eg, McCowan v Baine [1891] AC 401 (HL) (a policy of marine insurance expressed to cover loss arising from a collision between the insured ship and another vessel was held to cover loss arising from a collision involving a tug attached to the insured ship). 138 See, eg, Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310, 316 (Kirby P) (CA). For a discussion of the extent to which judicial preference plays a role in the balancing act in construction, see [4-38]–[4-40]. 139 See [3-41]. 140 See, eg, Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [18]–[19] (Lord Neuberger). 141 Such evidence is described by some as ‘extrinsic evidence’: see, eg, Carter (2013) 247 [8-05]; Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd [2012] VSCA 134, (2012) 37 VR 486, 518 [113] (the Court). But the term ‘extrinsic evidence’ can also simply be used to describe evidence that is found outside the contract: see, eg, Heydon (n 4) 329 [9.10].

Interpretive Materials  65 [3-30]   Broadly speaking, ‘subjective intentions’ in contract law consist of each party’s state of mind regarding: (i) why it entered the contract and agreed the contract terms;142 (ii) what constitutes the contract terms;143 (iii) the meanings of the words used;144 (iv) how the interpretive dispute should be resolved;145 and (v) in England at least, the rejection or deletion of a term.146 Evidence of subjective intention may take the form of testimonial evidence,147 contemporaneous documentary evidence (such as written communications148 or prior drafts),149 or expert evidence (by analogy).150 Evidence of negotiations, on the other hand, is usually documentary or testamentary evidence of what the parties said or did in negotiating the contract.151 And evidence of subsequent conduct is evidence in a similar form, but of what the parties said or did after entering into the contract.152 [3-31]   Evidence of subsequent conduct cannot be considered in contract interpretation,153 subject to a narrow exception in the case of quite old documents.154 However, evidence of subjective intention and evidence of negotiations can be taken into account in slightly broader circumstances. In particular, such evidence can be relied upon to resolve a ‘latent’ ambiguity155 and to ascertain the subject matter of a contract (if ambiguous).156 In Australia, it may also be admissible to 142 The Diana Prosperity [1976] 1 WLR 989, 996 (Lord Wilberforce) (HL) (‘the intention of the parties to the contract’); Carter (2013) 227 [7-25]. 143 Codelfa [1982] HCA 24, (1982) 149 CLR 337, 352 (Mason J) (‘intentions’ regarding ‘the terms of the contract which the parties intended or hoped to make’). 144 B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227, 236 (Kirby P) (NSWCA). But note that party-specific meanings may be accepted: see [3-12]. 145 McMeel (2017) 221 [5.96] (‘direct testimony on questions of construction’). 146 See A & J Inglis v John Buttery (1878) 3 App Cas 552, 562, 568–69 (Lord Hatherley), 571–72 (Lord O’Hagan), 576 (Lord Blackburn) (HL). But note that there is controversy regarding whether evidence of deletion of a term in a standard form contract is admissible: see further [5-35] (n 108). Contrast the Australian position: Codelfa [1982] HCA 24, (1982) 149 CLR 337, 352–53 (Mason J). 147 Goss v Lord Nugent (1833) 5 B & Ad 58, 64–65; 110 ER 713, 716 (Denman CJ) (KB). 148 Australia and New Zealand Banking Group Ltd v Compagnie D’Assurances Maritimes Aeriennes et Terrestres [1966] 1 VR 561, 565–66 (Hayne J) (VSC). 149 National Bank of Australasia Ltd v J Falkingham & Sons [1902] AC 585, 591 (Lord Lindley) (PC). 150 See, eg, Durham v BAI (Run Off) Ltd [2012] UKSC 14, [2012] 1 WLR 867, 885–86 [39]–[40] (Lord Mance); Sunrock Aircraft Corp Ltd v Scandinavian Airlines System Denmark–Norway–Sweden [2007] EWCA Civ 882, [2007] 2 Lloyd’s Rep 612, 616 [17] (Thomas LJ). 151 Goss v Lord Nugent (1833) 5 B & Ad 58, 64–65; 110 ER 713, 716 (Denman CJ) (‘what passed between the parties’) (KB); A & J Inglis v John Buttery (1878) 3 App Cas 552, 577 (Lord Blackburn) (HL). See further Calnan (2017) 63–69 [4.71]–[4.93]. 152 James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, 603 (Lord Reid) (HL). 153 ibid; Gardiner [2008] HCA 57, (2008) 238 CLR 570, 582 [35] (Gummow, Hayne and Kiefel JJ). 154 See, eg, Watcham v Attorney-General of the East African Protectorate [1919] AC 533 (PC) (as discussed in McMeel (2017) 241–42 [5.144]); Carter (2013) 271–72 [8-35]. 155 See, eg, Doe d Hiscocks v Hiscocks (1839) 5 M & W 363, 368–69; 151 ER 154, 156 (Lord Abinger CB) (Ex); Hope v RCA Photophone of Australia Pty Ltd [1937] HCA 90, (1937) 59 CLR 348, 356 (Latham CJ); Codelfa [1982] HCA 24, (1982) 149 CLR 337, 347 (Mason J); Lewison (2015) 439–48 [8.02]– [8.05]; Lewison and Hughes (2012) 348–58 [8.02]–[8.05]; Carter (2013) 621–25 [18-27]–[18-31]. But see Schuler [1974] AC 235, 268 (Lord Simon) (HL); McMeel (2017) 64–66 [1.111]–[1.112]. 156 See, eg, Macdonald v Longbottom (1860) 1 El & El 977, 983; 120 ER 1177, 1179 (Lord Campbell CJ) (QB) (‘your wool’); Rankin v Scott Fell & Co [1904] HCA 42, (1904) 2 CLR 164, 172 (Griffith CJ).

66  Key Features of Contract Interpretation establish a party-specific meaning.157 And negotiation evidence can be relied upon to establish ‘objective background facts’.158 That said, evidence of subjective intention and evidence of negotiations are otherwise rarely admissible. This reflects the primacy given to the text in construction: the aim is to infer what was objectively intended by analysing the choice of words in the contract.

Comment [3-32]   Contract interpretation is driven by conclusions drawn from prescribed materials: the text, the potential meanings for the words, the background, and so on. The relevant question of construction is defined, competing interpretations are put forward, and then much time is spent identifying arguments in support of each construction. The arguments are composed, as a matter of propositional logic, from the admissible materials. That is to say, each party points to underlying factors that tend to establish what was objectively intended – what was intended by the choice of words in the contract. For example, a party may assert that its interpretation was probably intended because it aligns with the apparent meaning of a key word or phrase. Alternatively, a party may claim that its construction should be accepted because it makes sense as a matter of commercial purpose; that is, what was ­objectively intended by the choice of words is illustrated by the purpose of the transaction. In short, the prescribed materials constitute evidence from which the objective intention of the parties is inferred. To put it differently, the prescribed materials contain indicators of intention – indicators of what was probably intended with respect to the disputed aspect of the agreement. Through interpretation, the court weighs and balances the competing indicators to arrive at the construction that represents the probable intention of the parties. One way to formulate an interpretive argument is to rely upon a traditional maxim or principle.

3.3.  Interpretive Principles and Maxims [3-33]   Rules in one form or another constitute any legal doctrine or process.159 Contract interpretation is no exception. In its infancy, the process was 157 See, eg, Australasian Medical Insurance Ltd v CGU Insurance Ltd [2010] QCA 189, (2010) 271 ALR 142, 156 [58] (Chesterman JA); Gate Gourmet Australia Pty Ltd v Gate Gourmet Holding AG [2004] NSWSC 149, [182] (Einstein J). This is the position in New Zealand: see Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444, 460 [27] (Tipping J) (SC). 158 See, eg, Codelfa [1982] HCA 24, (1982) 149 CLR 337, 352 (Mason J); Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, 665 (Lord President Rodger) (IHCS); Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1121 [42] (Lord Hoffmann); Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44, [2011] 1 AC 662, 680 [38] (Lord Clarke). 159 See, eg, HLA Hart, The Concept of Law, first published 1961, 3rd edn (Oxford University Press, 2012) ch 7. See further [4-42] and [7-06] (the ‘contract’ as rules).

Interpretive Principles and Maxims  67 conceptualised in formal terms by references to rules or ‘maxims’.160 Rules remain in construction, but such rules are often framed as ‘principles’.161 This is because the rules consist of a few broad standards of universal application162 and a large number of discrete and often flexible guidelines dealing with particular issues,163 such as the hierarchical rules dealing with inconsistency.164 The purpose of this section is to explore the latter category of principles: the discrete or ‘secondary’165 rules that feature in construction. Such principles often apply as a ‘last resort’.166 Some of them are directed to particular types of contract or clause, while others apply to specific questions of interpretation. In each instance, the principles act as argument templates or ‘argument schemes’: ‘blueprints of arguments’ that include ‘a set of abstract criteria that are necessary for the argument to work’.167 That is to say, the principles give rise to potential arguments in certain circumstances – they act as ‘guide[s] to the intention of the parties’.168 The strength of the argument that is produced by a principle depends on the circumstances of the case, including in particular the other arguments in the dispute. The most notorious of the discrete principles are the old linguistic maxims that typify the traditional ‘law’ of contract interpretation.

Linguistic or Textual Principles [3-34]  In ICS,169 Lord Hoffmann famously pronounced that the ‘old intellectual baggage of “legal interpretation” had been discarded’.170 Nonetheless, a handful of old Latin maxims and principles directed to particular linguistic formulations are still occasionally invoked in construction. For example, the maxim generalia

160 See, eg, Athlam’s Case (1610) 8 Co Rep 150, 154b–155a; 77 ER 701, 708–09 (Coke CJ) (KB); Clift v Schwabe (1846) 3 CB 437, 469; 136 ER 175, 188 (Parke B) (CP) (‘the court must adopt the usual rules’); P Atiyah and SA Smith, Atiyah’s Introduction to the Law of Contract, 6th edn (Oxford University Press, 2005) 147. 161 See, eg, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912 (Lord Hoffmann) (HL) (ICS); BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 274 [55] (Lord Hoffmann), 282 [79] (Lord Clyde); Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900, 2906 [14] (Lord Clarke); Calnan (2017) 5 [Pr.25]; McMeel (2017) 35 [1.56]–[1.57]. Contrast Carter (2013) ch 4. 162 For example, it is an incontrovertible rule that interpretive materials must be considered in contract interpretation (subject to debate regarding the ambiguity gateway: see [3-14] (n 63)). 163 For discussion of those principles, see generally Calnan (2017); Lewison (2015) chs 7–18; Lewison and Hughes (2012) chs 7–9; McMeel (2017) ch 1; Heydon (n 4) chs 8–9. 164 See [3-54]. 165 JW Carter and D Yates, ‘Perspectives on Commercial Construction and the Canada SS Case’ (2004) 20 Journal of Contract Law 233, 239. 166 See [3-55] (n 265) (rules dealing with inconsistency). 167 See K Ashley, ‘Precedent and Legal Analogy’ in Handbook of Legal Reasoning and Argumentation (Springer, 2018) 674. See further R Catterwell, ‘Automation in Contract Interpretation’ (2020) Law Innovation and Technology Journal (forthcoming). 168 Lewison and Hughes (2012) 333 [7.13] (a comment regarding the noscitur a sociis principle). 169 ICS [1998] 1 WLR 896 (HL). 170 ibid 912 (Lord Hoffmann).

68  Key Features of Contract Interpretation specialibus non derogant (specific words governs general words) is applied to resolve inconsistency.171 The maxims are often criticised172 and strict reliance upon them is discouraged.173 However, for the most part, the principles constitute ‘presumptive rule[s] of language’,174 reflecting the proposition that a contract must be construed as a whole.175 That is to say, the maxims give rise to linguistic or textual arguments: arguments based on textual features, usually about the potential meanings for words. [3-35]  The ejusdem generis principle is a well-worn example. It applies when general descriptive words follow specific words that form a genus. The classic example is the phrase ‘car, truck, motorcycle or other vehicle’. The effect of the maxim is that the general words are restricted by the genus of the specific words.176 So, in the example, the term ‘vehicle’ is limited to motorised vehicles (and, therefore, excludes a bicycle). The maxim is still applied on occasion.177 It is said to reflect ‘wisdom of experience’ rather than constitute discarded ‘intellectual baggage’.178 The principle embodies a linguistic argument based on textual features: the meaning of the general descriptive words is narrowed due to the fact that the general words are preceded by specific words forming a genus. [3-36]  The maxim noscitur a sociis is closely connected with the ejusdem generis principle. The maxim applies when a vague word or phrase is used among associated words. The effect of the maxim is that the meaning of the word can be gathered from the associated words.179 For example, in Watchorn v Langford,180 an insurance policy covered damage to ‘stock in trade [of a coach-plater and cowkeeper], household furniture, linen, wearing apparel and plate’. The term ‘linen’ was read down to mean ‘household linen or apparel’ by looking to the preceding 171 See [3-54]. 172 See, eg, BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 274 [55] (Lord Hoffmann); Carter (2013) 143–44 [4-41]–[4-42]. 173 See, eg, McMeel (2017) 35 [1.57] (‘Many judges have cautioned against too slavish an adherence to any supposed rule of construction’); Lewison (2015) 382–83 [7.06] (expressio unius); Lewison and Hughes (2012) 299 [7.06] (expressio unius). 174 McMeel (2017) 310 [8.01]. See also Prestcold (Central) Ltd v Minister of Labour [1969] 1 WLR 89, 96–97 (Lord Diplock) (HL) (a statutory interpretation case) (‘general rules of composition’); Leggatt (n 7) 469. 175 cf Lewison (2015) 425 [7.15] (distributive construction); Lewison and Hughes (2012) 333 [7.13] (noscitur a sociis). See further [3-07]. 176 Thames & Mersey Marine Insurance Co v Hamilton, Fraser & Co (1887) 12 App Cas 484, 490 (Lord Halsbury LC) (HL); Lewison (2015) 413–22 [7.13]; Lewison and Hughes (2012) 325–32 [7.12]; McMeel (2017) 320–22 [8.28]–[8.35]. 177 See, eg, F & D Normoyle Pty Ltd v Transfield Pty Ltd [2005] NSWCA 193, (2005) 63 NSWLR 502, 510 [48], 511 [57], 512 [67] (Ipp JA). cf Carter (2013) 150 [4-49] (‘rarely used today in the construction of commercial contracts’). 178 Biggin Hill Airport Ltd v London Borough of Bromley [2001] EWCA Civ 1089 [128] (Arden LJ). Contrast Carter (2013) 150 [4-49]. 179 Lend Lease Real Estate Investments Ltd v GPT RE Ltd [2006] NSWCA 207 [30]–[32] (Spigelman CJ); Watchorn v Langford (1813) 3 Camp 422, 423; 170 ER 1432, 1432 (Lord Ellenborough) (Assizes); Lewison (2015) 422–24 [7.14]; Lewison and Hughes (2012) 332–34 [7.13]; McMeel (2017) 322 [8.36]. 180 Watchorn v Langford (1813) 3 Camp 422; 170 ER 1432 (Assizes).

Interpretive Principles and Maxims  69 and subsequent words. Hence, coverage for linen that was bought on speculation for sale was excluded.181 Although the maxim has its detractors,182 it has been described in recent times as ‘an obviously sensible principle to be applied in understanding the meaning of words in their context’.183 Like the ejusdem generis principle, the noscitur a sociis maxim gives rise to a linguistic argument that is derived from a broader analysis of the contract text. [3-37]  The expressio unius est exclusio alterius principle is distinct from the ejusdem generis and noscitur a sociis maxims. The expressio unius principle applies when a contract expressly mentions one or more alternatives, but fails to mention others. The effect of the rule is that, by implication, the alternatives not mentioned are excluded.184 For example, applying the principle, a contract that states the consequence of a failed condition (one party has a right to terminate) thereby excludes other consequences not mentioned (ie, the other party does not have a right to terminate).185 On one view, the maxim reflects common sense; it ‘hardly [being] necessary to clothe the thought in authority or in Latin garb’.186 In essence, the maxim is a specific example of a textual argument: an argument based on the composition of words in a contract. In this respect, it is quite similar to the presumption against surplusage or redundancy.187 [3-38]   The presumption against surplusage or redundancy is to the effect that no words in a contract are redundant and that therefore all words should be given effect if possible.188 It applies when a construction would deny any effect to a part of the contract. The effect of the presumption is that such a construction should be avoided.189 For example, in Patching v Dubbins,190 a covenant in a sale of a terraced 181 ibid (1813) 3 Camp 422, 423; 170 ER 1432, 1432 (Lord Ellenborough). 182 Letang v Cooper [1965] 1 QB 232, 247 (Diplock LJ) (CA) (‘The maxim noscitur a sociis is always a treacherous one unless you know the sosietas to which the socii belong’). 183 Australian Aviation Underwriting Pty Ltd v Henry (1988) 12 NSWLR 121, 126 (Hope JA) (CA). 184 Re North Stafford Steel, Iron and Coal Company (Burslem) Ltd; Ex parte Ward (1868) LR 3 Exch 172, 177 (Wiles J) (Ex); SCN Pty Ltd v Smith [2006] QCA 360, [7] (McPherson JA); Carter (2013) 149–50 [4-48] (‘exclusion by inclusion’); Lewison (2015) 381–86 [7.06]; Lewison and Hughes (2012) 298–302 [7.06]. 185 Sandra Investments Pty Ltd v Booth [1983] HCA 46, (1983) 153 CLR 153, 157–59 (Gibbs CJ). 186 See, eg, SCN Pty Ltd v Smith [2006] QCA 360, [7] (McPherson JA). However, the maxim has been criticised: Beaufort Developments [1999] 1 AC 266, 275 (Lord Hoffmann) (HL) (‘dangerous’ in the context of standard form contracts); McMeel (2017) 320 [8.27] (questionable ‘even as a mere presumptive rule of language’). 187 cf Beaufort Developments [1999] 1 AC 266, 275 (Lord Hoffmann) (HL) (‘in truth merely a variety’). 188 Patching v Dubbins (1853) Kay 1, 14; 69 ER 1, 6 (Sir Page Wood VC) (Ch); Lewison (2015) 371–75 [7.03]; Lewison and Hughes (2012) 291–93 [7.03]. See also Carter (2013) 144–45 [4-43] (the principle is distinct from the proposition that a contract must be construed as a whole); International Institute for the Unification of Private Law, UNIDROIT Principles of International Commercial Contracts (2016) art 4.5. 189 The presumption is at its most persuasive if the proposed interpretation would render words redundant on their apparent or ‘natural’ meaning: see Re Lehman Brothers International (Europe) (in administration) (No 4) [2017] UKSC 38, [2018] AC 465, 502 [67] (Lord Neuberger); MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Ltd [2017] UKSC 59, [2017] Bus LR 1610, 1625 [50] (Lord Neuberger). 190 Patching v Dubbins (1853) Kay 1; 69 ER 1 (Ch).

70  Key Features of Contract Interpretation house restrained the vendor from building on land described as ‘lying on the east side of the said terrace and opposite to the plot of land thereby conveyed’. To give effect to both the first and second limb of the description, the land was identified as that immediately opposite the terrace to its east side, not all land to the east of the terrace.191 The presumption against surplusage is like the expressio unius principle in that it constitutes a particular example of a textual argument: one party argues that its interpretation was probably intended because it gives effect to a part of the contract that would otherwise be ineffective. Hence, although the presumption has been criticised,192 it is still influential in some cases.193 This reflects the role of traditional linguistic principles in modern contract interpretation: the maxims are rarely invoked and only apply in discrete situations.194 An interpretive dispute is determined by analysing the full gamut of interpretive materials. The traditional maxims may highlight potential arguments in a particular case. But those arguments are rarely determinative. The principles that apply to specific types of contract or clause bear a similar significance in the interpretive process.

Principles Specific to Certain Types of Contract or Clause [3-39]   It is often said that the same approach to interpretation applies in the case of all types of contracts and contractual provisions.195 Nonetheless, numerous principles are directed to specific types of contract or clause.196 Most of these principles are motivated by policy.197 Hence, the principles give rise to normative arguments in construction, that is, arguments based on normative standards or objectives.198 For example, the contra proferentem rule is notorious in its application to exclusion or limitation clauses, as well as grants and covenants.199 In this context, the rule requires that an ambiguous exclusion or limitation clause be construed against 191 ibid (1853) Kay 1, 14; 69 ER 1, 6 (Sir Page Wood VC). 192 See, eg, Beaufort Developments [1999] 1 AC 266, 273–74 (Lord Hoffmann) (HL). 193 Mineralogy Pty Ltd v Western Australia [2005] WASCA 69, [52] (McLure JA); Shepparton Projects Pty Ltd v Cave Investments Pty Ltd [2010] VSC 504, [42] (Croft J) (‘a basic rule of construction’). See also Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47, [2011] SLT 184, 187 [11] (Lord Hope); Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173, 1184–85 [33]–[35] (Lord Hodge) (Wood). cf MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Ltd [2017] UKSC 59, [2017] Bus LR 1610, 1625 [50] (Lord Neuberger). 194 cf JW Carter and W Courtney, ‘Unexpressed Intention and Contract Construction’ (2017) 37 OJLS 326, 333 (‘the emphasis on contextualism in the modern law has diminished the use of formal and mechanical rules’); McMeel (2017) 33 [1.53] (‘the “canons of construction” … appear for most practical purposes to be redundant’). 195 See, eg, Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [20] (Lord Neuberger); Carter (2013) 137–38 [4-33]–[4-34]. 196 cf JW Carter, W Courtney and G Tolhurst, ‘“Reasonable Endeavours” in Contract Construction’ (2014) 32 Journal of Contract Law 36, 40 (‘Except at the highest level of generality, a “one size fits all” approach is not viable’). 197 cf McMeel (2017) 56 [1.96], 311 [8.01] (‘rule[s] of public policy’). 198 See [3-25]–[3-28]. 199 The rule is also understood as having a general application: see [3-44].

Interpretive Principles and Maxims  71 the party seeking to rely upon it200 and that an ambiguous grant or covenant be construed against the grantor or covenantor, respectively.201 Similarly, an ambiguous guarantee is construed strictissimi juris in favour of the surety.202 Both maxims have been criticised as inappropriate in the context of commercial contracts.203 However, the maxims merely embody interpretive arguments based on fairness – a normative standard occasionally invoked in construction.204 [3-40]   Outside the Latin maxims, numerous other principles can be found that apply to specific contracts or clauses. Usually, these principles give rise to arguments based on fairness or a desire to secure commercial certainty. For example, under the Consumer Rights Act 2015 (UK), a consumer contract capable of different meanings is to bear ‘the meaning that is most favourable to the consumer’.205 Likewise, conditions precedent to the exercise of an option must be strictly met,206 and a release is usually limited to known or contemplated claims.207 By contrast, an arbitration clause is to be construed broadly and flexibly.208 And, in the case of a registered document (such as an easement),209 or a corporate constitution or articles of association,210 a restrictive approach is usually taken to the admissibility of background. 200 Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82, (1986) 161 CLR 500, 510 (Mason, Wilson, Brennan, Deane and Dawson JJ); Geys v Societe General [2012] UKSC 63, [2013] 1 AC 523, 538 [24] (Lord Hope) (Geys); Carter (2013) 145–49 [4-44]–[4-47], 575–84 [17-09]–[17-17]; Lewison (2015) 388–402 [7.08]; Lewison and Hughes (2012) 304–15 [7.08]; McMeel (2017) 313–14 [8.06]. 201 Webb v Plummer [1819] 2 B & Ald 746, 751; 106 ER 537, 539 (Holroyd J) (KB); Ferella v Otvosi [2005] NSWSC 962, (2005) 64 NSWLR 101, 108 [21] (Hamilton J); Carter (2013) 145–49 [4-44]–[4-47]. 202 Bacon v Chesney (1816) 1 Stark 192, 193; 171 ER 443, 443–44 (Lord Ellenborough) (Assizes); Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15, (1987) 162 CLR 549, 561 (Mason ACJ, Wilson, Brennan and Dawson JJ); Carter (2013) 521–23 [15-38]–[15-39]. 203 See, eg, Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 851 (Lord Diplock) (HL) (exclusion clauses); Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57, [2017] AC 73, 79 [6] (Lord Hodge) (insurance exclusions); Carter (2013) 522–23 [15-39] (commercial guarantees). 204 See [3-27]. 205 Consumer Rights Act 2015 (UK) s 69(1). See further Lewison (2015) 402–03 [7.09]. 206 Hare v Nicoll [1966] 2 QB 130, 141 (Willmer LJ) (CA); C&P Syndicate Pty Ltd v Reddy [2013] NSWSC 643, (2013) 16 BPR 31,771, 31,783 [77]–[81] (Lindsay J); Carter (2013) 511–13 [15-28]. 207 Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112, 123, 129–30 (Dixon CJ, Fullagar, Kitto and Taylor JJ); BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 263 [17] (Lord Bingham), 266 [29] (Lord Nicholls), 282 [79] (Lord Clyde). Contrast BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 277 [62] (Lord Hoffmann). 208 Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719, 1725 [13] (Lord Hoffmann), 1728 [26] (Lord Hope); G McMeel, ‘Arbitration Agreements: Construction and Distinctiveness – A New Dawn?’ [2007] LMCLQ 292, 292–94. But see Rinehart v Welker [2012] NSWCA 95, (2012) 95 NSWLR 221, 246–48 [114]–[122] (Bathurst CJ); Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13, (2019) 93 ALJR 582, 588–89 [18]–[25] (Kiefel CJ, Gageler, Nettle and Gordon JJ) (a broad approach did not need to be applied). 209 See, eg, Westfield Management Ltd v Perpetual Trustee Company Ltd [2007] HCA 45, (2007) 233 CLR 528, 539 [37]–[39] (the Court) (construction of a registered easement). See further M Barber and R Thomas, ‘Contract Interpretation, Registered Documents and Third Party Effects’ (2014) 77 MLR 597, 598–606. 210 See eg, Belize [2009] UKPC 10, [2009] 1 WLR 1988, 1998 [36] (Lord Hoffmann); HNA Irish ­Nominee Ltd v Kinghorn (No 2) [2012] FCA 228, (2012) 290 ALR 372, 424 [209] (Emmett J). See further Barber and Thomas (n 209) 606–15.

72  Key Features of Contract Interpretation

Principles Specific to Certain Questions of Interpretation [3-41]   Rather than being specific to certain types of contract or clause, some interpretive principles apply to particular questions of interpretation. These principles are usually described as ‘preferences’ or ‘presumptions’. Such principles are policy driven.211 For example, several preferences are directed to questions of construction regarding contract validity:212 the modern preference against finding a contract void for uncertainty;213 the preference against a construction that would render a contract illegal;214 and the preference in favour of construing a stipulation as a condition precedent to performance rather than formation.215 [3-42]   Conceptually, the principles directed to particular questions of interpretation are distinct from those that apply to particular types of clause or contract (discussed in the preceding section). However, the line is ­occasionally blurred. For example, the Canada SS rules apply to both a particular type of contract or clause (an exclusion clause or indemnity) and a particular type of interpretive question (whether liability in negligence is caught by the exclusion or indemnity). The rules require clear words for liability in negligence to be captured by such a provision.216 [3-43]   As with the Canada SS rules and the preferences that promote contract validity, the presumptions that apply to questions regarding contract performance give rise to arguments based on fairness and certainty in contractual relations.217 For example, there is said to be a presumption against a construction that makes performance impossible218 and a preference in favour of construing a term as a promise rather than as a condition (so as to encourage contract performance).219 These presumptions give rise to arguments in a quite narrow set of circumstances. By comparison, at least under Australian law, the duty of good faith constitutes a broader basis to argue in the interests of fairness in 211 cf McMeel (2017) 311 [8.01] (‘rule[s] of public policy’). 212 See, eg, Hillas & Co Ltd v Arcos Ltd (1932) 43 Lloyd’s Rep 359, 364 (Lord Tomlin) (HL); Meehan v Jones [1982] HCA 52, (1982) 149 CLR 571, 589 (Mason J). See also Carter (2013) 550–56 [16-26]–[16-31]. 213 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8, (1968) 118 CLR 429, 436–37 (Barwick CJ). 214 Hirsch v Zinc Corp Ltd [1917] HCA 55, (1917) 24 CLR 34, 59 (Isaacs J); Lewison (2015) 409–11 [7.11]; Lewison and Hughes (2012) 320–23 [7.10]; Carter (2013) 552–53 [16-28]. 215 See, eg, Perri v Coolangatta Investments Pty Ltd [1982] HCA 29, (1982) 149 CLR 537, 552 (Mason J). See also Carter (2013) 554–55 [16-30]. 216 Canada Steamship Lines Ltd v The King [1952] AC 192, 208 (Lord Morton) (for the Board) (PC); Davis v Pearce Parking Station Pty Ltd [1954] HCA 44, (1954) 91 CLR 642, 649 (Dixon CJ, McTiernan, Webb, Fullagar and Kitto JJ); Geys [2012] UKSC 63, [2013] 1 AC 523, 543 [37] (Lord Hope). 217 As to the role of fairness and certainty in interpretation, see [3-27]–[3-28] and [5-50]–[5-53]. 218 Lewison (2015) 435 [7.19]; Lewison and Hughes (2012) 343–44 [7.18]. 219 Carter (2013) 557–58 [16-33] citing, inter alia, United Scientific Holdings Ltd v Burnley BC [1978] AC 904.

Interpretive Principles and Maxims  73 disputes regarding contract performance.220 In particular, the duty is a basis to argue that contractual rights, powers and discretions were meant to be exercised in good faith.221 [3-44]   Fairness is also the motivating factor behind a number of other discrete rules specific to particular types of interpretive question. For example, there is a presumption that contracting parties do not intend to abandon remedies for breach arising at common law222 and a preference against a construction that allows a party to take advantage of its own wrong.223 The contra proferentem principle also has a general application beyond its typical use in the context of exclusion or limitation of liability clauses.224 It requires that any ambiguous clause be construed against the party who drafted, proposed or relies upon it.225 This aspect of the rule is rarely invoked in the commercial context.226 But, to the extent that it is, it essentially embodies a normative argument based on fairness.

Comment [3-45]   The discrete principles that have traditionally characterised the ‘law’ of contract interpretation still play a part in the interpretive process. The various maxims, presumptions, preferences and principles serve as templates for interpretive arguments, that is, as ‘argument schemes’.227 The principles do not operate as ‘hard and fast rules’.228 As Lord Nicholls noted in BCCI v Ali, ‘there is no room today for the application of any special “rules” of interpretation’.229 However, at least occasionally, the traditional principles and maxims give rise to arguments that influence the interpretive process. The linguistic and textual maxims outline arguments about the meaning of words and arguments based on the composition of the text. By comparison, the principles specific to certain types of contract, clause or

220 See further [7-15]. The duty is not universally recognised under English law: see [7-15] (n 80). 221 The duty may also have a broader operation as a matter of implication: see further [7-15]. 222 See [7-06] (n 34). 223 See, eg, New Zealand Shipping Co Ltd v Societe des Ateliers et Chantiers de France [1919] AC 1, 9 (Lord Atkinson) (HL); Suttor v Gundowda Pty Ltd [1950] HCA 35, (1950) 81 CLR 418, 440–42 (Latham CJ, Williams and Fullagar JJ); Carter (2013) 565–67 [16-41]–[16-42]; Lewison (2015) 404–08 [7.10]; Lewison and Hughes (2012) 316–20 [7.09]. 224 For discussion of its typical use, see [3-39]. 225 See Youell v Bland Welch & Co Ltd [1992] 2 Lloyd’s Rep 127, 134 (Staughton LJ) (CA); North v Marina [2003] NSWSC 64, (2003) 11 BPR 21,359, 21,372–76 [56]–[71] (Campbell J). 226 K/S Victoria Street v House of Fraser (Stores Managements) Ltd [2011] EWCA Civ 904, [2012] Ch 497, 518 [68] (Neuberger LJ). 227 See [3-33] (text at n 167). 228 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114, (2004) 12 BPR 22,879, 22,893 [73] (McColl JA). 229 BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 265 [26] (Lord Nicholls).

74  Key Features of Contract Interpretation dispute give rise to normative arguments, predominantly based on fairness or the object of securing commercial certainty. The extent to which a particular principle is influential depends on the strength of the argument in each case. The relevant argument is considered, along with the other considerations, so as to arrive at the objective intention of the parties. Through this process, deficiencies in the contract text are addressed.

3.4.  Interpretive Problems [3-46]  Contract interpretation is employed to define a particular aspect of the parties’ agreement or, to put it another way, to resolve a given ‘question of construction’. Usually, interpretation is needed to resolve ‘hard’ cases. These are cases in which the contract text does not provide an obvious answer to the relevant question.230 Such cases arise due to a textual defect. That is, either on its face or in light of the question in dispute, the contract text is: a. ambiguous b. inconsistent, or c. contains an obvious error.231 Hence, one of the defining characteristics of interpretation is that it is employed to resolve these textual problems: it is a tool used to remedy ambiguity, inconsistency and obvious error in a contract. Textual defects give rise to uncertainty regarding what the parties intended. Through interpretation, the uncertainty is resolved by weighing and balancing arguments derived from the prescribed materials.

Ambiguity [3-47]   Construction is routinely employed to deal with ambiguity in a contract.232 In fact, the resolution of ambiguity is a long-standing feature of the process.233

230 As to the distinction between ‘clear’ and ‘hard’ cases in legal and linguistic theory, see, eg, Hart (n 159) 127; TAO Endicott, Vagueness in Law (Oxford University Press, 2000) 29. cf Wood [2017] UKSC 24, [2017] AC 1173, 1180 [13] (Lord Hodge). 231 cf McMeel (2017) 6–7 [1.03]–[1.06] (there are several ‘sources of construction disputes’, including ‘incompleteness’, ‘ambiguity’, ‘error’ and ‘deliberate equivocation’); Mitchell (2019) 17. See also Lewison (2015) chs 8–9; Lewison and Hughes (2012) chs 8–9; Herzfeld, Prince and Tully (n 4) 507–13 [25.3.270]–[25.3.300], 533–34 [25.3.440]. 232 See, eg, Prenn v Simmonds [1971] 1 WLR 1381 (HL) (discussed at [5-05]–[5-10]). 233 See, eg, Re Wedgwood Coal & Iron Co (1877) 7 Ch D 75, 99–100 (Jessel MR) (CA) (Anderson’s Case); Hoyt’s Pty Ltd v Spencer [1919] HCA 64, (1919) 27 CLR 133, 144 (Isaacs J).

Interpretive Problems  75 But ambiguity itself is a ‘flexible’ concept.234 One way to understand ‘ambiguity’ is that it encompasses not only lexical or syntactical ambiguity, but also ambiguity in terms of vagueness or omission.235 [3-48]   Lexical ambiguity arises when a word has more than one meaning,236 such as the multiple meanings of ‘summer’.237 Lexical ambiguity may be obvious or ‘patent’. Or it may arise ‘latently’; that is, it arises in light of evidence of potential things to which the word may refer (eg, a legacy ‘to my nephew John’ when the testator has two nephews by that name).238 Lexical ambiguity is a common problem addressed through interpretation.239 [3-49]   Syntactical ambiguity is ‘ambiguity of grammatical structure, of what is syntactically connected with what’.240 Rainy Sky241 is an example of such ambiguity. Under a series of refund guarantees issued with respect to shipbuilding contracts, a guarantor bank undertook to pay ‘all such sums [due under the shipbuilding contract]’. The difficulty was that the phrase ‘all such sums’ could be read as referring to the limited bases for a refund noted in the previous clause of the guarantee, or it could be read as referring to all bases for a refund under the shipbuilding contracts.242 [3-50]   Vagueness or indeterminacy arises when it is unclear whether an object is caught by the meaning of a word.243 Some words are inherently vague, such as ‘old’, ‘bald’, ‘rich’, and so on. With these words, there are always ‘borderline’ cases that may or may not qualify under the description.244 Other words are not vague

234 Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18, (1925) 36 CLR 60, 78 (Isaacs J). See also Ambatielos v Anton Jurgens Margarine Works [1922] 2 KB 185, 196–97 (Lord Sterndale MR) (HL); Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216, (2012) 45 WAR 29, 50 [77] (McLure P); K Lindgren, ‘The Ambiguity of “Ambiguity” in the Construction of Contracts’ (2014) 38 Australian Bar Review 153. 235 cf Lewison (2015) 437 [8.01] (ambiguity arises whenever meaning is ‘doubtful’). See also Lewison and Hughes (2012) 345 [8.01]. 236 EA Farnsworth, ‘“Meaning” in the Law of Contracts’ (1967) 76 Yale Law Journal 939, 954 (ambiguity ‘of term’); G Williams, ‘Language and the Law-II’ (1945) 61 LQR 179, 179 (‘words of multiple meaning’). In linguistics, this form of ambiguity is divided into homonymy and polysemy: see Cann (n 21) 8; Carter (2013) 365 [11-12]. 237 See [3-10]. 238 Hope v RCA Photophone of Australia Pty Ltd [1937] HCA 90, (1937) 59 CLR 348, 356 (Latham CJ). See also Raffles v Wichelhaus (1864) 2 Hurl & C 906; 159 ER 375 (KB) (two carriers named ‘Peerless’). 239 Grove Investments [2014] CSIH 43, [2014] Hous LR 35, 38 [9] (Lord Drummond Young) (for the Court). 240 Farnsworth, ‘“Meaning” in the Law of Contracts’ (n 236) 954. See also Cann (n 21) 9. 241 Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900. 242 ibid 2904 [9] (Lord Clarke) (‘The question is what was meant by “such sums”’). cf PS Davies, ‘Interpreting Commercial Contracts: A Case of Ambiguity?’ [2012] LMCLQ 26, 26. See further [6-17]–[6-20]. 243 Farnsworth, ‘“Meaning” in the Law of Contracts’ (n 236) 953; Williams (n 236) 179 (words with ‘fringe meanings’). 244 S Soames, ‘What Vagueness and Inconsistency Tell Us About Interpretation’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011).

76  Key Features of Contract Interpretation by nature. Instead, such words are rendered vague due to the manner in which they are used, for example, a sale of ‘your wool’.245 [3-51]  Closely connected with vagueness is ‘ambiguity in application’,246 which is also described as ambiguity by ‘omission’.247 It arises when the contract text does not address the disputed issue at all or when the text addresses the issue in broad terms, but with a lack of specificity. For example, a lease of ‘sound-reproduction equipment’ is ambiguous if the question is whether old or new equipment must be provided.248 To similar effect, a contract for security services merely stating that the contractor was ‘engage[d] … to provide the Service’ is ambiguous if the question is whether or not the engagement was exclusive.249 [3-52]   Ambiguity, in its various forms, is the main problem addressed through interpretation.250 Yet it is not clear, on current authority, how interpretation cures ambiguity.251 A choice or modification of meaning is said to be required.252 But it remains to be seen how such a choice is made.253 Occasionally, traditional maxims are invoked.254 However, the maxims have a limited scope of operation. Ultimately, as is demonstrated in this book, textual defects in a contract, including ambiguity, are resolved by weighing and balancing the competing arguments to arrive at the construction that was probably intended.

245 Macdonald v Longbottom (1860) 1 El & El 977; 120 ER 1177 (QB). 246 Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18, (1925) 36 CLR 60, 78 (Isaacs J); Carter (2013) 621 [18-28]. See also M Furmston and GJ Tolhurst, Contract Formation: Law and Practice, 2nd edn (Oxford University Press, 2016) 296–97 [11.17]–[11.18]. 247 Soames (n 244) 32 (‘the information [provided] is [not] sufficiently specific to answer the question, or questions, directing one’s inquiry’); Casson v Ostley PJ Ltd [2001] EWCA Civ 1013, [29] (Sedley LJ); Bromarin AB v IMD Investments Ltd [1999] STC 301, 310 (Chadwick LJ) (CA); Schuler [1974] AC 235, 268 (Lord Simon) (HL) (‘the contract [is] silent on a crucial point’). See also EA Farnsworth, ‘Disputes Over Omission in Contracts’ (1968) 68 Columbia Law Review 860. 248 Hope v RCA Photophone of Australia Pty Ltd [1937] HCA 90, (1937) 59 CLR 348, 356 (Latham CJ). 249 Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140 (discussed further at [7-19] (n 105)). 250 Cases of omission may also be resolved through implication: see [7-13]–[7-25]. 251 Not all ambiguity can be cured through interpretation. In a small number of cases, the contract is void for uncertainty: see [4-41]. In others, only a vague intention can be inferred from the choice of words in the contract, leaving work to be done in applying the contract through the process of factual characterisation: see [4-41]–[4-44] and [7-44]–[7-48]. And, in rare instances, evidence of subjective intention establishes a mutual mistake rendering the contract void: see, eg, Raffles v Wichelhaus (1864) 2 Hurl & C 906; 159 ER 375 (KB). 252 See, eg, Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8, (1968) 118 CLR 429, 436–37 (Barwick CJ); OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27, (2013) 85 NSWLR 1, 20 [61] (Allsop P). 253 See further [4-12]. 254 See, eg, [3-34]–[3-38] (linguistic or textual maxims). An election can also cure ambiguity: see, eg, Dann v Spurrier (1803) 3 Bos & P 399; 127 ER 218 (a lease for a term of ‘7, 14 or 21’ years was terminable by the lessee after 7 or 14 years); Lewison (2015) 449–57 [8.06]–[8.08]; Lewison and Hughes (2012) 359–68 [8.06]–[8.08].

Interpretive Problems  77

Inconsistency [3-53]   Inconsistency in a contract must be resolved through interpretation.255 Inconsistency arises when a part of the contract text contradicts another part,256 for example, an option to purchase land that prescribes contradictory modes for its exercise257 or a security trust deed that contains inconsistent provisions regarding distribution of trust funds.258 [3-54]  Traditionally, a number of discrete rules established a hierarchy for resolving inconsistency: negotiated terms override standard terms;259 the specific governs the general;260 words prevail over figures;261 the terms of a ‘host’ document take precedence over incorporated terms;262 and, perhaps most controversially, an earlier clause overrides a later clause.263 Inconsistent descriptions can also be reconciled by looking to see if one adequately and sufficiently explains a subject matter with certainty.264 [3-55]   The discrete rules are nowadays seen as a ‘last resort’.265 Instead, inconsistency is said to be resolved by ‘harmonising’ the contract, that is, by giving

255 See, eg, Grey v Pearson (1857) 6 HLC 61, 105–06 (Lord Wensleydale); Caledonian Railway Co v North British Railway Co (1881) 6 App Cas 114, 131 (Lord Blackburn) (HL); Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420, 426–27 (Dixon CJ and Fullagar J), 437 (McTiernan, Webb and Taylor JJ); MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Ltd [2017] UKSC 59, [2017] Bus LR 1610, 1621 [37] (Lord Neuberger) (‘the reconciliation of … terms’). But a contract may fail for uncertainty if it is irreconcilably inconsistent: see [4-41] (n 171). For examples of the resolution of inconsistency through interpretation, see [6-107]–[6-127]. 256 This includes contradictions between parts of the ‘whole contract’, eg, between transaction documents: Anderson’s Case (1877) 7 Ch D 75, 99–100 (Jessel MR) (CA). 257 George v Cluning (1979) 28 ALR 57, 61–62 (Mason J) (HCA). 258 Re Sigma Finance Corp [2009] UKSC 2, [2010] BCC 40 (discussed at [6-31]–[6-34]). 259 See, eg, Robertson v French (1803) 4 East 130, 136; 102 ER 779, 782 (Lord Ellenborough) (KB); Lewison (2015) 375–78 [7.04], 525–29 [9.10]; Lewison and Hughes (2012) 293–97 [7.04], 437–39 [9.10]; McMeel (2017) 111 [1.198]. But see Chacmol Holdings Pty Ltd v Handberg [2005] FCAFC 40, (2005) 215 ALR 748, 769 [93]–[95] (North and Dowsett JJ) (the principle is of questionable application in the case of ‘boilerplate’ precedents). 260 Generalia specialibus non derogant: Athlam’s Case (1610) 8 Co Rep 150, 154b–155a; 77 ER 701, 708–09 (Coke CJ) (KB); William Sindall Plc v Cambridgeshire CC [1994] 1 WLR 1016, 1024 (Hoffmann LJ) (CA); McMeel (2017) 111 [1.199]; Lewison (2015) 378–81 [7.05]; Lewison and Hughes (2012) 297–98 [7.05]. 261 See, eg, Saunderson v Piper (1839) 5 Bing NC 425, 431; 132 ER 1163, 1165 (Tindal CJ) (CP); Lewison (2015) 529 [9.11]; Lewison and Hughes (2012) 440 [9.11]. 262 See, eg, Modern Building (Wales) Ltd v Limmer & Trinidad Co Ltd [1975] 1 WLR 1281, 1289 (Buckley LJ) (CA); Lewison (2015) 530 [9.12]; Lewison and Hughes (2012) 441 [9.12]. 263 Unless the later clause can be read as qualifying the earlier clause: Australian Guarantee Corp Ltd v Balding [1930] HCA 10, (1930) 43 CLR 140, 151 (Isaacs J); Tsolon Investments Pty Ltd v Waffle Pod Footing Systems NSW Pty Ltd [2002] NSWCA 302, [36] (Heydon JA) (a ‘mechanical’ rule); Carter (2013) 152 [4-53]; Lewison (2015) 519–24 [9.08]; Lewison and Hughes (2012) 431–35 [9.08]. 264 See [3-58] (n 274) (the falsa demonstratio non nocet principle). 265 See, eg, Missing Link Network Integration Pty Ltd v Olamte Pty Ltd [2005] NSWSC 430, [68]–[69] (White J) (as regards the rule regarding later verse earlier clauses). cf Hume Steel Ltd v A-G Vic [1927] HCA 24, (1927) 39 CLR 455, 465–66 (Higgins J) (‘more or less artificial’ rules).

78  Key Features of Contract Interpretation harmonious meanings to inconsistent words or phrases.266 Under this approach, words are ‘read down’ and the meanings of words are modified so as to avoid inconsistency.267 But this is only possible if the inconsistency is partial. For example, the inconsistency in an option over land that stipulates contradictory modes of exercise cannot be resolved by harmonisation.268 Further, to rationalise the interpretive process as one of ‘harmonisation’ begs the question: on what basis does the court decide to read down one provision by reference to another? The objective intention of the parties must guide the process. Cases of inconsistency, like cases of ambiguity and cases of error, are resolved by analysing the arguments in favour of each interpretation so as to determine what was objectively intended.

Error [3-56]   Particularly in modern cases, construction is employed to correct ‘clear’ or ‘obvious’ errors in a contract.269 These are cases in which ‘something must have gone wrong with the language’.270 The errors that are fixed though interpretation fall into three categories. [3-57]   The first type of error is that which gives rise to ambiguity or inconsistency. These errors are easy to identify simply from the contract text.271 For example, a lease granting a right of re-entry upon breach of ‘any of the covenant hereinbefore contained’ includes an obvious error. This is because the use of the noun ‘covenant’ in the singular does not fit with the use of the adjective ‘any’.272 [3-58]   The second form of error is one of description. For example, a contract may be erroneously labelled, such as a charterparty described as a ‘bill of lading’.273 Such errors have traditionally been corrected, to the extent possible, by applying

266 Geys [2012] UKSC 63, [2013] 1 AC 523, 538 [24] (Lord Hope); William Sindall Plc v Cambridgeshire CC [1994] 1 WLR 1016, 1024 (Hoffmann LJ) (CA); Lewison (2015) 530–33 [9.13]; Lewison and Hughes (2012) 441–43 [9.13]. 267 Grey v Pearson (1857) 6 HLC 61, 106 (Lord Wensleydale); William Sindall Plc v Cambridgeshire CC [1994] 1 WLR 1016, 1024 (Hoffmann LJ) (CA). cf Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420, 426–27 (Dixon CJ and Fullagar J), 437 (McTiernan, Webb and Taylor JJ). 268 See George v Cluning (1979) 28 ALR 57 (HCA). 269 See, eg, Chartbrook [2009] UKHL 38, [2009] 1 AC 1101 (discussed at [6-28]–[6-30]); ICS [1998] 1 WLR 896 (HL) (discussed at [5-11]–[5-14] and [6-98]–[6-99]). See further East v Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111, 112 (Brightman LJ) (CA); Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1114 [22]–[25] (Lord Hoffmann); Calnan (2017) 122 [7.40]; Carter (2013) 82 [3-06]; Lewison (2015) 504–07 [9.04]; Lewison and Hughes (2012) 416–18 [9.04]; McMeel (2017) 521 [17.03]. 270 ICS [1998] 1 WLR 896, 913 (Lord Hoffmann) (HL). 271 See, eg, Mourmand v Le Clair [1903] 2 KB 216 (DC) (a loan requiring monthly repayments of ‘seven’ did not specify the denomination of the currency, ie, whether it was pounds or shillings). 272 Matthews v Smallwood [1910] 1 Ch 777 (Ch). 273 Adamastos Shipping Co Ltd v Anglo-Saxon Petroleum Co Ltd [1959] AC 133, 154 (Viscount Simonds) (HL) (‘a conspicuous example of the maxim’).

Interpretive Problems  79 the falsa demonstratio non nocet principle: a description that is partially correct and partially incorrect is applied to the extent that it is correct.274 [3-59]   The final form of error is that which gives rise to absurdity. The correction of errors of this type through interpretation has long been a feature of English law.275 However, it has become ‘a very significant feature’ of modern construction.276 This is largely due to the increased tendency to recognise error purely by reference to consequences.277 This can be seen, in particular, in the rent review cases.278 [3-60]   Once an error is identified, it is said to be ‘corrected’ through interpretation.279 However, an error can only be corrected, as a matter of interpretation, if there is both a clear mistake and a clear correction for the mistake.280 The process of correction is described in terms of linguistic modification: words can be added, replaced, modified or deleted.281 However, like the harmonisation approach in the case of inconsistency, to explain the correction of error in interpretation as involving the modification of words masks the true nature of the cognitive process. Cases of error, like cases of ambiguity and inconsistency, are resolved by evaluating the competing considerations to determine the objective intention of the parties.

Comment [3-61]  The fact that interpretation is needed to address deficiencies in the contract text tells a great deal about its cognition. The text is deficient because it gives rise to a lack of clarity regarding the objective intention of the parties: it is not clear what the parties intended with respect to a disputed aspect of the agreement. The parties either agree words that are ambiguous, agree words that

274 Lewison (2015) 507–13 [9.05]–[9.06]; Lewison and Hughes (2012) 418–26 [9.05]–[9.06]; Morrell v Fisher (1849) Ex 591, 604; 154 ER 1350, 1355 (Alderson B) (Ex); Administration of Territory of Papua and New Guinea v Guba [1973] HCA 59, (1973) 130 CLR 353, 449 (Gibbs J). To the extent that a legal description is involved, the proper approach is one based in legal characterisation: see [7-49]–[7-54]. 275 Bache v Proctor (1780) 1 Doug 382, 384; 99 ER 247, 247 (Buller J) (‘palpable mistake’); Wilson v Wilson (1854) 5 HLC 40, 66; 10 ER 811, 822 (Lord St Leonards) (‘clear mistake’). 276 McMeel (2017) 521 [17.03]. 277 See, eg, Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (HL); ICS [1998] 1 WLR 896 (HL). 278 See [3-24] (nn 114–15). 279 Wilson v Wilson (1854) 5 HLC 40, 66; 10 ER 811, 822 (Lord St Leonards); Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1114 [22]–[25] (Lord Hoffmann); McMeel (2017) 521 [17.03]. 280 See [3-56] (n 269). 281 Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420, 426–27 (Dixon CJ and Fullagar J); Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1114 [25] (Lord Hoffmann); McMeel (2017) 523–24 [17.08]–[17.10] (‘supplying’, ‘disregarding’ or ‘transposing’ words); Carter (2013) 81–86 [3-05]–[3-11]. But see Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47, [2011] SLT 184, 187 [11] (Lord Hope); Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1628 [18], 1629 [20] (Lord Neuberger).

80  Key Features of Contract Interpretation are inconsistent, or agree words in error. Each of these deficiencies is overcome by analysing the choice of words in the contract, in light of background, purposive and consequentialist considerations, so as to arrive at the interpretation that was probably intended. The different types of defect often give rise to similar types of interpretive dispute, that is, cases that involve a similar composition of ­underlying arguments. In a case of ambiguity, both parties can argue about the meaning of key words. Hence, the dispute is usually determined by looking for arguments beyond the clause or phrase under consideration. In some cases, the contentions beyond the provision in focus render the case quite one-sided or a determinative argument is conclusive.282 By comparison, in a case of inconsistency, the competing interpretations are anchored by conflicting parts of the text. Such a dispute is determined, in the first instance, by investigating which construction has a stronger foundation in the text, taken as a whole. However, if the text does not provide a clear answer, purposive or consequentialist factors are often ­determinative.283 Finally, cases of error are distinct from cases of ambiguity and inconsistency in that the conflict is between a literal or linguistic interpretation (ie, an interpretation advanced solely or predominantly by an argument regarding the meaning of the words) and a purposive or consequentialist construction (ie, a construction based primarily on an argument regarding contractual purpose or potential consequences).284 The extent to which the purposive or consequentialist construction is based in the contract text is often critical to the determination of the dispute.285 This is because the aim in interpretation is to infer objective intention from the choice of words in a contract. Textual deficiencies are resolved by evaluating the competing considerations so as to determine what was probably intended regarding the disputed aspect of the agreement.

3.5. Conclusion [3-62]   Contract interpretation is characterised by three indicia. First, conclusions in construction are drawn from a prescribed set of materials. Second, interpretation is governed by an array of bespoke principles that apply to specific textual features, certain types of contract or clause, and unique questions of interpretation. Third, interpretation is a tool that deals with textual deficiencies in the form of ambiguity, inconsistency and obvious error. These characteristics explain much about contract interpretation. The process is centred on building arguments from the admissible materials, namely, the text as a whole, the potential meanings for the words, the background, the objects served by the contract, the consequences



282 See

[6-05] and [6-09]–[6-25]. [6-07] and [6-107]–[6-127]. 284 See [6-06] and [6-35]–[6-106]. 285 See [5-63], [6-06] and [6-35]–[6-106] (in particular [6-80] and [6-105]–[6-106]). 283 See

Conclusion  81 of the competing interpretations, and normative considerations, such as business common sense and fairness. The traditional principles and maxims are illustrations of argumentation in interpretation. Each principle sets out a template for an argument that is triggered in unique circumstances. But those arguments are rarely determinative. Instead, an interpretive dispute is resolved by analysing the indicators of intention found in the contract text and the background to the transaction. The competing considerations are evaluated against each other to arrive at the probable intention of the parties: what the parties objectively intended with respect to the disputed aspect of the agreement. Through this process, deficiencies in the contract text are resolved. This explanation for contract interpretation not only fits with and explains its key features. More significantly, as is demonstrated in the next chapter, it follows from an analysis of those features.

4 A Unified Theory of Contract Interpretation 4.1. Introduction [4-01]  The theory of contract interpretation is controversial. As was ­demonstrated in chapter two, the subject is described in a multitude of ways. Lord Steyn has claimed that it is ‘too elusive to be encapsulated in a theory’.1 However, an analysis of the key features of the process reveals a unifying theory of interpretation. In particular, it establishes that contract interpretation is a four-stage process: the relevant question of interpretation is defined; competing constructions are put forward; supporting arguments are formulated; and the correct construction is chosen. The aim of the process is to infer the parties’ objective intention in answer to a particular question regarding the agreement. The intention is inferred from the choice of words in the contract. The competing arguments are composed from the relevant materials, namely, the contract as a whole, the potential meanings for the words, the background to the transaction, the objects served by the contract, the potential consequences of the competing interpretations, and any applicable normative considerations. The arguments are weighed and balanced to figure out what was intended by the choice of words in the contract. The end result is the definition of the agreement – the definition of the rules in the contract. [4-02]   The first part of this book demonstrates that the proposed approach to contract interpretation makes sense as a matter of theory. Chapter two analysed the different judicial and academic theories of interpretation and it showed that the proposed approach is an amalgam of those theories. Chapter three outlined the key features of interpretation and it established that the proposed approach fits with and explains those features. This chapter goes one step further. It demonstrates that the proposed approach follows from an analysis of the essential characteristics of interpretation. In particular, an analysis of the key features clarifies the aim and method of interpretation. The aim in interpretation is to infer objective intention from the choice of words in the contract. The court arrives at that object through a four-stage approach. 1 J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 123.

The Aim of Contract Interpretation  83

4.2.  The Aim of Contract Interpretation [4-03]   The aim in interpretation is to infer objective intention from the choice of words in the contract. Interpretation is not simply a process through which the meaning of words is ascertained – it involves more than choosing between competing meanings. This is the only way to make sense of the key features of interpretation: the prescribed materials act as indicators of intention; the discrete principles and maxims outline potential arguments regarding the intention of the parties; and the textual deficiencies addressed through interpretation are resolved by inferring what was intended from the choice of words in the contract. Hence, although reliance upon ‘objective intention’ has been criticised, the concept remains essential to understanding contract interpretation.

The Nature of Objective Intention [4-04]  ‘Intention’ is a difficult concept to define.2 It is essentially a state of mind.3 But it bears different shades of meaning depending on context.4 It is a useful construct in analysing any communication. In everyday conversation, the relevant ‘intention’ or state of mind is the thought or subject matter that the speaker aimed to convey by the communication. The goal is to infer the speaker’s state of mind (ie, the intended message) from the speaker’s words or conduct. To borrow from modern pragmatics, the ‘communicator provides evidence of her intention … which [intention] is inferred by the audience on the basis of the evidence provided’.5 As Endicott describes it, the aim of understanding a communication is to determine ‘the reasons that a speaker gives (by using the words that he or she uses) for another person to believe that the speaker has one intention or another’.6 [4-05]   A similar approach applies in construing a contract. The contract is effectively a joint communication by the parties to a third-party arbiter about how

2 See, eg, RA Duff, Intention, Agency and Criminal Liability: Philosophy of Action and the ­Criminal Law (Basil Blackwell, 1990) 15; N Naffine, R Owens and J Williams, ‘The Intention Project’ in N ­Naffine, R Owens and J Williams (eds), Intention in Law and Philosophy (Ashgate, 2001) 1. 3 Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919, 932 [6] (Lord Nicholls); G Leggatt, ‘Making Sense of Contracts: The Rational Choice Theory’ (2015) 131 LQR 454, 455 (a ‘mental state’); Duff (n 2) 28 (a ‘mental state’); T Starkie, A Practical Treatise on the Law of Evidence and Digest of Proofs in Civil and Criminal Proceedings (J & W T Clarke, 1824) 739 (‘intention consists in the internal and invisible resolve or determination of the mind’). 4 See, eg, Naffine, Owens and Williams (n 2) 1–2. 5 D Wilson and D Sperber, ‘Relevance Theory’ in LR Horn and G Ward (eds), Handbook of Pragmatics (Blackwell, 2004) 607 (Relevance Theory). 6 TAO Endicott, ‘Objectivity, Subjectivity, and Incomplete Agreements’ in J Horder (ed), Oxford Essays in Jurisprudence (Oxford University Press, 2000) 155.

84  A Unified Theory of Contract Interpretation the contractual relationship should be governed.7 It is necessarily forward-looking – a vision of the parties’ future relationship. On one view, it takes the form of an imperative command: it is an order by the parties regarding how the relationship is to be governed.8 The aim in construing the communication constituted by a contract is to infer what the parties collectively intended by it. The objective is to establish the bargain struck: the agreement.9 Hence, the focus is ‘intention’ in the broader sense of ‘intentionality’ and ‘intentional states’ – ‘intention’ as simply a mental state that is ‘directed at … objects and states of affairs in the world’.10 The making of the contract is an ‘intentional act’.11 It is a collective act directed to achieving a particular state of affairs.12 In this sense, a contracting party is ‘bound not so much because of what he intends but because of what he does’.13 He is bound by the making of the contract and by the ‘common objective intention’ that is the product of the bargaining process. The intention is ‘objective’ for three key reasons. [4-06]   First, objective intention is inferred from a prescribed and limited set of materials.14 In particular, it is derived from an analysis of the text in combination with background, purpose, results and normative factors.15 It cannot be inferred from direct evidence, such as testimonial or contemporaneous documentary evidence.16 [4-07]  Second, objective intention is ascertained from the perspective of a reasonable person; it is the reasonable person’s understanding of what was intended that is determinative.17 But this is not to say that the objective approach involves the imposition of a ‘postulated – or fictitious – author’,18 that is, a hypothetical 7 cf Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [22] (Lord Neuberger) (a document ‘intended by its originator[s] to convey information’); M Greenberg, ‘Legislation as Communication? Legal Interpretation and the Study of Linguistic Communication’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011). 8 cf HLA Hart, The Concept of Law, first published 1961, 3rd edn (Oxford University Press, 2012) 18–20. 9 cf A Burrows, A Restatement of the English Law of Contract (Oxford University Press, 2016) 44 §2 (the contract as an ‘agreement’). 10 JR Searle, Intentionality: An Essay in the Philosophy of Mind (Cambridge University Press, 1983) 1–3. 11 cf SA Smith, Contract Theory (Oxford University Press, 2004) 56 (the contract is a product of ‘intentional acts (ie, of the “will”)’ and ‘acts expressing an intention to undertake an obligation’). See also Searle, Intentionality: An Essay in the Philosophy of Mind (n 10) 164. 12 cf Searle, Intentionality: An Essay in the Philosophy of Mind (n 10) 1, 164. 13 PS Atiyah, Essays on Contract (Clarendon, 1990) 22. See also Endicott, ‘Objectivity, Subjectivity, and Incomplete Agreements’ (n 6) 151 (‘The content of an agreement is determined by the meaning of the conduct by which the parties agreed’). 14 Leggatt (n 3) 456, 475. 15 See [3-07]–[3-28]. 16 Otherwise than in exceptional circumstances: see [3-29]–[3-31]. 17 See [2-27]. 18 N Stoljar, ‘Postulated Authors and Hypothetical Intentions’ in N Naffine, R Owens and J Williams (eds), Intention in Law and Philosophy (Ashgate, 2001) 271. cf Lord Hoffmann, ‘The Intolerable Wrestle with Words and Meanings’ (1997) 114 South African Law Journal 656, 664 (‘imaginary, disembodied contracting parties’).

The Aim of Contract Interpretation  85 speaker standing in the place of the parties.19 Such an imposition is ‘a mere decision procedure or heuristic device, and probably not a very useful one’.20 Instead, the relevant intention is that which a reasonable third-party observer – the reasonable interpreter – would infer as the bargain struck by the parties in agreeing the contract.21 The focus is on what the parties to the transaction intended by agreeing the contract. The court analyses the relevant material and it infers what the parties probably intended in answer to the question of interpretation. [4-08]  Finally, objective intention is established by analysing the choice of words in the contract. As Leggatt J noted, extra-curially, the key enquiry in construction is as to which interpretation best explains why reasonable people with a shared intention that they were seeking to express would have chosen the particular language used to express that intention?22

In essence, it is the choice of words in the contract that provides the necessary insight into the minds of the parties. Using this insight, objective intention is inferred from the contract text. The focus is on what the parties meant or intended by using or choosing the words. Lord Hoffmann advocated such an explanation for interpretation.23 It is effectively borrowed from the philosophy of language.24 Hence, from the choice of words, ‘the lessee may offer to purchase the demised land’, it can be inferred that a grant of an option was intended.25 Similarly, by agreeing an exclusion from an assignment of ‘any claim (whether sounding in rescission for undue influence or otherwise)’, it can be inferred that only claims in rescission were meant to be excluded.26 What was objectively intended by the choice of words is established by analysing the use of words in context. The potential meanings for the words still play a key role. But it is a constituent role. Meanings are simply abstract definitions from which, in combination with other factors, the intent in using words is inferred. 19 cf Leggatt (n 3) 466. 20 Stoljar (n 18) 290. 21 See [2-28]. cf Leggatt (n 3) 470. Contrast Carter (2013) 382 [11-26] (the detached objectivity approach is ‘manifestly unappealing’). 22 Leggatt (n 3) 472. See also D McLauchlan, ‘A Better Way of Making Sense of Contracts?’ (2016) 132 LQR 577, 579. cf Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173, 1179 [10] (Lord Hodge) (Wood) (as quoted in [2-45]). 23 See, eg, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 914 (Lord Hoffmann) (HL) (ICS); Hoffmann (n 18) 658. See also Kirin-Amgen Inc v Hoechst Marion Roussel Ltd [2005] RPC 9, 193 [64] (Lord Hoffmann) (construction of a patent). cf Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24, (1982) 149 CLR 337, 401 (Brennan J) (‘[t]he internal and extrinsic context in which a word or phrase is used may throw light upon the meaning with which the parties must be taken to have used it’). 24 See generally L Wittgenstein, Philosophical Investigations, 2nd edn (Basil Blackwell, 1958). See also RC Stalnaker, ‘Introduction’ in RC Stalnaker (ed), Context and Content: Essays on Intentionality in Speech and Thought (Oxford University Press, 1999) 2 (‘Language is a device for achieving certain purposes’). 25 Watson v Phipps (1985) 63 ALR 321 (PC). 26 ICS [1998] 1 WLR 896 (HL) (discussed at [5-11]–[5-14] and [6-98]–[6-99]).

86  A Unified Theory of Contract Interpretation

Objective Intention and Linguistic Meaning [4-09]   In contract law, the parties’ objective intention and the meaning of the words used in a contract are usually regarded as one and the same.27 For example, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,28 the High Court of Australia remarked: 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.29

This reflects a contextualist tendency to deny the content of words absent an intention in using them:30 ‘[i]ntention cannot be separated from meaning’.31 [4-10]  Nonetheless, as Wigmore noted, the distinction between meaning and intention is ‘vital’ in legal interpretation.32 To similar effect, Gleeson CJ has remarked in the High Court of Australia: ‘The concepts of meaning and intention are related, but distinct’.33 The concept of meaning is the focus of semantics.34 In this field, meaning is broken down into intension (ie, the denotation of the property of a word) and extension (ie, the denotation of the potential referents of a word).35 A distinction is also drawn between ‘sense’ and ‘reference’.36 As Ho explains, by way of example: When I say the bank is broken, I mean bank in the sense associated with a river and I mean to refer to this river and not that river.37

Contract interpretation relies on the ‘sense’ of a word, or, to put it differently, its intension or extension. A given meaning for a word is simply a potential definition. It identifies the properties of the word and its potential referents.38 Objective intention, on the other hand, is a conclusion inferred through a unique process.39 27 See [2-10]. 28 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, (2004) 219 CLR 165. 29 ibid 176 [40] (the Court) (quoted in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3, (2008) 234 CLR 151, 174 [53] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ)). 30 See further [4-31]–[4-36]. 31 S Fish, ‘There is No Textualist Position’ (2005) 42 San Diego Law Review 629, 631. 32 JH Wigmore, A Treatise on the System of Evidence in Trials at Common Law (Little, Brown and Company, 1904) 3472 §2459. 33 Wilson v Anderson [2002] HCA 29, (2002) 213 CLR 401, 418 [8] (Gleeson CJ). 34 See further [2-39]–[2-42]. 35 R Cann, Formal Semantics (Cambridge University Press, 1993) 11–12. 36 See G Frege, ‘On Sense and Reference’ (1948) 57 The Philosophical Review 209, 210. 37 HL Ho, A Philosophy of Evidence Law (Oxford University Press, 2008) 16 [2.4.1] (emphasis in original). 38 See further [3-08] and [4-31]–[4-36]. 39 See [4-05]–[4-08].

The Aim of Contract Interpretation  87 It is a conclusion regarding the collective state of mind of the parties – a conclusion regarding what was agreed in the contract. The focus is on what can be inferred, about the state of mind of the parties, from the ‘use’ of words in the contract.40 In summary, to borrow from Wigmore, ‘the will to utter a specific word is one thing, and the fixed association of that word is another thing’.41 [4-11]   On a practical level, much more can be established as a matter of objective intention than a search for meaning permits. This can be seen in the correction of obvious error through interpretation42 and in the construction of vague contractual provisions.43 For example, intent to grant an option can be inferred from the agreement of a ‘Further Term: One term of 10 years’.44 But it is hard to see how such a conclusion can be reached simply by choosing a particular meaning.

Choice of Meaning [4-12]   Some cases of interpretation can be understood as turning on a choice of meaning, that is, a choice between competing meanings for words. These are usually cases of ambiguity, in particular, lexical ambiguity.45 For example, on one view, Prenn v Simmonds46 turned on a choice between a broad and narrow meaning for the abbreviation ‘RTT’.47 However, not all cases of interpretation can be explained on this basis.48 Cases involving the correction of error are a prominent example.49 In addition, even if a case can be understood in terms of a choice between competing meanings, it is not clear how such a choice is made.50 It is said to be guided by background,51 the ‘whole contract’,52 purpose,53 business common 40 For an examination of the ‘use’ of language, see further Wittgenstein (n 24). 41 Wigmore (n 32) 3473 §2459. Lord Hoffmann’s distinction between the meaning of words and ‘the meaning of the document’ can be understood in a similar light: see [2-13] and Hoffmann (n 18) 658. See also R McDougall, ‘Construction of Contracts: The High Court’s Approach’ (2016) 41 Australian Bar Review 103, 114. 42 See [3-56]–[3-60] and [4-16]. 43 See [3-50]. 44 Eastern Health v MIA Victoria Pty Ltd [2009] VSC 105, (2009) 22 VR 502, 516 [64] (Judd J). 45 See [3-47]–[3-52]. 46 Prenn v Simmonds [1971] 1 WLR 1381 (HL). 47 See further [5-05]–[5-10]. 48 cf Carter (2013) 422 [13-02] (a choice of meaning is only part of the process). But see ICS [1998] 1 WLR 896, 914 (Lord Hoffmann) (HL) (a choice ‘between competing unnatural meanings’); OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27, (2013) 85 NSWLR 1, 20 [61] (Allsop P). 49 See [4-16]. 50 Contrast the position under American law: see [4-35]. 51 See, eg, Robertson v French (1803) 4 East 130, 135; 102 ER 779, 781 (Lord Ellenborough) (KB); Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 391 (Lord Hoffmann) (HL) (Fagan). 52 See, eg, Australian Broadcasting Corp v Australasian Performing Rights Association Ltd [1973] HCA 36, (1973) 129 CLR 99, 109 (Gibbs J) (dissenting on the facts). 53 See, eg, Brennan v Permanent Trustee Co of NSW Ltd [1945] HCA 17, (1945) 73 CLR 404, 414 (Dixon J); Glynn v Margetson & Co [1893] AC 351, 357 (Lord Halsbury LC) (HL).

88  A Unified Theory of Contract Interpretation sense54 and even results.55 Further, ‘natural’ or ‘ordinary’ meanings are said to apply by default.56 However, ultimately, it seems that any choice of meaning must be dictated by the intention of the parties.57 As Leggatt J notes, extra-judicially: [T]o talk about what the words of an utterance are intended to mean is not just an optional figure of speech. It is essential to and inherent in any attempt to find a meaning in those words.58

In short, the only ‘correct’ meaning is the one that was objectively intended.59 Carter acknowledges this point.60 Likewise, for Lord Nicholls, ascertaining the intended meaning of words in a contract is the overriding aim in interpretation: The question posed by the law when interpreting a contract is thus: what would a reasonable person in the position of the parties understand was the meaning the words were intended to convey?61

Hence, to the extent that interpretation can be explained as a choice between meanings, objective intention still guides the way.

A Search for Objective Intention, Not Linguistic Meaning [4-13]   Contract interpretation must be understood as a process through which objective intention is inferred from the choice of words in a contract. It cannot simply be a technique used to ascertain linguistic meaning.62 This conclusion follows from an analysis of the key characteristics of interpretation.

54 See, eg, Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310, 313–14 (Kirby P) (CA); Miramar Maritime Corp v Holborn Oil Trading Ltd [1984] AC 676, 682 (Lord Diplock) (HL); Weardale Coal & Iron Co Ltd v Hodson [1894] 1 QB 598, 601 (Lord Esher MR) (CA). 55 See, eg, Re Sigma Finance Corp [2008] EWCA Civ 1303, [2009] BCC 393, 418 [99] (Lord Neuberger). 56 cf Carter (2013) 407 [12-27] (‘the standard of interpretation is presumed to be that of the community at large’); Calnan (2017) 79 (Principle 5: ‘Words are nearly always given their ordinary meaning in their context’). See also [3-11] (n 39). 57 See, eg, National Roads and Motorists Association v Whitlam [2007] NSWCA 81, (2007) 25 ACLC 688, 698 [59] (Campbell JA) (NSWCA) (‘A choice … needs to be made about which of the potential meanings of the word “loss” is intended to be the subject of this indemnity’) (emphasis added). 58 Leggatt (n 3) 466. 59 cf Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 775 (Lord Hoffmann) (‘intended meaning’) (HL) (Mannai); L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 256 (Lord Morris) (HL); A Kramer, ‘Common Sense Principles of Contract Interpretation (and how we’ve been using them all along)’ (2003) 23 OJLS 173, 176 (‘apparently intended meaning’); Leggatt (n 3) 468. 60 Under Carter’s model, the meanings for words in a contract are ascertained by reference to standards of interpretation which are themselves ‘chosen’ as a matter of intention: see Carter (2013) ch 12 (in particular, 393–95 [12-06]–[12-08]) and ch 13. 61 D Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 LQR 577, 579 (emphasis in original). 62 To the extent that interpretation can be understood in this way, any choice of meaning must be made as a matter of objective intention: see [4-12].

The Aim of Contract Interpretation  89 [4-14]   The most elementary feature of contract interpretation is that it involves drawing conclusions from a prescribed set of materials, namely, the text as a whole, potential meanings, background, purpose, results and normative factors. These materials are clearly relevant to inferring intention. For example, the use of a word with a particular established meaning can ground an inference of intention that aligns with that meaning. Similarly, a given construction is more probable, as a matter of intention, if it gives effect to the commercial purpose of the transaction or if it is the only interpretation that produces a sensible outcome. Even normative objectives and standards can guide an inference of intention if understood as values and beliefs attributed to the parties and, more importantly, to the reasonable interpreter.63 By contrast, it is hard to see how background, purpose and results are relevant to a choice of meaning.64 This is unless, of course, such a choice is made as a matter of intention.65 [4-15]   To similar effect, the various discrete principles invoked in construction, although often couched in terms of meaning, only make sense as guides to inferring intention.66 For example, the old linguistic maxims suggest that a particular meaning was intended,67 the rules regarding inconsistency suggest that one provision was meant to override another,68 and the policy-driven principles suggest that a particular interpretation was intended, either as a matter of fairness or to secure commercial certainty.69 [4-16]  Finally and most fundamentally, contract interpretation needs the breadth of inferred intention to fulfil its primary function as a tool employed to resolve deficiencies in the contract text. In this regard, linguistic meaning is clearly inadequate. The resolution of lexical ambiguity, vagueness or inconsistency may be explained through a choice of meaning,70 but such a choice must be made as a matter of inferred intention.71 More critically, in a case of omission72 or obvious error,73 it cannot sensibly be said that a choice of meaning resolves the dispute. In the case of omission, the specific words are simply absent.74

63 See further [2-28], [2-44], [4-07] and [5-50]. 64 However, a potential meaning may be established from background, as in the case of a customary or trade meaning: see [3-09](b). 65 See [4-12]. 66 See, eg, Lewison and Hughes (2012) 333 [7.13] (noscitur a sociis). cf Leggatt (n 3) 469. 67 See [3-34]–[3-38]. 68 See [3-54]. 69 See [3-39]–[3-44]. 70 See [3-47]–[3-52] (ambiguity) and [3-53]–[3-55] (inconsistency). 71 See [4-12]. But see Kramer (n 59) 191 (‘it is fictional to say that a particular meaning reasonably appears to have been intended when it does not even appear to have crossed the communicator’s mind’) (emphasis in original). 72 See [3-51]. 73 See [3-56]–[3-60]. 74 cf S Soames, ‘What Vagueness and Inconsistency Tell Us About Interpretation’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011) 32 (‘the information [provided] is [not] sufficiently specific to answer the question, or questions, directing one’s inquiry’).

90  A Unified Theory of Contract Interpretation In the case of obvious error, the words cannot ‘legitimately bear’75 the requisite meaning. For example, ‘inconsistent’ cannot mean ‘consistent’,76 ‘offer’ cannot mean ‘option’,77 and ‘12 January’ cannot mean ‘13 January’,78 without undermining the utility of language as a means to crystallise rights and obligations.79 Nor can construction be understood as both a process through which meaning is ascertained and a process through which words are corrected. This would render the process circular and self-fulfilling. Conclusions regarding the object of the process (ie, what the words mean) could be facilitated by simply changing the words as a matter of ‘correction’. This is an inaccurate explanation for the reasoning involved in such cases. [4-17]   By comparison, the resolution of ambiguity, inconsistency and obvious error can be easily explained if interpretation is understood as a process directed to inferring objective intention. This is because there is greater flexibility and breadth in inferences of intention than there is in conclusions regarding meaning. Hence, from the agreement to incorporate terms ‘insofar as inconsistent’, it could be inferred that the parties objectively intended to incorporate terms so far as consistent.80 Likewise, from the agreement in a lease that the lessee could ‘offer to purchase’ land, it could be inferred that the grant of an option was objectively intended.81 However, in each case, it is a stretch to reach the same conclusion as a matter of linguistic meaning. On a similar basis, it is hard to see how a choice of meaning can explain the conclusion that a service provider is engaged exclusively when the contract merely provided that the contractor was ‘engage[d] … to provide the Service’.82 The conclusion is derived as a matter of inferred intention. In short, linguistic meaning cannot explain how interpretation is used to get what is needed from the contract text so as to regulate the bargain. Despite its criticism, objective intention is a better guide.

75 Borrowed from Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 458 (Lord Steyn) (HL). For other cases discussing the scope to apply meaning to words, see Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40, [2010] 1 AC 180, 187 [4] (Lord Phillips) (‘an alternative meaning that the words … can[not] naturally bear’); McCowan v Baine [1891] AC 401, 403 (Earl of Selborne) (HL) (‘if the words will bear it’); Fagan [1997] AC 313, 388 (Lord Mustill) (HL) (a meaning which words ‘cannot fairly bear’); EJR Lovelock Ltd v Exportles [1968] 1 Lloyd’s Rep 163, 167 (Edmund Davies LJ) (CA) (‘a quite extraordinary connotation’). 76 Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420. 77 Watson v Phipps (1985) 63 ALR 321 (PC). 78 Mannai [1997] AC 749 (HL). See further [5-24]; PS Davies, ‘Interpreting Commercial Contracts: A Case of Ambiguity?’ [2012] LMCLQ 26, 28. 79 See further [4-31]–[4-36]. However, party-specific meanings can be established by appropriate means: see [3-12]. 80 Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420. 81 Watson v Phipps (1985) 63 ALR 321 (PC). 82 Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140 (discussed further at [7-19] (text at n 105)).

The Aim of Contract Interpretation  91

Criticisms of Objective Intention [4-18]   Reliance on objective intention is criticised on at least four bases. The first criticism is that objective intention is artificial.83 It is not meant to represent the parties’ actual states of mind.84 Hence, it is argued that there is a contradiction inherent in … giving effect to individual intentions but … seek[ing] to ascertain those intentions through objective means. The protection of the subjective by reference to the objective is illogical.85

Essentially, the objective approach is said to present a ‘paradox’.86 The aim cannot be to ascertain intention, so the argument goes, if the parties’ subjective states of mind are to be ignored. A simple response is that intention, as a state of mind, can only ever be inferred from evidence.87 This is the case in everyday communications: ‘(without telepathy) the best that the interpreter can hope for is to discover the apparently intended meaning of the communicator’.88 And, as Lord Hoffmann notes, the proposition applies equally in legal interpretation: ‘the notion of interpretation according to subjective intent is a logical contradiction’.89 It also holds true in the case of conclusions regarding states of mind in other legal contexts. For example, the criminal court or jury cannot see into the mind of an accused. It can only draw inferences regarding the accused’s intent from the admissible evidence (albeit such evidence may include direct evidence of intention from the accused). The objective approach to inferring intention in construction is no different as a matter of basic principle. It is simply that the process of inference is modified by restricting the admissible evidence and by adopting a particular focus.90 In short, objective intention is not an arbitrary ‘fiction’. It is the product of a complex system for weighing and balancing competing arguments so as to define a disputed aspect of the agreement. It is the ‘outcome’ of ‘the process of interpretation’.91 [4-19]   The second basis for criticism of objective intention is a corollary of the first. What is the point of employing the concept of ‘intention’ if the parties’ actual states of mind are irrelevant? To borrow from Sir George Leggatt, ‘[i]f actual intentions are irrelevant, what purpose, if any, is served by using the language of

83 See, eg, McMeel (2017) 32 [1.50], 42–44 [1.68]–[1.71]. See also Z Chafee, ‘The Disorderly Conduct of Words’ (1941) 41 Columbia Law Review 381, 398–99. 84 See [2-09]. 85 A Mason, ‘The Contract’ in PD Finn (ed), Essays on Contract (Lawbook Co, 1987). 86 Leggatt (n 3) 456. See also H Collins, ‘Objectivity and Committed Contextualism in Interpretation’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 199. 87 See Starkie (n 3) 739; Duff (n 2) 28. 88 Kramer (n 59) 176 (emphasis in original). 89 Hoffmann (n 18) 660–61. 90 See [4-04]–[4-08]. 91 Borrowed from Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184, (2014) 89 NSWLR 633, 654 [77] (Leeming JA).

92  A Unified Theory of Contract Interpretation “intention” at all?’92 A straightforward answer is that we use our everyday understanding of ‘intention’ to infer what was objectively intended by the contract as a form of communication; that is, in construction, the court relies on its understanding of intention and intentionality. Judges look to their understanding of how rational persons act, behave and think when holding a particular state of mind.93 For example, the court assumes that parties wish to avoid unreasonable outcomes, including results that would undermine the commercial object of a transaction.94 [4-20]   The third criticism of objective intention is that it is collective in nature. Even accepting that intention can only ever be inferred from evidence, how does one infer the joint state of mind of two or more parties? ‘How can there be “an intention” when the communicator is a group of two people?’95 The answer is that, in interpretation, objective intention is inferred based on ‘collectivise[d] reason’96 or ‘collectivised behaviour’.97 The making of the contract is a collective act.98 The parties agree the contract as a bargain. It is a collective statement. As Kramer notes: [W]e are talking about agreements, for which the problem [of having two authors] does not arise, since to have made an agreement the parties must have known or intended that it would have only one meaning (that is what an agreement means).99

To similar effect, Lord Wilberforce noted in Prenn v Simmonds:100 The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’.101

Hence, the ultimate aim in construction is to define the ‘agreement’, in particular, the rules that make up the contract. The parties are bound by that definition.102 [4-21]   The final objection to objective intention is advanced on a moral or normative basis. Adopting an objective approach, the intention that is inferred

92 Leggatt (n 3) 456. 93 Hence, it may be accurate to say that ‘what is commonly called “the intention of the parties” is in large measure the intention of the judge’: Chafee (n 83) 401–02. 94 See further [5-19] and [5-50]. 95 Kramer (n 59) 194. 96 P Pettit, ‘Collective Intentions’ in N Naffine, R Owens and J Williams (eds), Intention in Law and Philosophy (Ashgate, 2001) 241. 97 J Searle, The Construction of Social Reality (Simon & Schuster, 1995) 24–25. See also MJ Detmold, ‘Intention: Meaning in Relation’ in N Naffine, R Owens and J Williams (eds), Intention in Law and Philosophy (Ashgate, 2001) 188–89. 98 See [4-05]. 99 Kramer (n 59) 195. 100 Prenn v Simmonds [1971] 1 WLR 1381 (HL). 101 ibid 1385 (Lord Wilberforce). 102 cf Hoffmann (n 18) 664 (‘A written contract is a document which binds the parties according to the interpretation it would be given by a reasonable person’); Wasa International Insurance Co Ltd v Lexington [2008] EWCA Civ 150, [2008] Bus LR 1029, 1046 [46] (Sedley LJ) (‘It is the rule of law and the principle of finality which forms part of it which make the meaning and effect of a contract whatever a court of competent jurisdiction holds them to be’) (overturned on other ground: see [2009] UKHL 40, [2010] 1 AC 180).

The Method of Contract Interpretation  93 in a given case of interpretation may not coincide with an intention established by direct evidence.103 On one view, if the document cannot be rectified, this presents a moral problem: contract law is often justified on the basis that ‘contractual obligations are voluntarily undertaken’.104 However, such criticism can be rejected for institutional and pragmatic reasons. We cannot define a contract in terms of a coincidence between mental states. Judges are not ‘psychics who [can] delve into the parties’ minds to ascertain original intent’.105 It is the act of agreeing the contract that binds the parties.106 The point of ‘the contract’ is that, upon formation, it crystallises rights and obligations.107 The parties achieve commercial certainty. The parties are bound by the words agreed. Through interpretation, the court infers what intent it can from the choice of words in the contract; that is, it is not restricted to ascertaining what the words mean. The objective intention of the parties is established through a four-stage process.

4.3.  The Method of Contract Interpretation [4-22]  Contract interpretation involves the inference of objective intention from the choice of words in the contract. But how does one arrive at the objective intention of the parties? An analysis of the key features of interpretation leads to five conclusions regarding the interpretive method. First, interpretation involves four steps: define the question of interpretation; identify competing constructions; formulate arguments in support; and choose the correct construction by evaluating the arguments. Second, argumentation in construction is logical and propositional: interpretive arguments are composed from the admissible materials as a matter of probability and inductive logic. Third, interpretation relies on the notion that words have abstract objectively identifiable meanings. Fourth, the balancing act in construction involves the resolution of conflict between competing indicators of intention; the correct interpretation is the one that is established to the highest degree of probability. Finally, the scope to infer intention through the four-stage interpretive process is limited by the interpretive materials available.

103 See further D McLauchlan, ‘The Contract That Neither Party Intends’ (2012) 29 Journal of Contract Law 26; Leggatt (n 3) 474. Contrast D McLauchlan, ‘Common Intention and Contract Interpretation’ [2011] LMCLQ 30, 48 (‘courts are highly unlikely nowadays to give a meaning to contractual terms that is inconsistent with a clearly proven consensus of the parties’). 104 Leggatt (n 3) 457–58. See also Calnan (2017) 13 [1.02]. 105 Mellon Bank NA v Aetna Business Credit Inc, 619 F 2d 1001, 1009 [10] (Cahn J) (3rd Cir, 1980). 106 cf Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55, (2004) 218 CLR 471, 483 [35] (the Court). 107 cf Leggatt (n 3) 474 (‘it is fair and respects [the autonomy of the parties] to treat them as reasonable people who have chosen the language of the contract and intended it to create rights and obligations’); Carter (2013) 44 [2-06] (‘intention to contract signifies a commitment to the contract institution’).

94  A Unified Theory of Contract Interpretation

A Four-Stage Process [4-23]  Contract interpretation must be understood as a four-stage process: define the question; identify competing answers; formulate underlying arguments; and choose the correct answer. The interpretive process necessarily follow this structure because of its key characteristics. [4-24]  Each instance of interpretation involves the resolution of a discrete question regarding the agreement – a discrete question of construction.108 Due to a deficiency in the contract text, the agreement is unclear in some respect. For this reason alone, the interpretive exercise must begin with the definition of the question in dispute. However, there is also another reason why interpretation logically starts with the question of construction. It derives from the fact that conclusions in interpretation are drawn from a prescribed set of materials: the text as a whole, the potential meanings for the words, the background, and so on. The question of construction must be defined at the start of the interpretive enquiry because it guides the search through the admissible materials. It is only once the question is defined that one can search the materials to identify factors that support one interpretation or another. This is because the materials – the text as a whole, the potential meanings for the words, the background, and so on – are only relevant as indicators of intention.109 The materials indicate what the parties probably intended in answer to the question of interpretation. Hence, the interpretive process must start with the definition of the relevant question. [4-25]   Looking to the remaining steps in the process, contract interpretation is a technique employed to resolve a dispute between the parties.110 It follows that the second stage of interpretation involves identifying potential answers to the relevant question. The question of interpretation is defined and each party puts forward an ‘interpretation’. The next step in construction is argumentation. With the question defined and potential answers identified, arguments in favour of each interpretation are formulated from interpretive materials. Arguments are drawn from the text as a whole, the potential meanings for the words, the background, and so on. This leaves the evaluation of the competing considerations to be undertaken in the final stage of the process. The court weighs and balances the rival arguments to determine the construction that was probably intended. Hence, the different interpretive materials are not considered in sequence.111 The full range of interpretive arguments are considered at once. This is why the Supreme Court of the United Kingdom has described interpretation as an ‘iterative’ and ‘unitary’ exercise.112 The relevant materials must be scanned, often repeatedly, to identify

108 See

[2-23] and [3-46]. [4-14]. 110 See [2-23]–[2-25]. 111 See further [2-32]. 112 See [2-34]. 109 See

The Method of Contract Interpretation  95 arguments in favour of each interpretation and the correct construction is determined by evaluating the arguments as a whole. [4-26]   On one view, the proposed four-stage approach to contract interpretation is too simplistic: it merely reflects the adversarial process in action. Any aspect of the common law can be explained as a process through which questions in dispute are resolved. However, the unique point about contract interpretation is that it is the only adequate explanation for the process.113 Contract interpretation must be understood as a four-stage process that is punctuated by the evaluation of interpretive arguments, in particular, arguments about the meaning of words, the objects served by the contract, and the practical consequences. This is the only way to explain interpretation at a level of sophistication that is warranted by both its complexity and its prevalence in contract law. In particular, it is the only way to understand how interpretive disputes are resolved. A question of interpretation is answered by weighing and balancing the arguments in favour of each interpretation, adopting a principled approach. Hence, it is fair to say that interpretation is driven by its argumentation and that, therefore, understanding argumentation in construction is fundamental to understanding the interpretive method.

Logic and Argumentation [4-27]   Contract interpretation involves conclusions drawn from a prescribed set of materials, namely, the text as a whole, potential meanings, background, purpose, results and normative factors. From those materials, the court is able to infer objective intention in answer to a particular question. The court is able to draw such an inference by evaluating arguments about the probable intention of the parties – arguments about what was intended by the choice of words in the contract. Those arguments are constructed as a matter of propositional logic and inference. [4-28]   In evidence, an inference is a ‘conclusion’ regarding the ‘truth’ of a fact ‘draw[n] … from information’.114 In propositional logic, inference is ‘a process by which one proposition is arrived at and affirmed on the basis of some other proposition or propositions’.115 Inferences can be drawn deductively or inductively.116 In a deductive argument, the conclusion necessarily follows from the underlying

113 Statutory interpretation has been explained in a similar way: see N MacCormick and RS Summers, ‘Interpretation and Justification’ in N MacCormick and RS Summers (eds), Interpreting Statutes: A Comparative Study (Dartmouth, 1991). 114 IH Dennis, The Law of Evidence, 4th edn (Sweet & Maxwell, 2010) 4 [1.1]. 115 IM Copi, C Cohen and K McMahon, Introduction to Logic, 14th edn (Pearson, 2011) 5 [1.2]. 116 ibid 24–27 [1.5].

96  A Unified Theory of Contract Interpretation propositions.117 In an inductive argument, the conclusion is only established as a matter of probability.118 [4-29]   Inductive logic explains argumentation in interpretation. Each potential construction is effectively an asserted proposition. It is an alleged formulation of the disputed aspect of the agreement: an alleged intention. The relevant interpretive materials (ie, the text, potential meanings, background, and so on) constitute the underlying premises from which inferences are drawn in support of each construction; that is, the interpretive materials are building blocks used to construct inductive arguments in favour of one interpretation or another.119 For example, in crude terms, it could be argued that parties to a hypothetical contract probably intended rule X by agreeing clause Y because: (i) rule X conforms with the apparent meaning of the words in clause Y; (ii) rule X would give effect to the broader object of the transaction; or (iii) the opposing formulation of the rule would give rise to absurd consequences. [4-30]   Interpretation involves different types of argument. The type of argument is dictated by the nature of the factor or factors giving rise to the argument. For example, a ‘linguistic’ argument is based on a potential meaning for a word or phrase, a ‘purposive’ argument relies on an apparent object of the contract, a ‘consequentialist’ argument is put together by looking to the consequences of the competing interpretations, and so on. In essence, each party seeks to ‘justif[y] [its] interpretations by appropriate arguments … [and] the arguments are classifiable into different types’.120 It is important to bear in mind the different types of interpretive argument because interpretive disputes involve reoccurring argument patterns (ie, familiar contests between particular types of argument), and arguments of a similar argument composition are decided in a similar way. Linguistic arguments are the most prominent form of argument. These arguments depend on the concept of meaning.

The Role of Meaning [4-31]   ‘Meaning’ is a flexible concept. In everyday communication, meaning is often associated with the state of mind of the speaker or audience: ‘The meaning of

117 For example, all humans are mortal; Socrates is human; therefore, Socrates is mortal: see Copi, Cohen and McMahon (n 115) 26 [1.5]. 118 For example, most corporate lawyers are conservative; A is a corporate lawyer; therefore, A is conservative: see Copi, Cohen and McMahon (n 115) 26 [1.5]. cf Dennis, The Law of Evidence (n 114) 4 [1.1] (‘truth’ is necessarily ‘a question of probability’ due to ‘the limits of human knowledge’). 119 cf Copi, Cohen and McMahon (n 115) 5 (‘With propositions as building blocks, we construct arguments’). 120 Borrowed from MacCormick and Summers in the context of statutory interpretion: see ­MacCormick and Summers (n 113) 511.

The Method of Contract Interpretation  97 words chosen by a speaker comprises the idea those words prompt in his mind or in the mind of the hearer’.121 In semantics, the concept of meaning is more objective: a word has a definitional meaning and a meaning in the sense of its real-world referents.122 The semantic search usually focuses on the latter.123 In contract law, ‘meaning’ is a term used in a number of senses.124 It can refer to the various categories of meanings,125 the effect of the contract as a whole,126 or ‘the application of the instrument to a particular case’.127 [4-32]  Contract interpretation relies upon the semantic concept of meaning, in particular, the notion that words have abstract meanings in the form of definitions.128 This follows from its argumentation. Interpretive arguments are built propositionally, as a matter of inductive logic, from admissible materials. The most common form of argument is an argument based on the meanings of words: a linguistic argument. A potential definition for a word is relied upon as evidence of what was intended by the choice of words in the contract. For example, in Prenn v Simmonds,129 each party relied on a different meaning for the abbreviation ‘RTT’. Each meaning tended to establish a different intention in agreeing that the share sale was triggered when ‘the aggregate profits of RTT’ exceeded a certain threshold.130 In short, meanings, in the form of abstract definitions, are essential to argumentation in construction. Definitional meanings are the primary source from which the court infers what was intended by the choice of words in the contract. They are the materials used to decipher the text. [4-33]   Under English common law, an objective approach is taken to ascertaining potential meanings for words in a contract. Meanings are established by reference to categories.131 They are taken from dictionaries, proved by contextual evidence, or derived by judicial notice.132 Only in limited circumstances is a meaning established by relying on evidence from the parties, that is, by relying on evidence of the meaning attached by both parties.133 Instead, the words have abstract meanings that can be objectively identified by the court.

121 Nicholls (n 61) 578. 122 Cann (n 35) 11–12. cf Wigmore (n 32) 3472 §2459 (‘meaning’ as ‘sense’: ‘the fixed association between the uttered word and some external object’). See further [3-08] and [4-10]. 123 Cann (n 35) 13. 124 Carter (2013) 422 [13-02] (‘The concept of “meaning” is a specialised one’). 125 See [3-09]. 126 See [2-13] (the ‘meaning of the contract’). 127 A Robertson ‘The Foundations of Implied Terms: Logic, Efficacy and Purpose’ in S Degeling, J Edelman and J Goudkamp (eds), Contract in Commercial Law (Thomson Reuters, 2016) 150 (meaning in an ‘applicative’ sense). 128 See [3-08] and [4-09]–[4-10]. 129 [1971] 1 WLR 1381 (HL). 130 See further [5-05]–[5-10]. 131 See [3-09]. 132 See [3-11]. 133 See [3-12].

98  A Unified Theory of Contract Interpretation [4-34]   The notion that words have abstract objectively identifiable meanings is described as the concept of ‘semantic autonomy’: [T]he ability of symbols – words, phrases, sentences, paragraphs – to carry meaning independent of the communicative goals on particular occasions of the users of those symbols.134

Several jurists and scholars appear to deny the concept of semantic autonomy in contract interpretation. For example, McLauchlan states: The truth is that no words have a fixed or settled meaning. Rather it is some person who gives a meaning to them. There is either a person who uses them to convey his or her meaning or a person who hears or reads them and gives them a meaning of his or her own.135

To similar effect, Lord Nicholls has remarked extra-curially: Words used as a medium of communication do not have a ‘meaning’ of their own. They do not have a ‘meaning’ independently of the person who utters them or the person who hears them.136

In the American context, Fish states the position in even stricter terms: [L]exical items and grammatical structures by themselves will yield no meaning – will not even be seen as lexical items and grammatical structures – until they are seen as having been produced by some intentional agent.137

[4-35]   The contention that words have no meanings apart from those attached by a speaker (or audience) derives from a subjective (or at least partly subjective) approach to construction. For example, the American approach to determining the meaning of words in a contract is ‘neither fully objective nor fully subjective’: it is ‘an approach that includes elements of both objectivity and subjectivity’.138 Potential meanings are effectively derived from the parties; that is, the court determines the meanings ‘attached’ by the parties by analysing ‘any evidence that is ordinarily admitted to prove a state of mind’, including ‘a party’s own admissions’.139 If both parties ‘attach’ the same meaning to a word, that meaning applies. On the other hand, if the parties ‘attach’ different meanings, the meaning attached by one party in good faith applies so long as the other knew or had reason to know of it. Otherwise, no meaning applies and the parties are not ad idem.140 134 F Schauer, Playing by the Rules (Clarendon Press, 1991) 55. 135 D McLauchlan, ‘Contract Interpretation: What is it About?’ (2009) 31 Sydney Law Review 5, 18. 136 Nicholls (n 61) 578–79. 137 Fish, ‘There is No Textualist Position’ (n 31) 635. See also S Fish, ‘Don’t Know Much About the Middle Ages: Posner on Law and Literature’ (1988) 97 Yale Law Journal 777, 778 (‘Words are intelligible only within the assumption of some context of intentional production’). 138 MN Kniffin, ‘Interpretation of Contracts’ in JM Perillo (ed), Corbin on Contracts, rev edn (Lexis Law Publishing, 1998) vol 5, 25 §24.6. 139 ibid 63 §24.10. 140 See American Law Institute, Restatement (Second) of Contracts (1981), §201; Kniffin (n 138) 15–30 §24.5–§24.6. See also G Rosen, ‘Textualism, Intentionalism and the Law of Contract’ in A Marmor and

The Method of Contract Interpretation  99 [4-36]   The objective theory reigns supreme in the common law of contract.141 The contract has the effect of crystallising rights and obligations. It is ‘a legal institution designed to create enforceable promises with the necessary degree of reliability and precision’.142 Hence, to achieve this objective, words must have abstract definitions that a court can identify without resort to what the parties say the words mean. By contrast with the American approach, the contract cannot fix obligations only to the extent, and in the manner, that the parties say the words bear a particular meaning. In short, under English common law, objectively identifiable abstract meanings are needed to facilitate the contract as a communication between the parties and the court.143 The court must have a means by which to give content to the words used. Otherwise, the words would be empty symbols and the communication would fail.144 The communication constituted by the contract does not fail, however, because the words in it carry an inherent range of potential meanings. Like in the case of everyday communications, the parties and the court share this common reservoir of meanings. This is what facilitates the contract as an objective means of communication. As Mitchell notes: [P]rovided my friend and I share the same conventional understanding of the colour that people in our community generally call ‘black’, and the animal that such people call ‘a cat’, she can understand my meaning … if I tell her ‘my cat is black’.145

In other words, a shared understanding of the meaning of words is the ‘universal’ or ‘baseline’ context needed for any communication to be effective.146 In contract interpretation, abstract objectively identifiable meanings are the primary material relied upon to infer objective intention from the contract text. However, the apparent meaning of the words in a contract is not necessarily determinative.

The Nature of the Balancing Exercise [4-37]   The aim in interpretation is to infer objective intention from the choice of words in a contract. The court arrives at the correct interpretation by weighing and balancing the competing considerations. The interpretation that prevails is the S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011) 153 (references to ‘personal’ or ‘attached’ meanings are ‘ubiquitous in modern writing about contracts’). A similar approach applies at international level: see International Institute for the Unification of Private Law, UNIDROIT Principles of International Commercial Contracts (2010), art 4.2 (‘The statements and other conduct of a party shall be interpreted according to that party’s intention if the other party knew or could not have been unaware of that intention’). 141 See, eg, Smith v Hughes (1871) LR 6 QB 597, 607 (Blackburn J) (QB); Australian Broadcasting Corp v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 549 (Gleeson CJ) (NSWCA) (the ‘general test of objectivity is of persuasive influence in the law of contract’); Taylor v Johnson [1983] HCA 5, (1983) 151 CLR 422, 428–29 (Mason ACJ, Murphy and Deane JJ) (‘the objective theory [is] in command of the field’). 142 Hoffmann (n 18) 664. 143 See further [4-05]. 144 The court can only look to the meanings attached by the parties in limited circumstances: see [3-12]. 145 Mitchell (2019) 8–9. 146 Schauer (n 134) 57.

100  A Unified Theory of Contract Interpretation one that is established to the highest degree of probability. The range of interpretive materials illustrates the nature of the balancing exercise. That is to say, some of the interpretive materials are naturally in conflict. For example, it is often the case that an interpretation supported by the apparent meaning of a key word or phrase sits in tension with a construction that makes sense looking to the object of the transaction or the consequences of the competing constructions. Interpretation is the process through which such conflict is resolved. As McLauchlan notes, construction ‘is dependent on how one balances internal textual considerations and external factors’.147 Likewise, McKendrick remarks that a ‘balance [is] struck by the courts between the need to pay careful attention to the language used by the parties and the concern of the court to give effect to the perceived commercial purpose of the clause or contract in issue’.148 [4-38]   Many scholars claim that the balancing act in interpretation is a matter of judicial preference. That is to say, some judges appear more inclined to infer intention from the meaning of words rather than from background, purposive or consequentialist considerations.149 Such a preference may be driven by a desire to secure certainty and objectivity at the expense of flexibility and common sense.150 [4-39]   It is certainly true that, during the twentieth century, it became accepted that objective intention could be readily inferred from purposive and consequentialist considerations.151 However, it has also been argued that, in the last decade, there has been a shift back to linguistic or textual justification: a ‘change of emphasis’.152 For example, Burrows observes that there appears to have been a subtle move to steer interpretation back towards the words used as the primary factor of importance as against, for example, commercial common sense.153 147 D McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ [2015] LMCLQ 406, 436–37. 148 E McKendrick, ‘The Interpretation of Contracts: Lord Hoffmann’s Re-Statement’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 140–41. 149 cf HG Beale, Chitty on Contracts, 33rd edn (Sweet & Maxwell, 2018), 1038 [13-043] (‘differences of emphasis rather than principle’) (Chitty); Calnan (2017) 8 [Pr 38] (‘a matter of judgement, which will depend on the approach of the judge concerned’); Mitchell (2019) 6. Contrast ZX Tan, ‘Beyond the Real and the Paper Deal: The Quest for Contextual Coherence in Contract Interpretation’ (2016) 79 MLR 623, 637 (‘it is incomplete and reductive to think primarily in terms of judicial attitudes to “formalism” or “contextualism”’). 150 cf J O’Sullivan, ‘Absurdity and Ambiguity – Making Sense of Contract Construction’ (2012) 71 CLJ 34, 35 (‘the desire for commercial certainty versus individual justice’). See further [3-28]. 151 Prenn v Simmonds [1971] 1 WLR 1381, 1384 (Lord Wilberforce) (HL); Calnan (2017) 52 [4.20] (‘We are all contextualists now’); McMeel (2017) 30–33 [1.45]–[1.52]; J Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433, 440 (‘The purposive approach … has prevailed’); A Burrows, ‘Construction and Rectification’ in A Burrows and E Peel (eds), Contract Terms (Oxford University Press, 2007) 84 (‘We have moved from a literalist to a contextual approach’); M Furmston, Cheshire, Fifoot, and Furmston’s Law of Contract, 17th edn (Oxford University Press, 2017) 171 (‘contextualism is now king’); J O’Sullivan, ‘Say what you mean and mean what you say: Contract Interpretation in the House of Lords’ (2009) 68 CLJ 510, 510. 152 Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, [2016] 1 CLC 712, 730 [58] (Beatson LJ). See also Lord Sumption, ‘A Question of Taste: The Supreme Court and the Interpretation of Contracts’ (2017) 17 Oxford University Commonwealth Law Journal 301, 309, 312–13. 153 Burrows, A Restatement of the English Law of Contract (n 9) 87 §14(2).

The Method of Contract Interpretation  101 To similar effect, Calnan claims: There is a distinct chill in the air … The Supreme Court, under the influence of Lord Neuberger, has stressed that the main focus should be on the natural meaning of the words the parties have used, and that twisting the meaning of those words to reflect commercial common sense should be a minority sport.154

And Mitchell states: While outwardly remaining committed to the basic contours of Lord Hoffmann’s contextualism, recent Supreme Court decisions on contract interpretation have signalled a retreat from Lord Hoffmann’s expansive method in favour of a more limited approach to determining contract meaning. While one would not go so far as to say we are witnessing a turn towards literalism in interpretation, higher courts have reasserted the importance of upholding the plain meaning of language in contract interpretation and have sought to curb reliance on commercial common sense as a general interpretative criterion.155

The shift in approach is arguably demonstrated by cases such as Arnold v Britton,156 Thompson v Goblin Hill Hotels Ltd,157 and Electricity Generation Corp v Woodside Energy Ltd.158 On one view, these cases stand in contrast with earlier decisions, in particular, ICS,159 Royal Botanic Gardens and Domain Trust v South Sydney City Council,160 Chartbrook Ltd v Persimmon Homes Ltd161 and Rainy Sky SA v Kookmin Bank.162 The alleged change in focus has been lauded by some163 and derided by others.164 For example, McLauchlan notes: [T]here has undoubtedly been a distinct change in attitude involving a more conservative approach to contract interpretation under which disputes should be resolved primarily on the basis of textual analysis with limited resort to external context, including considerations of commercial common sense, so that a court should depart from

154 See, eg, Calnan (2017) vii. 155 Mitchell (2019) 2. 156 Arnold v Britton [2015] UKSC 36, [2015] AC 1619 (discussed at [6-100]–[6-104]) (see, in particular, [2015] AC 1619, 1628 [17]–[18] (Lord Neuberger)). 157 Thompson v Goblin Hill Hotels Ltd [2011] UKPC 8, [2011] 1 BCLC 587 (discussed at [6-82]–[6-87]). 158 Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7, (2014) 251 CLR 640 (discussed at [6-121]–[6-126]) (Electricity Generation). 159 ICS [1998] 1 WLR 896 (HL) (discussed at [5-11]–[5-14] and [6-98]–[6-99]). 160 Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45 (discussed at [6-45]–[6-48]). 161 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 (discussed at [6-28]–[6-30]). 162 Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 (discussed at [6-17]–[6-20]). 163 See R Havelock, ‘Return to Tradition in Contract interpretation’ (2016) 27 King’s Law Journal 188, 197–208, 212–13; RC Connal, ‘Has the Rainy Sky Dried Up? Arnold v Britton and Commercial Interpretation’ (2016) 20 Edinburgh Law Review 71, 76 (‘a clear shift back toward primary focus on the words used’). 164 See K Loxley, ‘Intention, Meaning and the Case for Reform of Contract Interpretation in Australia’ (2012) 21 Griffith Law Review 637, 638 (‘too strict an adherence to the notion of plain meaning’); JW Carter, W Courtney and G Tolhurst, ‘“Reasonable Endeavours” in Contract Construction’ (2014) 32 Journal of Contract Law 36, 64 (‘simply blind literalism’); McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ (n 147) 422.

102  A Unified Theory of Contract Interpretation what it perceives to be the plain meaning of a contract only in exceptional circumstances. This starts to look very much like the traditional approach.165

By contrast, Havelock claims that the apparent shift is likely to reduce lack of transparency and intelligibility to the reader (and resulting uncertainty and unpredictability) because it primarily gives effect to the actual language used; implicitly respects its common or conventional meaning; and does not usurp the function of implication and rectification.166

This echoes the simple justification for the traditional textual focus identified by Atiyah and Smith: [T]he context in which contract drafters use words is one in which words are meant to be understood narrowly or literally.167

However, Mitchell suggests that contextual, and in particular relational considerations, may be relied upon to determine the correct preference in a given case, one way or another; that is, the solution may rest in identifying a set of criteria to apply to contractual relationships that allow courts to negotiate between the different strategies the parties might adopt during the course of performance and which might indicate whether a more formal or more contextual approach is appropriate when dealing with the dispute.168

[4-40]   Despite the apparent academic consensus that literalism has enjoyed a renaissance, the Supreme Court of the United Kingdom denies any change in approach.169 As a matter of theory, there is no reason why judicial preference must play a role (or any significant role). The relevant materials act as indicators of intention, that is, indicators of what was intended by the choice of words in the contract. In some cases, the apparent meaning of a word is a better indicator of what was intended than the object of the transaction or the consequences of the competing interpretations. In others, the inverse applies: the purpose of the contract or the practical consequences are a better indicator of intention. Each case involves the same approach. That is to say, the correct interpretation 165 D McLauchlan, ‘The ICS Principles: A Failed “Revolution” in Contract Interpretation?’ (2016) 27 New Zealand Universities Law Review 263, 284. 166 Havelock (n 163) 213. See also L Macgregor, ‘Crossing the Line between Business Common Sense and Perceived Fairness in Contract Interpretation’ (2015) 19 Edinburgh Law Review 378, 383 (‘cross[ing] the line between (acceptable) business common-sense and (unacceptable) fairness … [can] impact negatively on contractual certainty’); Mitchell (2019) 2. 167 P Atiyah and SA Smith, Atiyah’s Introduction to the Law of Contract, 6th edn (Oxford University Press, 2005) 147. 168 C Mitchell, Contract Law and Contract Practice: Bridging the Gap between Legal Reasoning and Commercial Expectation (Hart Publishing, 2013) 244. 169 Wood [2017] UKSC 24, [2017] AC 1173, 1178–80 [8]–[15] (Lord Hodge). See also McMeel (2017) 47 [1.79] (‘the [recent] change of emphasis … is over-stated’), 52 [1.88] (‘[t]he pendulum may have swung back a little to loyalty [to the text] over the last decade’), 103 [1.181] (‘an important change of emphasis’), 109 [1.189] (‘the pendulum can be said to be swinging towards literalism … or more kindly, textualism’); Mitchell (2019) 2.

The Method of Contract Interpretation  103 is determined by identifying the set of arguments that establishes the objective intention of the parties to the highest degree of probability. The aim is to infer objective intention from the choice of words in the contract. Hence, one must look at the document as a whole to understand the nature of the transaction and the practicalities of the competing interpretations. The interpretation that makes sense in light of the whole contract is usually the one that prevails. The court strives to identify a probable intention and, in most cases, it finds one. However, on occasion, objective intention cannot be inferred at all or it can only be inferred in a broad sense.

The Scope to Infer Objective Intention [4-41]   In contract interpretation, objective intention is inferred from the choice of words in a contract. The product of the interpretive exercise is the definition of the agreement. The scope to infer what was agreed in a contract, as a matter of objective intention, is limited by the range of interpretive materials available. The court can only infer the intent permitted by the words, taken in context. An alleged interpretation must be grounded by the choice of words in the contract; it must have a clear textual foothold. Hence, intention cannot be inferred through interpretation if the contract text is too uncertain, that is, if the parties use language that is not referrable to any tangible or intangible objects,170 or if the contract is irreconcilably inconsistent.171 In such (relatively rare) cases, since no intention can be inferred, the relevant contractual provision, or the contract as a whole, is void for uncertainty.172 If, however, intention can be inferred from the choice of words in a contract, the interpretive process is not subject to significant doctrinal limits; most doctrinal rules can be modified or displaced by clear contractual agreement.173 [4-42]   Ordinarily, interpretation is employed to define a rule in a contract.174 Once a rule in a contract is defined, it is given effect according to the principle of freedom of contract.175 That is to say, the rule is applied. A rule in a contract is applied by determining whether the components in the rule are satisfied – whether

170 See, eg, Fitzgerald v Masters [1956] HCA 53, (1956) 95 CLR 420 (a clause in a sale of land contract purported to incorporate non-existent terms); Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 (CA) (an employment agreement included as remuneration ‘the option to participate’ in a non-existent share scheme). 171 See, eg, EJR Lovelock Ltd v Exportles [1968] 1 Lloyd’s Rep 163 (CA) (an arbitration clause was inconsistent as to forum); National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365 (NSWCA) (a loan agreement contained inconsistent provisions regarding interest). 172 See further Chitty (n 149) 296–301 [2-148]–[2-156]; NC Seddon and RA Bigwood, Cheshire & Fifoot Law of Contract, 11th Australian edn (LexisNexis Butterworths, 2017) ch 6. 173 See further [7-06]. 174 See further [7-06] and [7-08]. 175 See [7-05].

104  A Unified Theory of Contract Interpretation the rule is ‘triggered’.176 This is a process of factual characterisation.177 For example, in Prenn v Simmonds,178 the disputed rule related to the type of profits that could count towards a threshold for a share sale. Once the rule was defined, the profits alleged to meet the threshold needed to be characterised to determine whether the profits fell within the intended ‘type’.179 [4-43]   Through interpretation, a rule in a contract is defined in light of the particular dispute. Hence, in most cases, once the rule is defined, it is clear whether or not the rule applies. For example, returning to Prenn v Simmonds,180 the definition of the type of profits required under the rule made it clear that sufficient profits had been made.181 As MacCormick notes: In short: rules can be ambiguous in given contexts, and can be applied one way or the other only after the ambiguity is resolved. But resolving the ambiguity in effect involves choosing between rival versions of the rule … once that choice is made, a simple deductive justification of a particular decision follows.182

[4-44]   The difficulty is that, in some cases, the definition of a rule through contract interpretation does not always lead to a simple deductive application. This is because the means to define the rule eventually ‘run out’.183 The court can only go so far in inferring what was intended by analysing the choice of words in the contract. As a result, in these cases, the court can only ascertain what was intended in a general sense; that is, the relevant rule in the contract is defined in broad terms. This leaves work to be done in applying the rule. Hence, it can be difficult to determine, as a matter of interpretation, cases dealing with unforeseen circumstances.184 Likewise, if the parties use ‘general evaluative terms’,185 such as ‘reasonableness’,186 it is hard to infer a more specific rule through construction.187

176 Ali v Petroleum Co of Trinidad and Tobago [2017] UKPC 2, [2017] ICR 531, 534 [6], 537 [14] (Lord Hughes) (an implied rule). 177 See [7-45]–[7-48]. 178 [1971] 1 WLR 1381 (HL). 179 See [5-05]–[5-10] and [7-46]. 180 [1971] 1 WLR 1381 (HL). 181 See [5-05]–[5-10] and [7-46]. The proper characterisation of the profits that were in fact made was not in dispute: the only profits that exceeded the threshold were group profits. Hence, the case turned on the proper interpretation of the contract. 182 N MacCormick, Legal Reasoning and Legal Theory (Oxford University Press, 1994) 67–68. 183 cf B Bix, Law, Language and Legal Determinacy (Oxford University Press, 1995) 25. 184 See [7-48]. 185 T Endicott, ‘The Value of Vagueness’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011) 17. 186 ibid 17–18. See further [7-47]. 187 Such equivocation is often ‘deliberate’: McMeel (2017) 7 [1.05]–[1.06]. cf Wood [2017] UKSC 24, [2017] AC 1173, 1179 [11] (Lord Hodge) (‘the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms’). See also Endicott, ‘The Value of Vagueness’ (n 185) 26–27; Soames (n 74) 40. But note Electricity Generation [2014] HCA 7, (2014) 251 CLR 640 (interpretation was employed to define the nature of a ‘reasonable endeavours’ obligation) (discussed at [6-121]–[6-126]).

Conclusion  105 In these cases, much work remains in establishing whether the components of the rule are satisfied, that is, through factual characterisation.188 Hence, the scope to infer objective intention through interpretation is not limitless. It is confined by the interpretive materials available.

4.4. Conclusion [4-45]  Contract interpretation involves the inference of objective intention from the contract text. It is not simply a search for the meaning of words. Objective intention is inferred through a four-stage process: the question of interpretation is defined; competing constructions are put forward; underlying arguments are ventilated; and the correct construction is chosen by evaluating the arguments. The interpretive method is driven by its argumentation. Interpretive arguments are built propositionally from the admissible materials. The potential meanings for the words form one basis for argument. That is to say, objective intention is inferred by analysing potential definitions for words in the contract – abstract definitions that are, almost exclusively, objectively ascertainable. However, interpretation does not turn solely on linguistic considerations. It involves the resolution of conflict between competing arguments through a careful balancing exercise. In most cases, a probable intention can be inferred from the choice of words in the contract. But, on occasion, no intent can be inferred at all or it can only be inferred in broad terms. [4-46]   The first part of this book has demonstrated that contract interpretation fits a particular theoretical mould. An analysis of the key features of interpretation clarifies both the aim of the exercise and the method that is employed to arrive at that object. It outlines a framework for understanding cognition in contract interpretation – a framework for understanding what it is that judges are doing when construing a contract. The second part of this book builds on that framework. Through empirical analysis, the interpretive process is explained in greater detail. It is explained by reference to the reasoning evident in leading cases on contract interpretation. As a whole, the book demonstrates that, both in theory and in practice, contract interpretation is a four-stage process through which objective intention is inferred from the choice of words in a contract.



188 See

[7-45]–[7-48].

106

part ii The Practice of Contract Interpretation

108

5 The Cognition of Contract Interpretation: A Four-Stage Process 5.1. Introduction [5-01]   Contract interpretation is in the nature of a legal technique. To understand interpretation, one needs to explore its cognition; that is, one needs to understand what is actually involved in construing a contract. The first part of this book outlined a unified theory of contract interpretation. It set out a theoretical framework for interpretive reasoning. The aim in interpretation is to infer objective intention from the choice of words in a contract. The process involves four steps: define the question of interpretation; formulate potential answers to the question (ie, potential ‘interpretations’); identify arguments in support of each interpretation; and choose the correct interpretation by evaluating the rival contentions. The remainder of this book explores the practice of contract interpretation. It explains the interpretive process in greater detail and it outlines the role of interpretation in contract law. Through empirical investigation, the second part of the book proves that the proposed approach to interpretation reflects the interpretive process in action. The research was empirical because it involved the analysis of leading cases as evidence of judicial reasoning. The focus was on those parts of judgments in which rules and principles were applied – not on the parts in which judges merely stated rules and principles.1 Through empirical examination, the second part of this book serves four aims. First, it explains the cognition of contract interpretation by verifying (and building on) the theory outlined in the first part of this book. Second, it explores how interpretive disputes are resolved. Third, it distinguishes between interpretation and related techniques. Fourth, it explains how interpretation and related techniques are employed to apply contract doctrine. [5-02]  This chapter outlines the cognition of contract interpretation. It describes what is required in each stage of the process. It builds on the theoretical framework set out in the first part of this book. But it is based on empirical



1 For

a more detailed account of the empirical investigation, see [1-38]–[1-41].

110  The Cognition of Contract Interpretation research: a close analysis of the reasoning evident in leading English and Australian cases.2 The focus was on those parts of judgments in which judges engaged in the interpretive process, that is, those parts in which judges resolved interpretive problems by analysing admissible materials. The aim was to investigate ‘what it is [courts] are doing [in construction]’.3 Hence, the cases were relied upon as ‘instructive examples of the construction process in action’.4 The empirical investigation confirmed that interpretation is a four-stage process and it revealed a great deal about what is required in each stage.5 A summary of the four stages of interpretation is set out below. 1. First, the question of interpretation is framed as a matter of objective intention: what did the parties intend, by choosing the words in the contract, in relation to the disputed aspect of the agreement? The subject matter of the question varies depending on the dispute. A single case can involve multiple questions of interpretation. 2. Second, competing answers to the question are identified. Each answer is a potential ‘interpretation’ or ‘construction’. It is a vision of what was agreed. In most cases, it is a proposed definition for a disputed rule in the contract. Parties can plead interpretations in the alternative. 3. Third, arguments in support of each construction are built propositionally from interpretive materials, namely, potential meanings, the text as a whole, background, purpose, potential results, and normative factors. For example, the fact that an important word or phrase has a recognised meaning often advances one interpretation over others; that is, it suggests that that interpretation was probably intended. The third stage in interpretation is the most time-consuming. It involves scanning the relevant materials, often repeatedly, to identify potential arguments. In most cases, each construction is advanced by a number of contentions, and each argument involves a complex chain of reasoning. Precedent plays only a limited role: it provides templates for potential arguments. 4. Finally, the correct interpretation is chosen by evaluating the strength of the arguments and balancing the competing contentions. The correct interpretation is the one that is established to the highest degree of probability. A choice between potential interpretations often involves the striking of a balance between linguistic emphasis and purposive or consequentialist justification. However, the aim is to infer objective intention from the choice of words in the contract. Hence, a textual focus is always applied. 2 See Table of Cases, ‘Leading English and Australian Cases on Contract Interpretation’ (35 decisions of the Supreme Court of the United Kingdom, the House of Lords and the High Court of Australia). For a detailed explanation of selected cases, see ch 6. 3 Borrowed from R McDougall, ‘Construction of Contracts: The High Court’s Approach’ (2016) 41 Australian Bar Review 103, 114. 4 ibid 114 (applying a similar research approach). 5 For a more detailed account of this aspect of the empirical investigation, see [1-38]–[1-40].

The Interpretive Process in Action  111 [5-03]  The proposed approach to interpretation explains how any ­written contract is construed.6 The unique principles and preferences that apply to specific contracts or clauses are simply accommodated within the process; that is, the ­principles and preferences merely provide potential bases for argument.7 The purpose of this chapter is to explain the four-stage process in detail, both by way of example and by outlining what is required in each stage of the process.

5.2.  The Interpretive Process in Action [5-04]   To understand contract interpretation, one must observe the interpretive process in action. That is to say, one needs to analyse how the technique is applied by judges and lawyers. This book claims that the cognition of contract interpretation is evident in the reasoning employed in leading cases – it is illustrated in those parts of judgments in which judges engage in the interpretive process. Two of the seminal interpretation cases are Prenn v Simmonds8 and Investors Compensation Scheme Ltd v West Bromwich Building Society.9 Each of those cases is analysed below to explain the nature of the interpretive exercise.

Prenn v Simmonds10 [5-05]  Prenn v Simmonds is one of the key cases cited in support of the modern approach to contract interpretation. It is a good case to use to explain the interpretive process in action because it illustrates a number of important elements: the significance of defining the question of interpretation; the distinction between competing interpretations; the full range of interpretive arguments; the propositional manner in which such arguments are built; and the way in which the competing arguments are evaluated to arrive at the correct construction.

6 An almost identical approach is employed to determine the content of an instrument created by one party, such as an assignment, contractual notice, trust deed or other deed poll: see, eg, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) (ICS) (an assignment) (discussed at [5-11]–[5-14]); Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (HL) (Mannai) (a contractual notice) (discussed at [5-24]); Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [20]–[21] (Lord Neuberger) (a will); Re Sigma Finance Corp [2009] UKSC 2, [2010] BCC 40 (Re Sigma) (security trust deed) (discussed at [6-31]–[6-33]); McMeel (2017) 23 [1.33]; Carter (2013) 139–40 [4-36]–[4-37]. The main distinction is that, in the case of a unilateral instrument, the focus is on the intent of an individual rather than a collective: see further [4-20]. By comparison, a largely different approach is taken to determining the content of an oral or partly oral contract: see [7-10]–[7-12]. 7 See [3-33]–[3-45], [5-53] and [5-57]. cf Carter (2013) 137–38 [4-33]–[4-34]; McMeel (2017) 38–39 [1.61]–[1.63] (‘The principles of construction are universal’). 8 Prenn v Simmonds [1971] 1 WLR 1381 (HL). 9 ICS [1998] 1 WLR 896 (HL). 10 Prenn v Simmonds [1971] 1 WLR 1381 (HL).

112  The Cognition of Contract Interpretation [5-06]   The facts of the case are straightforward. In 1959, Prenn acquired all of the ordinary shares in Radio and Television Trust Ltd (RTT Ltd). Simmonds was an employee of one of its subsidiaries, Airmec Ltd. Prenn had acquired RTT Ltd mainly to secure the services of Simmonds. He paid £160,000 in cash, with £294,716 to be paid by four annual instalments. Coinciding with his acquisition of RTT Ltd, Prenn agreed to sell shares in RTT Ltd to Simmonds. However, pursuant to clause 2(b) of the share sale agreement, the sale was conditional upon ‘[t]he aggregate profits of RTT earned during the four years ending August 19, 1963 and available for dividend on … ordinary stock units [exceeding £300,000]’. The contract relevantly stated: A. In this agreement the following words and expressions shall have the meanings set opposite them: ‘RTT’ Radio and Television Trust Limited … … B. 1. 2.

3.

[Prenn agrees to sell shares in Radio and Television Trust Limited to Simmonds for £6,600.] The provisions of clause 1 hereof shall not take effect unless and until any one of the following conditions has been satisfied: (a) The said sum of £294,716 has been paid or satisfied in full on or before the due dates for payment thereof under the contract out of monies provided by RTT redeeming its preference stock units out of its profits which would otherwise be available for dividend; or (b) The aggregate profits of RTT earned during the four years ending August 19, 1963 and available for dividend on the ordinary stock units for the time being issued whether declared or not shall have amounted to £300,000 after payment or provision for income tax and profits tax … The provisions of clause 1 shall not take effect if at any time before August 20, 1963 Dr Simmonds ceases to be employed by RTT either directly or through any of its subsidiaries by reason of his own act or is dismissed for gross misconduct and at the time of such termination neither of the conditions in clause 2 shall have been fulfilled.11

[5-07]   The RTT group earned more than £300,000 during the set four-year period. However, these profits were not distributed up the chain to RTT Ltd. Hence, the profits of RRT Ltd did not exceed the threshold. Simmonds claimed that he was entitled to the shares in RTT Ltd pursuant to the share sale agreement. But Prenn denied that the threshold in clause 2(b) was satisfied. Hence, the question of interpretation was directed to the type of profits that counted towards the threshold. Did the parties objectively intend that only profits that reached



11 Emphasis

added.

The Interpretive Process in Action  113 RTT Ltd would count? Or were group profits to be counted? As Lord Wilberforce put it: What profits, then, are contemplated by [clause 2(b)]? The profits of the RTT group, including Airmec, or only such separate profits as reach RTT as holding company?12

[5-08]   Prenn’s construction was that only RTT Ltd profits could count towards the threshold. His interpretation was advanced by two linguistic arguments. The first was that the term ‘RTT’ was defined as ‘RTT Ltd’ in the definitions section of the contract. Such an argument would ordinarily carry great force, but the contract also used the abbreviation to reference the RTT group. (For example, clause 3 referred to Simmonds being ‘employed by RTT either directly or through any of its subsidiaries’, and it was a background fact that Simmonds was employed by Airmec Ltd (a member of the RTT group) rather than by RTT Ltd itself.)13 Prenn’s second argument was also not particularly persuasive. It was based on the use of the term ‘aggregate profits’ in clause 2(b). Prenn argued that this term denoted holding company profits because the same phrase allegedly had this denotation in relevant companies legislation. This argument failed because: (i) the phrase did not have such a meaning in the legislation; and (ii) even if it did, it could not have such a meaning in clause 2(b) because RTT Ltd did not trade.14 Hence, Prenn put forward an interpretation with a linguistic foundation, albeit not a particularly strong one. [5-09]   By comparison, Simmonds argued that, on a proper interpretation of clause 2(b), group profits must be counted, and his interpretation was advanced on numerous bases. First, as already mentioned, the abbreviation ‘RTT’ was used in clause 3 to refer to the RTT group.15 Hence, it could be argued that, in clause 2(b), ‘RTT’ meant ‘the RTT group’. Second, it was common background that RTT Ltd prepared consolidated group accounts that dealt with RTT Ltd and group profits as one and the same.16 Third, the clause 2(b) reference to profits ‘earned’, giving that word its ordinary meaning, suggested that group profits must be counted because RTT Ltd did not trade.17 Fourth, it was established accounting practice that group profits would ordinarily be ‘available for dividend’ on holding company stock.18 Fifth, it was clear from the text and background that the profit threshold had been agreed as an incentive for Simmonds to generate profits for the RTT group.19 12 [1971] 1 WLR 1381, 1388B (HL). 13 See ibid 1386A, 1386F, 1388H–1389A (Lord Wilberforce). 14 ibid 1389C–F (Lord Wilberforce). 15 ibid 1386F, 1388H–1389A (Lord Wilberforce). 16 ibid 1388C–F (Lord Wilberforce). 17 ibid 1387D, 1388H (Lord Wilberforce). 18 ibid 1389A (Lord Wilberforce). 19 ibid 1388G (Lord Wilberforce). Under clause 2, the sale was to go ahead if either: (a) £294,716 in profits were paid through the redemption of preference shares (still held by the vendor); or (b) £300,000 in profits were earned by ‘RTT’. Relevant background included that: (i) Simmonds was employed by Airmec Ltd, a subsidiary of RTT Ltd; (ii) Prenn acquired RTT Ltd to secure the services of Simmonds; (iii) Prenn paid £160,000 in cash, with £294,716 to be paid over four years; and (iv) group profits were treated as profits available to RTT Ltd.

114  The Cognition of Contract Interpretation This commercial purpose would be frustrated if group profits were not counted under clause 2(b). Finally, Prenn effectively controlled whether dividends were passed upstream to RTT Ltd and he also controlled the other share sale threshold, that is, the redemption of preference stock under clause 2(a). Hence, on his construction, he would have retained an absolute discretion to sell to Prenn. Such a result could not have been intended.20 [5-10]   The interpretation put forward by Simmonds was accepted by the House of Lords.21 And it is obvious why. The arguments pointed overwhelming in his favour. Prenn appeared to have the better linguistic justification. After all, ‘RTT’ was defined to mean ‘RTT Ltd’. However, the use of the term in clause 3 was sufficient to ‘dispel the idea that the draftsman had in mind any segregation of RTT (qua parent) from the rest of its group’.22 Hence, Prenn’s construction had a weak linguistic footing and it lacked a sensible commercial explanation. By comparison, the interpretation advanced by Simmonds was justified linguistically and as a matter of commercial common sense.23 The dispute was essentially quite onesided; the correct inference of intention was patently clear. The same cannot be said with respect to ICS.

Investors Compensation Scheme Ltd v West Bromwich Building Society24 [5-11]  ICS is famous for Lord Hoffmann’s five-point statement of principle. However, it is also significant due to the ‘radical nature of the decision’.25 Unlike Prenn v Simmonds, it was not a simple case of multiple meanings. Rather, it was a case of obvious error:26 ‘something must have gone wrong with the language’.27 It was a more difficult case because the arguments were finely balanced. [5-12]   A statutory fund was set up to compensate investors in a failed mortgage investment scheme. It was administered by the Investors Compensation Scheme Ltd (ICS). In exchange for compensation, each investor was to assign claims 20 See ibid 1388H (Lord Wilberforce). 21 ibid 1389G (Lord Wilberforce) (Lord Reid, Lord Donovan and Lord Pearson agreeing). cf ibid 1390B–C (Lord Diplock) (‘such doubts as I have [regarding the question of interpretation] are not strong enough to justify my differing from the remainder of your Lordships’). 22 ibid 1389A (Lord Wilberforce). This meant the reference to ‘RTT’ in clause 2(b) was ‘perfectly neutral’: ibid 1388H (Lord Wilberforce). 23 See ibid 1389G (Lord Wilberforce). 24 ICS [1998] 1 WLR 896 (HL). 25 A Burrows, ‘Construction and Rectification’ in A Burrows and E Peel (eds), Contract Terms (Oxford University Press, 2007) 93. See also PS Davies, ‘The Meaning of Commercial Contracts’ in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann: A Festschrift in Honour of Lord Leonard (Hart Publishing, 2015) 218. 26 See further [3-56]–[3-60]. 27 [1998] 1 WLR 896, 913D (Lord Hoffmann) (HL).

The Interpretive Process in Action  115 against responsible parties. The assignments were effected on a standard form. Section 4 was the operative provision. The focus of the assignment was the assignment of claims against financial advisers (described in section 4 as the ‘participant firm’). But the assignment, by section 4(6), also extended to ‘third-party claims’, which relevantly included claims against solicitors and financier building societies. Section 4 of the claim form relevantly stated: 1. I/we agree that my/our rights against the participant firm in respect of the claim shall pass to Investors Compensation Scheme Ltd (‘ICS’) on payment of compensation pursuant to the Financial Services (Compensation of Investors) Rules 1990 (‘the rules’) … 3. I/we acknowledge that under the rules on payment of the amount of £20,345.15 I/we will no longer have the right to make a claim against the participant firm in respect of the claim and that any such right will be vested in ICS pursuant to the rules, and I/we further acknowledge that any sums which would otherwise be payable to me/us … shall be paid instead to ICS … 5. I/we agree that in the event of my/our receiving any moneys or assets in respect of the claim from the participant firm … I/we will forthwith pay or transfer them to ICS 6. I/we hereby assign absolutely to ICS each and every third party claim and the benefit thereof … 7. ICS agrees and acknowledges that in the event that it recovers any moneys in respect of a third party claim, it will pay to you a sum equivalent to the aggregate of [the moneys recovered by ICS, less the amount of compensation paid to the investor (and interest and costs)]. 12. In this document, ‘third party claim’ means any right, claim or cause of action which the claimant has or may have against any person other than the participant firm or against any fund or property in the hands of any person other than the participant firm and arising out of the circumstances giving rise to the claim or otherwise relating to the claim.28

Section 3(b) was the focus of the dispute. It excluded from the assignment certain claims against building societies. Section 3(b) stated: ICS agrees that the following claims shall not be treated as a ‘third party claim’ (as defined in section 4 of this form) for the purposes of this agreement and that the benefits of such claims shall enure to you absolutely: Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the building society in which you claim an abatement of sums which you would otherwise have to repay to that society in respect of sums borrowed by you from that society in connection with the transaction and dealings giving rise to the claim (including interest on any such sums).29



28 Emphasis 29 Emphasis

added. added.

116  The Cognition of Contract Interpretation A dispute arose because both ICS and a set of investors pursued the same claims for damages against one of the building societies, West Bromwich Building Society (WBBS). The House of Lords had to determine whether these claims were assigned. This involved a question of interpretation: did the litigating investors objectively intend an assignment of damages claims against WBBS?30 [5-13]   The litigating investors asserted that damages claims were not meant to be assigned. The investors relied primarily on the ordinary meaning of the words in section 3(b): ‘any claim’ meant ‘all possible claims’.31 Hence, the investors argued, section 3(b) had the effect of excluding from the assignment any claim for damages in relation to which an investor sought, by way of set-off, an ‘abatement’ or reduction of mortgage debt. The linguistic justification in favour of the investors was persuasive; it clearly indicated that damages claims were meant to be excluded. The construction advanced by the litigating investors also made commercial sense. The aim of the carve-out, it was alleged, was to secure for investors ‘all claims of any kind which they might have to reduce [outstanding mortgage] liabilities’.32 This was a rational explanation because ICS only paid partial compensation. Hence, many investors were left with outstanding liabilities.33 The litigating investors therefore had a strong case: they advanced a construction with a firm linguistic foundation and tenable purposive justification.34 [5-14]   However, ICS also had persuasive arguments in its favour. Its construction was that only claims in rescission were excluded from the assignment, in particular, claims in which an investor sought a reduction of mortgage debt through an account on rescission. This interpretation was advanced on a consequentialist and purposive basis. Section 4 of the claim form, read as a whole, made it clear that a key object of the document was to assign compensatory claims to ICS.35 Further, the litigating investors’ construction would give rise to the surprising result that ICS could not pursue the ‘prime target’, namely, WBBS (the financial advisers being insolvent).36 Without more, ICS probably would not have succeeded. However, the argument that seems to have won the day was derived 30 The House of Lords delivered judgment on two preliminary issues: the proper interpretation of the claim form and the validity of any assignment at law. 31 [1997] CLC 348, 369 (Leggatt LJ) (overruled) (CA); [1998] 1 WLR 896, 904B–D (Lord Lloyd) (dissenting) (HL). 32 [1997] CLC 348, 369 (Leggatt LJ) (overruled) (CA). 33 ibid. 34 The construction advanced by the litigating investors was also allegedly justified on a consequentialist basis. In particular, it was argued that the construction put by ICS should be rejected because: (i) it would render clause 3(b) otiose (see [1998] 1 WLR 896, 916F (Lord Hoffmann) (HL)); and (ii) it would mean that the assignment was void at law, based on the erroneous assumption that it was not possible to divide claims for damages and rescission (see [1997] CLC 348, 371 (Leggatt LJ) (overruled) (CA); [1998] 1 WLR 896, 906–07 (Lord Lloyd) (dissenting) (HL)). 35 For example, section 4(7) provided that ICS must pay to investors any surplus recovery, ‘[b]ut there was no provision for the investor having to pay anything back to ICS’: see [1998] 1 WLR 896, 911H (Lord Hoffmann) (HL); [1997] CLC 348, 358–59 (Evans-Lombe J) (Ch) (but note section 4(5)). 36 [1998] 1 WLR 896, 911G (Lord Hoffmann) (HL).

The Four Stages of Contract Interpretation  117 from the text of section 3(b) itself. The reference to claims ‘sounding in rescission for undue influence’ as an example of ‘any claim’ was ‘very strange’.37 ‘It was rather like providing in a lease of a flat that the tenant should not keep “any pets (whether neutered Persian cats or otherwise)”.’38 This textual feature strongly suggested that ‘something [had] gone wrong’ with the language39 – that only claims in rescission were meant to be excluded. Hence, ICS succeeded. Its interpretation was adopted by majority in the House of Lords.40

Comment [5-15]  ICS clearly sits at the opposite end of the spectrum to Prenn v Simmonds. It involved a more difficult case of interpretation: the correction of error through a fine balancing of the competing considerations. The two cases, when juxtaposed, illustrate the interpretive process in action. Prenn v Simmonds was a clear-cut case: the linguistic considerations were finely balanced, but Simmonds advanced a range of other arguments that made the objective intention of the parties quite clear. By comparison, in ICS, ICS succeeded in advancing its interpretation by pointing to the commercial purpose of the assignment, the consequences of the construction put by the litigating investors, and the fact that the text seemed to evidence an obvious error. These considerations outweighed, albeit narrowly, the persuasive linguistic argument that ‘any claim’ meant ‘all possible claims’ (including claims for damages). Even though the litigating investors could explain their interpretation as a matter of commercial purpose, this was insufficient to overcome the textual, purposive and consequentialist factors in favour of ICS. [5-16]   The key to understanding the interpretive process is to appreciate that each case is determined by evaluating the competing arguments. That is to say, each dispute is resolved by assessing the extent to which the rival considerations establish the objective intention of the parties in answer to the relevant question. The question of interpretation dictates potential answers and, in turn, underlying arguments. The interpretive process is structured from its starting point: the definition of the question. The remainder of this chapter explains each stage of the process in greater detail.

5.3.  The Four Stages of Contract Interpretation [5-17]  Contract interpretation is a sequential process: first, the question is defined; second, the competing interpretations are identified; third, arguments

37 ibid

38 ibid. 39 ibid. 40 ibid

912A (Lord Hoffmann). 913F (Lord Hoffmann) (Lord Goff, Lord Hope and Lord Clyde agreeing).

118  The Cognition of Contract Interpretation in support are formulated; and, finally, the correct interpretation is chosen. This chapter outlines what is required in each stage of interpretation. The guidance in this chapter was synthesised through an analysis of the reasoning evident in seminal English and Australian cases.41 It assists in understanding how interpretation works – how, in practice, contracts are construed.

The Question of Interpretation [5-18]  Each instance of contract interpretation involves the resolution of a discrete question, that is, a particular question regarding what was objectively intended by the choice of words in the contract. Defining the question is all important.42 A ‘question of interpretation’ or ‘question of construction’ has two components. The first is the perspective from which the question is to be answered. The second is the subject matter of the question. In some cases, multiple questions of interpretation must be addressed.

Perspective [5-19]   A question of interpretation is framed as a matter of objective intention.43 What did the parties intend, by agreeing the contract, in relation to the disputed issue? The actual state(s) of mind of the parties are irrelevant. However, we use our understanding of the concept of ‘intention’ and intentional states to infer what the parties intended by the choice of words in the contract.44 In particular, what we know about how normal people act when they hold a particular intent or how they form such an intent is the basis for formulating interpretive arguments. For example, what a person intends by a particular act can be determined by analysing what the person says about what he or she did. But it can also be ascertained by looking to relevant background, the person’s broader motives, the potential consequences that could flow from the act, or even an understanding of the person’s values and beliefs. Hence, applying similar thinking, what contracting parties intend in agreeing a contract (ie, in choosing particular words) can be established by inference from context, the object of the transaction, or potential results. By adopting certain presumptions regarding the beliefs and expectations of contracting parties, normative considerations (such as business common sense) also guide inferences regarding what parties intended by a contract.45 41 See Table of Cases, ‘Leading English and Australian Cases on Contract Interpretation’ (35 ­decisions of the Supreme Court of the United Kingdom, the House of Lords and the High Court of Australia). 42 Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47, [2011] SLT 184, 188 [18] (Lord Hope) (‘Of course, it all depends on what the question is that one is trying to answer [through interpretation]’). 43 For theoretical justification, see [4-03]–[4-21]. 44 See further [4-19]. 45 See [5-50].

The Four Stages of Contract Interpretation  119

Subject Matter [5-20]   The subject matter of an interpretive question is the particular aspect of the agreement that is in dispute between the parties. The disputed aspect of the agreement usually takes the form of a rule.46 Either way, the subject matter varies from case to case. The focus is usually the definition of a contractual right (such as a termination right)47 or a contractual obligation (such as a shipbuilder’s obligation to deliver a vessel meeting specification).48 In some cases, the question relates to an ancillary matter, such as the nature of a condition precedent to a share sale.49 In others, the aspect of the agreement that needs to be defined regards the enforceability of the contract itself, for example, whether a preliminary agreement was intended to be binding.50 Whatever the subject matter of a construction question, the focus is quite narrow: each application of contract interpretation is dedicated to the definition of a discrete aspect of the bargain.51 [5-21]   Ordinarily, the facts of the dispute crystallise and define the subject matter of the interpretive question. Hence, in Prenn v Simmonds,52 the issue was the type of profits that could satisfy the share sale threshold,53 and, in ICS,54 it was the scope of claims assigned to ICS.55 More complicated circumstances give rise to more complex questions. For example, in Electricity Generation Corp v Woodside Energy Ltd,56 the question was whether gas had to be supplied at a fixed price (pursuant to a ‘reasonable endeavours’ obligation) in circumstances where the gas could be sold elsewhere at a higher price.57 [5-22]  On occasion, the interpretive process is engaged to resolve a question of intention for the purpose of applying a specific contract doctrine.58 In such instances, the relevant doctrinal rules play a role in defining the subject matter of the question. For example, interpretation is occasionally invoked in the classification of contract terms for the purpose of determining common law termination rights. To determine such rights, the term that has been breached must be classified as either essential, intermediate, or a warranty. This process of ‘legal characterisation’ requires the resolution of a question of intention: was any 46 See further [7-06] and [7-08]. 47 See, eg, Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 (HL) (The Antaios) (as discussed at [6-88]–[6-90]). 48 See, eg, Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (HL) (The Diana Prosperity) (as discussed at [6-10]–[6-11]). 49 See, eg, Prenn v Simmonds [1971] 1 WLR 1381 (HL) (as discussed at [5-05]–[5-10]). 50 See [7-62]. 51 See [2-23] and [3-46]. 52 [1971] 1 WLR 1381 (HL). 53 See [5-05]–[5-10]. 54 ICS [1998] 1 WLR 896. 55 See [5-11]–[5-14]. 56 Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7, (2014) 251 CLR 640. 57 See [6-123]. 58 See further [7-55]–[7-72].

120  The Cognition of Contract Interpretation breach of the term meant to give rise to a right to terminate? Contract interpretation is employed to resolve this question if there is a sufficient textual reference, that is, if the contract text actually addresses the issue (which it rarely does).59 In such cases, the subject matter of the interpretive question is whether a right to terminate arises for any breach (not whether a right to terminate arises for the breach that in fact occurred).60

Multiple Questions [5-23]   Some cases of interpretation involve multiple questions of construction. This can be seen in the decision of the High Court of Australia in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd.61 The case involved an assignment of mining rights to Mount Bruce Mining Pty Ltd (MBM). As consideration for the assignment, MBM had to pay royalties on ‘ore won by MBM from the MBM area’. MBM disputed certain royalties claimed by the assignor. It alleged that the relevant ore was neither ‘won by MBM’, nor ‘won … from the MBM area’. Hence, two questions of construction required determination: from where62 must the ore be won, and by whom?63 [5-24]  To similar effect, disputes regarding contractual notices often give rise to at least two questions of interpretation.64 First, the contract itself must be construed to define the rules that dictate the requirements of the relevant notice.65 Second, the notice itself must be construed to see whether it meets these requirements. Hence, in Mannai,66 the House of Lords construed the relevant lease first to determine what was required by the notice: the tenant merely needed to express a clear intention to trigger the break clause, rather than correctly specifying the termination date stated in the lease (13 January 1995).67 The House of Lords then construed the relevant break notices to determine whether the tenant had clearly expressed its intention to break the lease, which it had, even though it had referred to ‘12 January 1995’.68

59 See further [7-63]–[7-65]. 60 See, eg, L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (HL) (Schuler) (as discussed at [6-91]–[6-92]). 61 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, (2015) 256 CLR 104 (Mount Bruce). 62 See [6-108]–[6-110]. 63 See [6-49]–[6-54]. 64 An almost identical process to interpretation is employed to determine the content of a contractual notice: see [5-03] (n 6); Al Jadeed TV v United Broadcasting International Pty Ltd (2011) [2011] FCA 983, [2011] 283 ALR 205, 225 [68] (Flick J) (construed ‘by reference to an objective and reasonable person’); Carter (2013) 140 [4-37]; McMeel (2017) 38 [1.61]. 65 This may require the resolution of inconsistency: see, eg, George v Cluning (1979) 28 ALR 57 (HCA) (inconsistent modes for exercise of an option). 66 Mannai [1997] AC 749 (HL). 67 ibid 767D–F (Lord Steyn), 774A–C (Lord Hoffmann), 780H–781D (Lord Clyde). 68 ibid 767G (Lord Steyn), 774G–775A (Lord Hoffmann), 781D–783A (Lord Clyde).

The Four Stages of Contract Interpretation  121 [5-25]   Defining the question or questions in dispute is the first step in the process of interpretation. It is usually simple enough. But a failure to define the question properly can lead to confusion later in the process, for example, when formulating interpretive arguments. Once the question or questions are identified, competing constructions are formulated.

The Competing Interpretations [5-26]  Contract interpretation involves a choice between potential answers to the relevant interpretive question.69 Each potential answer is a competing ‘interpretation’ or ‘construction’. It is a proposed definition of the disputed aspect of the bargain – a proposed articulation of a rule that is said to make up part of the contract. In some cases, interpretations are pleaded in the alternative. Ultimately, the precise formulation of a particular construction depends on the circumstances of the case.

The Formulation of Competing Interpretations [5-27]  In many cases, the competing interpretations are straightforward. In Prenn v Simmonds,70 Simmonds claimed that group profits could trigger the sale; Prenn claimed that only profits of RTT Ltd could be counted.71 However, such simplicity is not always possible. This is because, in some cases, the circumstances warrant a more complicated exposition of the disputed rule. For example, the question itself may naturally give rise to multiple answers, such as in the case of a dispute regarding how a security trustee is to distribute trust funds.72 Alternatively, the facts may force quite specific articulations of the contested intention. In Bank of Credit and Commerce International SA v Ali,73 an ex-employee had released his former employer (a bank) from ‘all or any claims … that exist or may exist’. A dispute arose regarding whether stigma claims had been compromised. The liquidators for the bank could not simply argue that all claims were barred. The employee must have retained some claims against the bank, such as claims to his deposits with the bank. Hence, the bank had to argue that, properly construed, the release barred all claims arising from the employment relationship.74

69 See, eg, J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 126 (‘choices between feasible interpretations’); Mount Bruce [2015] HCA 37, (2015) 256 CLR 104, 122 [74] (French CJ, Nettle and Gordon JJ). 70 [1971] 1 WLR 1381 (HL). 71 See [5-05]–[5-10]. 72 See Re Sigma [2009] UKSC 2, [2010] BCC 40 (as discussed at [6-31]–[6-32]). 73 Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251 (BCCI v Ali). 74 This affected the persuasiveness of the construction: see [6-22].

122  The Cognition of Contract Interpretation [5-28]   Rather than warranting the articulation of competing interpretations in quite specific terms, some cases require the opposite: a broad description of the contested rule. This, in turn, leaves more work to be done in applying the rule, that is, in characterising the facts to determine whether the components of the rule are satisfied.75 This can be seen in The Diana Prosperity76 and Mount Bruce.77 [5-29]  Competing interpretations are usually formulated by the parties in dispute.78 However, on occasion, the court arrives at its own construction independently.79 For example, in Mount Bruce,80 different members of the High Court adopted slightly different constructions in upholding a claim for mining ­royalties.81 This illustrates the fact that a given question of interpretation can often be answered in favour of one party in different ways.

Alternative Interpretations [5-30]   A party can advance interpretations in the alternative; that is to say, a party can advance slightly different formulations of the disputed rule in question.82 In Fiona Trust & Holding Corp v Privalov,83 the Russian owners of a large commercial shipping fleet purported to rescind a series of charterparties. The owners alleged that the charters had been induced by bribery. The charterers sought to have this dispute resolved by arbitration. The interpretive question was whether this type of dispute could be referred to arbitration. Each charter provided that ‘any dispute arising under this charter’ could be arbitrated.84 The charterers contended that all disputes regarding the contractual relationship came within the arbitration clause. The owners, on the other hand, advanced two alternative interpretations. In particular, the owners claimed that the scope of disputes that could be referred to arbitration was limited to either: (i) disputes regarding rights and obligations created by the charters;85 or (ii) disputes which were in the contemplation of the parties at the time of contracting.86 The charterers succeeded; neither alternative 75 See [4-42]–[4-44] and [7-45]–[7-48]. 76 The Diana Prosperity [1976] 1 WLR 989 (HL) (as discussed at [6-10]–[6-11] and [7-45]). 77 Mount Bruce [2015] HCA 37, (2015) 256 CLR 104 (as discussed at [6-53]). See further [7-48]. 78 The parties in dispute may not necessarily be the contracting parties: see, eg, Re Sigma [2009] UKSC 2, [2010] BCC 40 (a dispute between beneficiaries under a Security Trust Deed) (discussed at [6-31]–[6-33]). 79 See, eg, Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326 (CA). See also Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 374 (Nourse LJ) (CA) (Fagan) (‘a question of construction of a document … is invariably at large’). 80 Mount Bruce (2015) 256 CLR 104. See further [5-23]. 81 See [6-53]. 82 See, eg, Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51, (1979) 144 CLR 596 (Secured Income) (as discussed at [6-67]); McCann v Switzerland Insurance Australia Ltd [2000] HCA 65, (2000) 203 CLR 579 (McCann) (as discussed at [6-76]). 83 Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, [2007] Bus LR 1719 (Fiona Trust). 84 Each charterparty was in Shelltime 4 form with the standard arbitration clause. 85 See Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719, 1724 [11] (Lord Hoffmann). 86 See ibid 1728 [27] (Lord Hope).

The Four Stages of Contract Interpretation  123 put forward by the owners was a viable one.87 However, the fact that the owners could plead in the alternative demonstrates that each interpretation is simply a proposed answer to the interpretive question – it is a proposed definition of the disputed rule. To determine which construction was probably intended, one must look to the underlying arguments.

Interpretive Arguments [5-31]   An interpretation is supported by arguments that are built propositionally from interpretive materials, namely, the text as a whole, potential meanings, background, purpose, results and normative factors.88 Interpretive arguments come in a variety of forms, depending on the nature of the materials relied upon to construct the argument: a ‘linguistic’ argument is based on the meaning of words; a ‘textual’ argument is grounded in a feature of the text; a ‘contextual’ argument is derived from the background to the transaction; a ‘purposive’ argument is made in furtherance of the object of the contract or a particular clause; a ‘consequentialist’ argument is based on the consequences of the competing interpretations; and a ‘normative’ argument is grounded in normative considerations, such as business common sense.89 Interpretive arguments are built through propositional inference. The build is often complex, involving layers of inference. For example, a textual argument may establish that the contract (or one of its parts) served a particular objective, with that objective, in turn, supporting a proposed interpretation. Hence, an interpretive argument supports a proposed interpretation either directly (by reinforcing the ultimate inference of intention) or indirectly (by establishing or reinforcing a direct argument). In formulating interpretive arguments, precedent plays a limited role. Previous cases merely provide examples of potential arguments – arguments that may or may not work in a given case. Hence, the fact that a linguistic argument has been decisive in a prior decision does not mean that it is determinative in future cases involving the same words.

Linguistic Arguments [5-32]  A linguistic argument is simply an argument that a word or phrase has a particular meaning.90 The potential meanings for words in a contract are

87 See further [6-12]–[6-15]. 88 See [3-05]–[3-32] and [4-29]. 89 For a similar approach to statutory interpretation, see N MacCormick and RS Summers, ‘Interpretation and Justification’ in N MacCormick and RS Summers (eds), Interpreting Statutes: A Comparative Study (Dartmouth, 1991) 511–16 (a hierarchy of ‘interpretive arguments’ is employed in statutory interpretation, ordered as follows: ‘linguistic’, ‘systemic’, ‘teleological/evaluative’ and ‘transcategorical’). 90 cf ibid 512–13 (‘argument[s] from ordinary meaning’ and ‘argument[s] from technical meaning’).

124  The Cognition of Contract Interpretation established by reference to categories.91 Most cases involve ordinary meanings, that is, meanings in common usage. These types of meaning are usually derived as a matter of judicial notice.92 That is to say, the process is ‘intuitive’ – one cannot trace the underlying logical steps.93 However, in some cases, a potential meaning for a word is itself established by a chain of reasoning. That is to say, the meaning is inferred from background (for example, a customary or trade meaning),94 the contract as a whole,95 or, more controversially, precedent.96 [5-33]   Linguistic arguments are often put in direct support of a proposed interpretation. Such an argument takes the following form: the parties chose these words; these words can bear this meaning, which meaning suggests a particular intention on the disputed issue; therefore, the parties probably held the particularised intention in choosing the words. For example, in Prenn v Simmonds,97 both Prenn and Simmonds advanced a linguistic argument in favour of their interpretation. Prenn claimed that the term ‘RTT’ in the share sale condition meant ‘RTT Ltd’ and that, therefore, only profits of RTT Ltd were meant to be counted.98 Simmonds, on the other hand, argued that ‘RTT’ denoted ‘the RTT group’ and, hence, group profits were meant to trigger the sale.99 [5-34]   Not surprisingly, linguistic arguments are the building blocks of contract interpretation. Most interpretive disputes involve a construction that is advanced primarily by an argument about the meaning of a key word or phrase.100 But linguistic arguments also play a subsidiary role in building other forms of argument. For example, a purposive argument built from the text often depends on a linguistic argument or arguments.101 That said, when analysing words beyond the key provision in dispute, the intended meaning of the words is usually patently clear such that an ‘argument’ about it is not necessary. There is no debate about the meaning of the words. It is the significance of the words, once given appropriate meaning, that is in issue.102 That is to say, the argument is textual in nature.

91 See [3-09]. 92 See [3-11]. See, eg, ICS [1998] 1 WLR 896 (HL) (the argument that ‘any claim’ meant ‘all possible claims’) (discussed at [5-13] (text at n 31)). 93 See [2-38]. 94 See [3-09](b). 95 For example, through application of the linguistic maxims, ejusdem generis, noscitur a sociis and generalia specialibus: see [3-34]–[3-38] and [5-37]. 96 See [3-13] and [5-55]. 97 [1971] 1 WLR 1381 (HL). 98 See [5-08]. 99 See [5-09]. 100 Usually, for such a construction to be successful, it needs purposive, consequentialist or normative support: see [6-05] and [6-26]–[6-34]. 101 See, eg, Fagan [1997] AC 313 (HL) (as discussed at [6-64]). 102 See, eg, Prenn v Simmonds [1971] 1 WLR 1381 (HL) (the significance of the relevant profits being ‘available for dividend’ in light of established accounting practice) (discussed at [5-09] (text at n 18)).

The Four Stages of Contract Interpretation  125

Textual Arguments [5-35]   A textual argument is based on a particular feature of the contract text.103 It involves drawing an inference from the text in support of a particular proposition. Such arguments represent an application of the ‘whole contract’ principle.104 The relevant textual feature is usually a sentence or fragment of the central clause in dispute,105 some other part of the contract,106 or the structure or composition of the whole document.107 Even an omission from the contract can form the basis for a textual argument.108 [5-36]   Textual arguments are occasionally put in direct support of a construction. For example, in cases of inconsistency, each party relies upon a textual argument (or arguments) in support of its contended intention.109 That said, textual arguments usually play a subsidiary role in contract interpretation. In particular, the text is often relied upon to ground a linguistic,110 purposive111 or ­­consequentialist112 argument. For example, in Schuler,113 the disputed clause was the only clause described as a ‘condition of this agreement’. Each party relied upon this textual feature to advance a purposive argument in its favour.114 Whether a purposive or consequentialist argument has a textual basis is often important in determining the outcome of an interpretive dispute.115 [5-37]   The old linguistic rules or ‘maxims’ occasionally invoked in construction represent textual arguments. For example, under the expressio unius principle,116 it is inferred from the express mention of one of a number of alternatives that the parties intended to exclude others. Similarly, in the case of the presumption

103 What constitutes the contract text is quite broad: see [3-07]. 104 See [3-07] (n 8). 105 See, eg, ICS [1998] 1 WLR 896 (HL) (as discussed at [5-14] (text at nn 37–38)). 106 For example, the meaning of a word may be defined or evident from the use of the word elsewhere in the contract: see, eg, Prenn v Simmonds [1971] 1 WLR 1381 (HL) (as discussed at [5-08]–[5-09]); Geys v Societe General [2012] UKSC 63, [2013] 1 AC 523, 542 [35] (Lord Hope). 107 See, eg, McCann [2000] HCA 65, (2000) 203 CLR 579 (as discussed at [6-78]). 108 See, eg, Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719 (as discussed at [6-15] (n 40)); Secured Income [1979] HCA 51, (1979) 144 CLR 596 (as discussed at [6-68] (n 212)). In Australia, a ‘struck-through’ or deleted term in a standard form contract can also form the basis for an interpretive argument: see, eg, Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12, (2017) 261 CLR 544, 549–50 [9]–[14] (Kiefel, Bell and Gordon JJ) (Ecosse). Under English law, there is controversy regarding whether such an argument is permitted: see Calnan (2017) 45 [3.50], 69 [4.94]–[4.97]; Carter (2013) 483–87 [14-30]–[14-32]; Lewison (2015) 77–83 [3.04]; McMeel (2017) 227–28 [5.114]–[5.116]. 109 See [6-07] and [6-107]–[6-127]. 110 See [5-35] (n 106). 111 See [5-43] (n 135). 112 See [5-49] (n 156). 113 Schuler [1974] AC 235 (HL). 114 See [6-96]. 115 See [5-63], [6-06] and [6-35]–[6-106] (in particular, [6-80] and [6-105]–[6-106]). 116 See [3-37].

126  The Cognition of Contract Interpretation against redundancy,117 the argument is based on a part of the text being denied any effect.118 Under the maxims ejusdem generis,119 noscitur a sociis120 and generalia specialibus,121 the relative position of a word or phrase in a contract is said to dictate its meaning. That is to say, the potential meaning of a word is inferred from the composition of the text,122 or, to put it in the vernacular of this book, a linguistic argument is established by a textual argument.123 Distinct from arguments of a textual or linguistic nature are arguments derived from background.

Contextual Arguments [5-38]   A contextual argument involves an inference drawn from background. Background consists of anything known or assumed by the parties at the time of contracting.124 It usually includes matters relating to the nature of the transaction, the relevant market or industry, the legal or regulatory background, or the characteristics of the parties.125 [5-39]  On occasion, a contextual argument is put in direct support of an interpretation.126 For example, in Fiona Trust,127 the question was whether an arbitration clause in a series of charterparties covered disputes as to the validity of the charters, in particular, disputes involving bribery. The clause was construed to cover such disputes, in part, because it was common background that ‘disputes about validity, are no less appropriate for determination by an arbitrator than any other kind of dispute’.128 [5-40]   Despite the occasional use as a direct aid in construction, a contextual argument is usually employed to establish another form of argument. For example, background is sometimes relied upon to establish a potential meaning for a word.129 It is also often critical to the formulation of consequentialist arguments.

117 See [3-38]. 118 See, eg, Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57, (2008) 238 CLR 570 (Gardiner) (as discussed at [6-43] (n 142)); Schuler [1974] AC 235 (HL) (as discussed at [6-96] (n 299)); Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 (Rainy Sky) (as discussed at [6-19] (n 55)); Mount Bruce [2015] HCA 37, (2015) 256 CLR 104 (as discussed at [6-54] (n 166)). 119 See [3-35]. 120 See [3-36]. 121 See [3-54] (n 260). 122 See [5-32]. 123 The maxims merely provide a template for such an argument: see [3-33] and [5-57]. 124 See [3-14]–[3-17]. 125 See [3-15]. 126 See, eg, Prenn v Simmonds [1971] 1 WLR 1381 (HL) (as discussed at [5-09] (text at n 18)); McCann [2000] HCA 65, (2000) 203 CLR 579 (as discussed at [6-79] (n 242) (a contextual argument based on insurance cover available in the market)). 127 Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719. 128 ibid 1728 [27] (Lord Hope). 129 See [5-32].

The Four Stages of Contract Interpretation  127 This is because, ordinarily, background is needed to establish the consequences of an interpretation.130 One also usually needs to refer to background to establish contractual purpose.131

Purposive Arguments [5-41]   A purposive argument is based on a conclusion regarding the purpose of a contract or the purpose of a specific part or clause in a contract.132 A conclusion regarding purpose is essentially a conclusion regarding the parties’ objective intention: the parties agreed the contract (or this clause or part) to achieve a particular state of affairs.133 [5-42]   Purposive arguments consist of a chain of reasoning. First, the relevant purpose is established. Second, the purpose is relied upon to support a contended interpretation (or other form of argument).134 [5-43]   Contractual purpose may be derived purely from the contract text,135 it may be put together from background,136 or, as is usually the case, it may be ascertained through a combination of textual and contextual analysis.137 Ordinarily, normative standards, such as reasonableness and business common sense, play a part.138 In some instances, courts invoke conventional objectives, such as securing commercial certainty.139 On other occasions, it is the potential consequences of a construction that tend to suggest that a contract or clause served a particular object.140

130 See, eg, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 (Chartbrook) (as discussed at [6-30] (n 101)). 131 See, eg, Prenn v Simmonds [1971] 1 WLR 1381 (HL) (as discussed at [5-09] (text at n 19)); Fagan [1997] AC 313 (HL) (as discussed at [6-64]); Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45 (Royal Botanic) (as discussed at [6-47] (n 155)); Mount Bruce [2015] HCA 37, (2015) 256 CLR 104 (as discussed at [6-54]). See also FM Douglas, ‘Modern Approaches to the Construction and Interpretation of Contracts’ (2009) 32 Australian Bar Review 158, 164. 132 As to the nature of contractual purpose, see further [3-18]–[3-22]. cf MacCormick and Summers (n 89) 514 (‘argument[s] from purpose’). 133 This is true even if the relevant objective serves only one party: see further [3-21]. 134 cf MacCormick and Summers (n 89) 514 (the ‘argument from purpose’ is an argument that a ­provision ‘ought, within limits, to be interpreted so that its application in concrete cases is compatible with the postulated point and purpose’). 135 See, eg, Schuler [1974] AC 235 (HL) (as discussed at [6-96]). 136 See, eg, Royal Botanic [2002] HCA 5, (2002) 240 CLR 45 (as discussed at [6-47] (n 155)). 137 See, eg, Prenn v Simmonds [1971] 1 WLR 1381 (HL) (as discussed at [5-09] (text at n 19)); Fagan [1997] AC 313 (HL) (as discussed at [6-64]); Mount Bruce [2015] HCA 37, (2015) 256 CLR 104 (as discussed at [6-54]). 138 See, eg, Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719 (as discussed at [6-15] (n 42)). 139 See, eg, Gardiner [2008] HCA 57, (2008) 238 CLR 570 (as discussed at [6-44]); Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 199, [57] (Beazley JA). 140 See, eg, Chartbrook [2009] UKHL 38, [2009] 1 AC 1101 (as discussed at [6-30]).

128  The Cognition of Contract Interpretation [5-44]   It is quite common for a construction to be advanced primarily by a purposive argument and for that construction to be put against an interpretation based squarely on a linguistic argument.141 A purposive argument put in direct support of a construction effectively takes the following form: it should be inferred that the parties held the determinative intention in answer to the relevant question of interpretation because the parties evidently held another intention in agreeing the contract.142 For example, in Fagan, it was evident that the object of an ‘ultimate net loss clause’ was to ensure that a reinsurer recouped sums recovered by its reinsured after settlement of a claim. Hence, it could be inferred that the parties had intended to give effect to this broader objective by agreeing that indemnification was limited to ‘sums actually paid’.143 [5-45]   Like most forms of argument, a purposive argument can play an i­ ndirect role in construction. For example, purposive justification can be used as a defensive mechanism in cases involving conflicting textual arguments, that is, cases of inconsistency.144 Whether put directly or indirectly, a purposive argument is based on an articulation of the parties’ intention. By contrast, consequentialist arguments focus more on practicalities.

Consequentialist Arguments [5-46]   A consequentialist argument is based on the potential consequences of a contended interpretation. The potential consequences of an interpretation are its practicalities.145 Such consequences include both results that will follow if a construction is accepted146 and results that could follow on different facts.147 The alleged consequences are established as a matter of hypothetical fact, usually by analysing the contract text and background.148 [5-47]   It is often the case that one party advances a construction primarily on the basis of a consequentialist argument, while the other party puts forward an interpretation justified by linguistic considerations.149 The consequentialist arguments that are most commonly invoked in construction are ‘negative’ in character; that is, the argument is that an opposing interpretation should be rejected because

141 See further [6-06] and [6-35]–[6-80]. 142 See, eg, Prenn v Simmonds [1971] 1 WLR 1381 (HL) (as discussed at [5-09] (text at n 19)). 143 See further [6-64]. 144 See [6-07] and [6-107]–[6-127]. 145 See [3-23]. 146 See, eg, Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900 (as discussed at [6-20]). 147 See Schuler [1974] AC 235 (HL) (as discussed at [6-95]). 148 See, eg, Thompson v Goblin Hill Hotels Ltd [2011] UKPC 8, [2011] 1 BCLC 587, 595 [24] (Lord Dyson) (for the Board) (Goblin Hill) (‘commercial absurdity’ may be ‘patent and clear on the face of the instrument’ or ‘less obvious’ and only demonstrable by reference to background); Schuler [1974] AC 235 (HL) (as discussed at [6-95]). 149 See [6-06] and [6-81]–[6-106].

The Four Stages of Contract Interpretation  129 it would or could give rise to unintended results.150 Such an argument is usually advanced to deny that a term is essential for the purpose of establishing common law termination rights:151 if the term can be breached in trivial ways, so the argument goes, the parties cannot have intended that any breach would give rise to a right to terminate.152 [5-48]   The composition of a negative consequentialist argument involves three steps. First, the alleged consequences are established as a matter of fact. Second, it is demonstrated that the consequences would be unintended. Finally, the unintended consequences are invoked as a reason for rejecting one interpretation in preference to another. [5-49]   The most intriguing part in the composition of such an argument is the middle stage, namely, the determination that a consequence would be unintended from the perspective of the parties. Such a determination is often made by reference to normative standards. For example, a result is unintended if it is absurd,153 unreasonable,154 or uncommercial.155 However, at least on occasion, a result is unintended because it is inconsistent with the purpose of the contract or a particular clause,156 or because it undermines a normative objective, such as securing commercial certainty.157 In the latter case, it is a normative argument that effectively underpins the relevant consequentialist argument.

Normative Arguments [5-50]   A normative argument is based on a normative standard or objective, such as reasonableness, business common sense, fairness and securing commercial certainty.158 One way to understand how normative arguments feature in contract interpretation – a process through which the parties’ intention is inferred – is to focus on the role of the reasonable person. Certain presumptions are made regarding contracting parties,159 and those presumptions are attributed to the

150 See, eg, Schuler [1974] AC 235 (HL) (as discussed at [6-95]); Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900 (as discussed at [6-20]). On occasion, consequentialist arguments are not invoked directly, but rather are relied upon to establish other forms of argument, eg, purposive arguments: see, eg, Chartbrook [2009] UKHL 38, [2009] 1 AC 1101 (as discussed at [6-30]). 151 See further [7-63]–[7-65]. 152 See, eg, Schuler [1974] AC 235 (HL) (as discussed at [6-95]). cf The Antaios [1985] AC 191 (HL) (the same argument was made in the context of an express termination right) (discussed at [6-88]–[6-90]). 153 See, eg, Westpac Banking Corp v Tanzone Pty Ltd [2000] NSWCA 25, (2000) 9 BPR 17,521 (as discussed at [3-24] (text at n 114)). 154 See, eg, Schuler [1974] AC 235 (HL) (as discussed at [6-95] (n 295)). 155 See, eg, Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719 (as discussed at [6-15] (text at n 43)). 156 See, eg, Chartbrook [2009] UKHL 38, [2009] 1 AC 1101 (as discussed at [6-30]). 157 See, eg, Secured Income [1979] HCA 51, (1979) 144 CLR 596 (as discussed at [6-68] (n 214)). 158 As to the nature of normative standards and objective in interpretation, see further [3-25]–[3-28]. 159 cf G McMeel, ‘Arbitration Agreements: Construction and Distinctiveness – A New Dawn?’ [2007] LMCLQ 292, 294.

130  The Cognition of Contract Interpretation reasonable person who acts as the reasonable interpreter of the bargain.160 Parties are presumed to be reasonable, fair and honest. They desire certainty in commercial dealings and for the agreed words to be enforced. But they also want the contract read flexibly and liberally where necessary. In short, contracting parties have a presumed profile or set of values and beliefs.161 From this presumed profile, it is possible to construct arguments on a normative basis. [5-51]   On occasion, normative arguments are put in direct support of an interpretation. BCCI v Ali162 is a notable example. An ex-employee had granted a release of claims in favour of his ex-employer, a bank. He succeeded in claiming that the release, which encompassed ‘all or any claims … that exist or may exist’, did not extend to unknown claims. A normative argument was particularly persuasive: clear words should be required, it was said, to release claims of which neither party was aware.163 This argument was recognised in a long line of authority.164 [5-52]  Normative standards and objectives are often invoked to establish ­purposive165 and consequentialist166 arguments. The latter can be seen in Arnold v Britton.167 The dispute regarded whether a lessee’s covenant to pay expenses and outgoings was an obligation to pay an indexed sum or a proportionate amount of the expenses and outgoings. In support of its construction that the relevant leases created an indexed charge, the lessor invoked the normative objective of securing certainty in commercial dealings. Parties are presumed to desire clear and crystallised obligations. Hence, it could be inferred that the object of the covenant was to create a predetermined and indexed sum – this being more certain than a proportionate charge based on actual figures.168 [5-53]   Normative arguments also feature in construction in the numerous principles directed to specific contracts, clauses or questions of construction.169 That is to say, these principles usually embody, or give rise to, normative arguments that are relied upon directly in interpretation. For example, the contra proferentem ­principle170 represents an argument based on fairness, as does the restrictive principle that a release should be construed as limited to known or contemplated claims.171 The Canada SS rules,172 as applied in the old consumer 160 See [2-28], [2-44], [4-07] and [4-14]. 161 The various presumptions may be rebutted: see, eg, Schuler [1974] AC 235, 263B (Lord ­Wilberforce) (HL) (as discussed at [6-97] (n 304)). 162 BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251. 163 See [6-25]. 164 As to the role of precedent, see further [5-54]–[5-58]. 165 See [5-43]. 166 See [5-49]. 167 Arnold v Britton [2015] UKSC 36, [2015] AC 1619. 168 ibid 1630 [26], 1631 [33] (Lord Neuberger). For a similar argument, see Secured Income [1979] HCA 51, (1979) 144 CLR 596 (as discussed at [6-68] (n 214)). 169 See [3-39]–[3-44]. 170 See [3-39] and [3-44]. 171 See [3-40]. See also BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251 (as discussed at [6-25]). 172 See [3-42].

The Four Stages of Contract Interpretation  131 cases at least,173 appear to give rise to a similar type of argument. However, in modern commercial disputes, the Canada SS rules are said to reflect common sense; it is ‘inherently improbable’ that parties would intend to exclude liability for negligence otherwise than by clear language.174 By comparison, the principle that an arbitration clause should be construed broadly (so as to catch all types of dispute) is advanced in the interests of securing commercial certainty.175 All these examples demonstrate not only the role of normative arguments in construction, but also how precedent features in the composition of interpretive arguments.

The Role of Precedent [5-54]   At first blush, it is difficult to see how precedent can be relevant to the formulation of an interpretive argument. How can a prior decision, involving its own parties, contract and dispute, influence the construction of a bespoke contract? How can that decision have any bearing on an argument regarding the intent of different parties in agreeing a different contract?176 [5-55]   Ultimately, precedent does play a role in the composition of interpretive arguments, but it is a limited one. In short, a prior decision can be relevant to the formulation of an interpretive argument by way of example. That is, precedent operates in a non-binding manner by providing examples of interpretive arguments that may apply in subsequent cases. For example, prior cases often make it clear that a particular word has an established meaning.177 In a subsequent interpretive dispute involving the same word, a party can rely upon the case to argue that the word – as it appears in the disputed contract – has the meaning recognised in the previous case. That is, the prior decision underpins or reinforces a linguistic argument.178 Such arguments are particularly common in the case of contracts using standard language, such as leases,179 policies of insurance,180 building and construction contracts,181 and standard form contracts.182

173 See, eg, Davis v Pearce Parking Station Pty Ltd [1954] HCA 44, (1954) 91 CLR 642. 174 Smith v South Wales Switchgear Ltd [1978] 1 WLR 165, 168 (Viscount Dilhorne) (HL); Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964, 970 (Lord Fraser) (HL); HIH ­Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 CLC 358, 381 [62] (Lord Hoffmann). 175 See Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719 (as discussed at [6-15] (n 43)). 176 See BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 272–73 [51], 274 [54]–[55] (Lord Hoffmann); Mannai [1997] AC 749, 770–71 (Lord Steyn), 775–78 (Lord Hoffmann), 783 (Lord Clyde) (HL). 177 See [3-13]. 178 See, eg, Gardiner [2008] HCA 57, (2008) 238 CLR 570, 581 [32] (Gummow, Hayne and Kiefel JJ) (ordinary meaning of ‘punctually’) (discussed at [6-42]); Schuler [1974] AC 235 (HL) (legal meaning of ‘condition’) (as discussed at [6-94]). 179 See [3-13] (n 54). 180 See [3-13] (n 55). 181 See [3-13] (n 56). 182 See [3-13] (n 57).

132  The Cognition of Contract Interpretation [5-56]   Although not as prevalent as linguistic arguments derived from precedent, bespoke non-linguistic forms of argument are occasionally drawn from prior authorities. For example, in Fiona Trust,183 the interpretive question was whether a particular type of dispute was caught by an arbitration clause.184 Precedent was invoked to support a consequentialist argument that all disputes regarding the relevant contract should be caught by the clause. Otherwise, different disputes would be dealt with by different processes and such an outcome would make no commercial sense.185 [5-57]  Some arguments derived from precedent crystallise into interpretive ‘principles’.186 These principles then effectively provide templates for interpretive arguments in particular situations. The linguistic maxims give rise to textual arguments,187 while the majority of the other established principles outline potential normative arguments.188 Whether the arguments gain traction in a given case depends on the other arguments that feature in the dispute. Hence, the principles are aptly described as ‘cautionary principle[s]’, rather than ‘dogmatic and unqualified’ rules.189 [5-58]   The formulation of competing arguments is undoubtedly the most timeconsuming stage in contract interpretation. This is particularly the case if excessive background or authorities need to be reviewed. However, the most difficult step in the process is figuring out why one construction should prevail over others.

The Correct Interpretation [5-59]   The correct interpretation is the one that was probably intended:190 the most likely of a number of alternatives.191 It is the interpretation that is established to the highest degree of probability. The court determines which construction was intended by evaluating the competing arguments. First, it assesses the relative strength of each argument. Second, it weighs and balances the competing clusters of arguments to determine which interpretation was probably intended.

183 Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719. 184 See [5-30] and [6-13]. 185 Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719, 1728 [28] (Lord Hope). 186 See [3-33]–[3-44]. 187 See [5-37]. 188 See [5-53]. 189 BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 263 [17] (Lord Bingham). See also BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 282 [79] (Lord Clyde) (‘reflections upon the way in which people may ordinarily be expected to express themselves’). 190 See ch 4 (in particular, [4-07], [4-22]–[4-23], [4-27]–[4-30] and [4-40]). See also [2-31] (n 131). 191 cf Wasa International Insurance Co Ltd v Lexington [2008] EWCA Civ 150, [2008] Bus LR 1029, 1046 [46] (Sedley LJ) (‘the least problematic [answer]’) (overturned on other grounds: see [2009] UKHL 40, [2010] 1 AC 180); Goblin Hill [2011] UKPC 8, [2011] 1 BCLC 587 (as discussed at [6-87]).

The Four Stages of Contract Interpretation  133

Strength [5-60]  The strength of an argument is measured by the extent to which it supports an alleged interpretation. How much more likely is the particular construction by reason of the argument? The strength of an argument depends on a variety of factors. [5-61]   First, the argument must make sense as a matter of logic. An ­argument is logically invalid if one of its underlying premises turns out to be false. An invalid argument is rejected. In construction, such a rejection occasionally occurs because background is not established as known by both parties.192 In terms of more complex examples, in Goblin Hill,193 a consequentialist argument was rejected because it was premised on the assumption that a contracting party would breach its obligations. Such an assumption is inappropriate in contract law. Hence, it constituted an invalid premise from which to draw an inference of intention in construction.194 [5-62]   The second important point to remember in assessing the strength of an interpretive argument is that, even if the premise or premises of an argument hold true, such premise or premises may not ground a particularly strong inference. That is to say, the premise or premises do not establish the asserted proposition to a high degree of probability.195 A particularly striking example can be found in BCCI v Ali.196 The ex-employee of a bank had executed an apparently broad release upon redundancy. The liquidators of the bank later relied upon the release as a bar to so-called ‘stigma’ claims. In this respect, the liquidators relied primarily upon the ordinary meaning of the words in the release: it encompassed ‘all or any claims … that exist or may exist’. The problem was that the liquidators’ construction was not as broad as the words suggested. The liquidators conceded that some claims were not barred. Hence, although the ordinary meaning of the words was clear, it did not support the alleged construction.197 [5-63]  The third factor to bear in mind in determining the persuasiveness of an interpretive argument derives from the textual focus in construction.198

192 See, eg, Durham v BAI (Run Off) Ltd [2012] UKSC 14, [2012] 1 WLR 867, 886 [39] (Lord Mance) (Durham) (an alleged understanding in the insurance market was not known by the relevant insurers). See further [3-15]. 193 Goblin Hill [2011] UKPC 8, [2011] 1 BCLC 587. 194 See [6-86] (n 272). See also Prenn v Simmonds [1971] 1 WLR 1381 (HL) (a linguistic argument was rejected because the legislative framework said to establish the relevant meaning was incorrectly characterised) (discussed at [5-08] (text at n 14)). 195 See, eg, Pioneer Shipping v BTP Tioxide Ltd [1982] AC 724, 751 (Lord Roskill) (HL) (the mere fact that an addendum to a charterparty (which provided for an additional voyage) was expressed to be an ‘extension’ of the charter did not demonstrate that the additional voyage was dependent on completion of the voyages already agreed). 196 BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251. 197 See further [6-22]. 198 See [3-07] (n 7).

134  The Cognition of Contract Interpretation Since the object of interpretation is to ascertain what the parties intended by choosing the words in the contract, arguments built from textual factors are usually more persuasive than arguments without a sound textual footing.199 Hence, a purposive argument that is derived exclusively, or at least partially, from the text ordinarily carries more weight than a purposive argument constructed from background or as a matter of business common sense.200 Similarly, a consequentialist argument is stronger if the relevant result is established as intended (or unintended) by reference to the text rather than normative standards, such as reasonableness.201 For example, a potential result may be unintended because it is inconsistent with a purpose of the contract or a particular clause.202 The extent to which a purposive or consequentialist argument is grounded by the contract text is often significant in determining whether a construction anchored by such an argument should trump a persuasive linguistic interpretation.203 [5-64]  The fourth consideration that can impact the strength of an interpretive argument is a matter of perspective. A contract is construed from the perspective of the hypothetical reasonable person or business person – the reasonable interpreter of the bargain.204 This perspective may enhance or diminish the strength of an argument. The former can be seen in ICS.205 The hypothetical layperson would have relied primarily upon the introductory note to the claim form. Hence, the purposive argument derived from that claim form was regarded as quite persuasive.206 Conversely, in Schuler,207 the reasonable commercial party would not have understood the word ‘condition’ to be a legal term of art. Hence, the distributor’s technical linguistic argument to this effect was not very convincing.208 [5-65]   The final factor that affects the strength of an interpretive argument follows from the fact that an interpretive dispute usually involves a collection of

199 See, eg, Durham [2012] UKSC 14, [2012] 1 WLR 867, 877 [19] (Lord Mance). 200 See [6-06] and [6-80]. See also Ecosse [2017] HCA 12, (2017) 261 CLR 544 (the commercial object of a lease was clearly stated in cl 13, namely, it was to approximate a sale of land in circumstances where such a sale was not possible). cf Re Golden Key Ltd [2009] EWCA Civ 636, [28] (Arden LJ); JD Heydon, Heydon on Contract (Thomson Reuters, 2019) 250 [8.30] (‘purpose derived from non-controversial material’); Lord Grabiner, ‘The Iterative Process of Contract Interpretation’ (2012) 128 LQR 41, 46 (‘It is critically important that the “commercial purpose” of the transaction is derived from the contract as a whole and from an accurate understanding of the way in which the various provisions interact’). 201 See [6-06] and [6-105]–[6-106]; D McLauchlan, ‘The ICS Principles: A Failed “Revolution” in Contract Interpretation?’ (2016) 27 New Zealand Universities Law Review 263, 290–91. 202 See [5-49] (n 156). See, eg, Chartbrook [2009] UKHL 38, [2009] 1 AC 1101 (as discussed at [6-30]). 203 See [6-06] and [6-35]–[6-106] (in particular, [6-80] and [6-105]–[6-106]). 204 See [2-27]–[2-28] and [4-07]. 205 ICS [1998] 1 WLR 896 (HL). 206 See [5-14] (n 35). See also ICS [1998] 1 WLR 896, 913 (Lord Hoffmann) (HL) (‘one should start with the assumption that a layman who read the explanatory note and did not venture into the claim form itself was being given an accurate account of the effect of the transaction’). 207 Schuler [1974] AC 235 (HL). 208 See [6-97] (n 302).

The Four Stages of Contract Interpretation  135 competing arguments. Hence, the strength of an argument may be greatly diminished by a countervailing argument such that neither argument is particularly persuasive. This can be seen in the conflicting linguistic arguments in Prenn v Simmonds,209 the competing purposive arguments in Schuler,210 and the rival textual arguments in Rainy Sky.211 On occasion, counter-arguments are put on a purely defensive basis so as to diminish the force of certain arguments. The purposive arguments advanced in International Air Transport Association v Ansett Australia Holdings Ltd212 are a good example. [5-66]  The relative strength of the competing arguments in an interpretive dispute goes a long way to deciding the case. However, the resolution of the construction question also depends on how the rival clusters of arguments are weighed and balanced against each other.

Balance [5-67]   To arrive at the most likely construction, the court must compare the strength of the competing arguments and it must make a choice.213 No bright-line rules dictate this process. Nonetheless, as explained in chapter six, the balancing exercise is a principled one. The following general guidelines are also instructive. [5-68]   The first point to remember is that, although the correct interpretation is chosen as a matter of probability, there is no formal burden of proof.214 The court simply chooses the construction that was probably intended. However, in a practical sense, one party usually bears the onus of establishing its interpretation. This is because, in an ordinary interpretive dispute, one party is seeking to infer an intention from the contract in order to ground its substantive claim pursuant to a rule in the contract. For example, in Prenn v Simmonds,215 it was Simmonds who sought to infer an intention from the contract so as to establish his entitlement to the shares in issue.216 Even if a party bears a pragmatic onus in construction, it still only needs to prove its interpretation as the most likely among a number of possible alternatives. It is only if a party seeks to infer an intention from the contract text that displaces or modifies a doctrinal rule (or other rule of law) that the party is arguably subject to a more onerous burden.217

209 [1971] 1 WLR 1381 (HL) (discussed at [5-08]–[5-09]). 210 Schuler [1974] AC 235 (HL) (discussed at [6-96]). 211 Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900 (discussed at [6-19]). 212 International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3, (2008) 234 CLR 151 (discussed at [6-119]). 213 See [5-26] (n 69). 214 cf McMeel (2017) 530 [17.33] (contrasting interpretation and rectification). 215 [1971] 1 WLR 1381 (HL). 216 See [5-05]–[5-10]. 217 In such cases, ‘clear’ words are usually required: see [7-06] (in particular, n 35).

136  The Cognition of Contract Interpretation [5-69]   The second guideline in terms of balancing competing arguments is that the enquiry is essentially qualitative, not quantitative. That is, no collection of arguments prevails merely because it is greater in number than another. ‘The “correct answer” is not arrived at merely by seeing which side has the greater number of “good” points’.218 It is the collective strength of the underlying arguments that is determinative. That said, an interpretation that is advanced by a number of persuasive arguments defeats a construction that is justified by arguments that are fewer in number and weaker in strength.219 [5-70]   The third factor relevant to balancing competing arguments in construction is that certain types of argument seem to hold sway in the interpretation of particular forms of contract. For example, linguistic arguments and arguments derived from precedent are often given greater weight in the construction of contracts using standard language, such as leases,220 policies of insurance,221 building and construction contracts,222 and standard form contracts.223 This is due to the repetition of familiar phrases and the long history of doctrinal rules governing such contracts.224 A similar approach applies in the interpretation of wills.225 Likewise, in the construction of a registered document226 or the interpretation of a constitution or articles of association,227 contextual arguments are usually given less emphasis. [5-71]   The final matter to bear in mind in the balancing exercise is that a choice between competing constructions may be influenced by judicial preference for particular forms of argument. That is to say, some judges may be more inclined to infer objective intention in construction by analysing the meaning of words, rather than by investigating purposive or consequentialist considerations, and vice versa.228 Contract law scholars claim that recent decisions of the Supreme Court of the United Kingdom evidence a shift back to linguistic emphasis.229 However, if one closely analyses leading interpretation cases, judicial preference does not play much of a role.230 As the Supreme Court claims, its approach to 218 OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27, (2013) 85 NSWLR 1, 20 [61] (Allsop P). 219 See [6-05] and [6-09]–[6-15]. 220 See [3-13] (n 54). 221 See [3-13] (n 55). 222 See [3-13] (n 56). 223 See [3-13] (n 57). 224 See generally J Dorter and JJA Sharkey, Thomson Reuters, Building and Construction Contracts in Australia (looseleaf); D Kelly and M Ball, LexisNexis, Kelly and Ball Principles of Insurance Law (looseleaf). 225 See generally DM Haines, Construction of Wills in Australia (LexisNexis Butterworths, 2007). But note Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 144 [20] (Lord Neuberger). 226 See [3-40] (n 209). 227 See [3-40] (n 210). 228 See [4-38]–[4-40]. 229 See [4-39]. 230 Otherwise than with respect to the linguistic focus that is applied in the interpretation of certain types of contract: see [5-70].

Conclusion  137 interpretation has remained the same.231 In a given case, the correct construction is determined by analysing the unique contest between competing arguments, so as to identify the interpretation that is established to the highest degree of probability.232 A textual emphasis is applied; that is, arguments based in the text, including purposive or consequentialist arguments, are usually more persuasive than arguments derived purely from background.233 The balance struck may be a fine one.234 However, even difficult cases are determined by evaluating the relative strength of the competing arguments. An interpretive dispute is resolved by assessing the extent to which each cluster of arguments clarifies the disputed intention of the parties.

5.4. Conclusion [5-72]   Contract interpretation is difficult to understand in the abstract. If it is simply understood as a process through which meaning or even intention is ascertained, it is hard to explain interpretive reasoning and how interpretive disputes are resolved. A structured understanding is required. And such an understanding is evident if the interpretive process is analysed in action. Adopting a pragmatic focus, the cognition of interpretation is not without structure. As this chapter has demonstrated, contract interpretation is a four-stage process. The technique is triggered by a particular question of intention – a particular question regarding what was agreed in the contract. The aim is to infer objective intention from the choice of words in the contract, so as to resolve the question in dispute. Hence, the process begins with the definition of the question. The subject matter of the question is usually dictated by the dispute. The question may be broad and openended, permitting multiple answers. Or it may be quite specific. In some cases, it is defined by contract doctrine. Once the question is defined, competing answers are formulated – each constituting an ‘interpretation’ or ‘construction’. Of course, the nature of the potential interpretations is dictated by the nature of the question. The next stage is the most time-consuming. It involves the composition of interpretive arguments. Those arguments are built propositionally from the admissible materials. Interpretive arguments come in a variety of forms depending on the materials relied upon to construct the argument. That is to say, interpretive arguments are textual, linguistic, contextual, purposive, consequentialist or normative. Precedent plays a limited role in the formulation of interpretive arguments; at best, a prior decision can outline a potential argument to be considered in a later case. In the final stage of interpretation, the correct construction is chosen by evaluating 231 Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173, 1178–80 [8]–[15] (Lord Hodge). 232 See [6-130]. 233 See [5-63], [6-06] and [6-35]–[6-106] (in particular, [6-80] and [6-105]–[6-106]). 234 See [6-08].

138  The Cognition of Contract Interpretation the competing clusters of arguments. The interpretation that is established to the highest degree of probability is the one that prevails. The textual focus in construction means that arguments based in the contract text are more persuasive than arguments derived purely from background. After all, the aim is to infer objective intention from the choice of words in the contract. Judicial preference plays only a limited role in the balancing exercise. The determination of an interpretive dispute depends on the composition of arguments: which set of arguments establishes the objective intention of the parties to the highest degree of probability? [5-73]   The approach to contract interpretation outlined in this book reflects the pragmatic nature of the interpretive process.235 It fits as a matter of theory. But, more importantly, it is verified and further developed through empirical research. That is to say, it is verified and further developed through a rigorous analysis of the reasoning evident in leading cases on interpretation.236 The proposed approach to interpretation presents a simple, yet sophisticated, way to understand interpretive reasoning. As is demonstrated in the next chapter, it explains how cases of interpretation are determined. That is to say, it explains how interpretive arguments are weighed and balanced to arrive at the most probable construction.

235 See, eg, Simic v New South Wales Land and Housing Corp [2016] HCA 47, (2016) 260 CLR 85, 104 [48] (Kiefel J) (a contract is interpreted ‘pragmatically’); Burrows (n 25) 78 (‘an intensely practical subject’). 236 See Table of Cases, ‘Leading English and Australian Cases on Contract Interpretation’ (35 ­decisions of the Supreme Court of the United Kingdom, the House of Lords and the High Court of Australia).

6 The Practice of Contract Interpretation: The Resolution of Interpretive Disputes 6.1. Introduction [6-01]   Contract interpretation is a process through which objective intention is inferred from the choice of words in a contract. It involves four steps: define the question of interpretation; identify potential answers; formulate underlying arguments; and choose the correct interpretation. This chapter demonstrates that the cognition of interpretation is evident in seminal cases on interpretation – the four-stage interpretive process can be seen in action in those parts of judgments in which judges are resolving interpretive problems. The focus of the chapter is the final stage of interpretation. Its aim is to explain how interpretive disputes are resolved. [6-02]   This chapter advances a principled approach to the balancing exercise in construction. In broad terms, a case of interpretation is determined by identifying the set of arguments that establishes the objective intention of the parties to the highest degree of probability. That said, interpretive disputes come in common forms depending on the nature and type of arguments at play, and disputes involving a similar argument composition are decided in a similar way. Some disputes are one-sided, that is, all or most of the arguments support one construction. For example, a construction that is advanced solely by a linguistic argument fails against an interpretation that is anchored by a range of persuasive arguments derived from textual, contextual, purposive or consequentialist ­considerations. Beyond such straightforward cases, the interpretive task becomes more complicated if the competing arguments are finely balanced. For example, it is often the case that an interpretive dispute is driven by two particularly strong arguments: a linguistic argument, on the one hand, and a purposive or consequentialist argument, on the other. Such a dispute involves tension between ‘linguistic’ interpretation and ‘purposive’ or ‘consequentialist’ construction. Cases of this nature are sometimes quite hard to resolve. A thorough analysis of the textual, linguistic, purposive and consequentialist factors is usually required. A similarly rigorous approach is often needed in cases of inconsistency, that is, disputes involving conflicting textual indicators.

140  The Practice of Contract Interpretation [6-03]   This chapter is based on empirical investigation.1 The data set comprised leading English and Australian judgments on interpretation.2 The focus of the investigation was those parts of the judgments in which judges engaged in the interpretive process. This chapter serves three objectives. First, it confirms the theoretical vision of contract interpretation established in the first part of this book. That is to say, it demonstrates that the reasoning in each of the seminal cases is evidence of the four-stage process in action.3 Second, the chapter explains how cases of interpretation are resolved. It sets out basic principles guiding the resolution of interpretive disputes.4 It shows that disputes regarding i­ nterpretation come in common forms (depending on the nature and type of arguments in favour of each interpretation) and that disputes involving a similar argument composition are resolved in a similar way.5 Third, the chapter demonstrates that apparently conflicting decisions of the Supreme Court of the United Kingdom (and the High Court of Australia) do not evidence a shift in emphasis back to linguistic interpretation.6 Instead, the decisions can be understood within a unified approach, namely, each dispute is determined by identifying the set of arguments that establishes the objective intention of the parties to the highest degree of probability. Sometimes, the meaning of the words is determinative. In other cases, purposive or consequentialist factors are a better indicator of intention. And, in the most difficult cases, it is the interpretation with stronger auxiliary support that prevails. Before analysing the different types of interpretive dispute, this chapter briefly discusses the nature of disputes involving contract interpretation.

6.2.  The Resolution of Interpretive Disputes Principle 1: An interpretive dispute is determined by identifying the collection of arguments that establishes the objective intention of the parties to the highest degree of probability. [6-04]   The key to understanding interpretive disputes is to appreciate that cases of interpretation are determined according to the strength of the arguments in favour of each construction. That is to say, an interpretive dispute is resolved by identifying the collection of arguments that establishes the objective intention of the parties to the highest degree of probability. The specific arguments in each 1 For a more detailed account of this aspect of the empirical investigation, see [1-38]–[1-40]. 2 See Table of Cases, ‘Leading English and Australian Cases on Contract Interpretation’ (35 ­decisions of the Supreme Court of the United Kingdom, the House of Lords and the High Court of Australia). 3 The finding of the quantitative research: see further [1-39]. 4 The principles are also set out collectively at [1-28]. 5 A finding of the qualitative or exploratory research: see further [1-39]. 6 A finding of the qualitative or exploratory research: see further [1-39].

The Resolution of Interpretive Disputes  141 case are, of course, unique to the parties and to the dispute.7 However, guidance can be taken from prior cases on interpretation in terms of understanding how competing considerations are evaluated to arrive at the correct construction. This is because interpretive disputes come in common forms depending on the nature and type of arguments in favour of each construction. In short, interpretation involves recurring patterns of argument.8 [6-05]   The most straightforward interpretive dispute is one-sided: all or most arguments point in favour of a particular interpretation.9 A slightly more challenging dispute is one where the contentions are finely balanced, except for a particularly persuasive argument that ultimately determines the dispute.10 Beyond these rather simple examples, interpretive disputes are usually more complex. In many cases, a construction is advanced either solely or predominantly by a particular argument. For example, it is quite common for one interpretation to be anchored by a linguistic argument. That is, one party alleges that its construction should be adopted because it aligns with the apparent meaning of key words in dispute. Such an interpretation is described in this book as a ‘linguistic interpretation’. If a party advances a construction solely in reliance on a linguistic argument (ie, no other tenable arguments support the alleged construction), it amounts to a ‘strict literal interpretation’. A strict literal interpretation is rarely accepted, if it is advanced against a persuasive alternative, because it usually does not represent what was objectively intended by the choice of words in the contract. In most cases, to be successful, a linguistic interpretation needs some purposive or consequentialist justification. Modern courts are reluctant to adopt a construction that lacks commercial sense, no matter its linguistic foundation.11 [6-06]   Perhaps the most common tension in contract interpretation is between ‘linguistic’ interpretation and ‘purposive’ or ‘consequentialist’ construction.12 A purposive construction is advanced predominantly by a purposive argument; that is, one party alleges that its construction was intended because it aligns with

7 Subject to the limited role of precedent in outlining potential arguments: see [5-54]–[5-57]. 8 A given dispute can be characterised in multiple ways, but the result is the same. For example, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) (ICS) can be characterised as a case involving a determinative argument (see [6-16]), a tension between linguistic interpretation and purposive construction (see [6-35]), or a tension between linguistic interpretation and consequentialist construction (see [6-98]–[6-99]). 9 See further [6-09]–[6-15]. 10 See further [6-16]–[6-25]. 11 See further [6-26]–[6-34]. But note that, in the case of contracts that use standard language, courts are more willing to adopt a linguistic focus: see [5-70]; McCann v Switzerland Insurance Australia Ltd [2000] HCA 65, (2000) 203 CLR 579 (McCann) (as discussed at [6-75]–[6-79]). 12 cf HG Beale, Chitty on Contracts, 33rd edn (Sweet & Maxwell, 2018) 1037–38 [13-043]; McMeel (2017) 33–34 [1.53] (‘[O]ne party may “thrust” with: “If language is plain and unambiguous it must be given effect”. The other may “parry” with: “Not when the literal interpretation would lead to absurd or mischievous consequences or thwart manifest purpose”’).

142  The Practice of Contract Interpretation the object of the contract or one of its parts. A consequentialist construction, on the other hand, is anchored by an argument regarding the potential consequences of the competing interpretations. For example, one party often alleges that its construction should succeed because the other construction would (or could) produce absurd or unreasonable results. The tension between linguistic interpretation and purposive or consequentialist construction is resolved by reference to the strength of the competing arguments: the interpretation that is established to the highest degree of probability is the one that prevails. In most cases, the relative strength of the linguistic, purposive or consequentialist factors is determinative; that is, the apparent meaning of the words makes it clear what was intended, or the relevant contractual objective or practical consequences determine the objective intention of the parties. However, the strength of a purposive or consequentialist argument often depends on the extent to which it is grounded in the contract text.13 Hence, a thorough investigation of the text as a whole is usually required.14 In addition, in some cases, the conflict is determined by analysing which interpretation has better ancillary justification. Is the linguistic interpretation justified by some rational commercial purpose or consequence? Alternatively, is the purposive or consequentialist construction supported by auxiliary considerations?15 [6-07]   The most challenging form of interpretive dispute involves conflicting textual indicators, that is, cases of inconsistency. Each party points to a part (or parts) of the text that reinforces its interpretation. Such a dispute is determined like any other, namely, by evaluating the relative strengths of the competing arguments. Some cases of inconsistency are resolved simply by assessing the strength of the rival textual indicators; that is, one interpretation is clearly intended because it is grounded by a more persuasive textual argument (or arguments). However, cases of inconsistency are challenging because it is often quite hard to determine what was objectively intended by analysing the textual indicators on their own. Hence, the court often investigates which construction has better auxiliary justification; it determines which construction is reinforced as a matter of contractual purpose or pragmatic consequence. In some instances, the court sides with the party that advances the better purposive explanation for textual indicators that are adverse to its case.16 [6-08]   Disputes arising from inconsistency, along with disputes that involve tension between linguistic interpretation and purposive or consequentialist construction, present the most difficulty in contract interpretation. This is because,

13 See [5-63]. 14 See further R Catterwell, ‘Striking a Balance in Contract Interpretation: The Primacy of the Text’ (2019) 23 Edinburgh Law Review 52. 15 See further [6-35]–[6-106]. 16 See further [6-107]–[6-127].

Clear Cases: One-Sided Disputes  143 in at least some of these disputes, the strengths of the competing arguments are quite even. Hence, in such cases, it is hard to conclude what the parties probably intended by agreeing the contract.17 Nonetheless, the contract must be made to ‘yield a solution’.18 This involves a rather delicate balancing of the competing considerations – an exercise over which reasonable minds may differ. By contrast, many interpretive disputes are clear-cut in that the arguments clearly indicate which interpretation was probably intended.

6.3.  Clear Cases: One-Sided Disputes Principle 2: An interpretation that is supported by a range of persuasive ­arguments prevails against an interpretation that is supported by fewer and weaker arguments. [6-09]   In some cases of contract interpretation, it is obvious what the parties objectively intended. This is because the number and cogency of arguments supporting one interpretation dwarf those supporting the competing construction (or constructions). This can be seen in Prenn v Simmonds19 and, even more starkly, in Fiona Trust & Holding Corp v Privalov20 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen.21

17 See, eg, Arnold v Britton [2015] UKSC 36, [2015] AC 1619 (as discussed at [6-100]–[6-104] and [6-106]); ­International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3, (2008) 234 CLR 151 (IATA v Ansett) (as discussed at [6-111]–[6-120] and [6–127]); Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7, (2014) 251 CLR 640 (Electricity Generation) (as discussed at [6-121]–[6-127]); McCann [2000] HCA 65, (2000) 203 CLR 579 (as discussed at [6-75]–[6-79]). 18 Borrowed from McMeel (2017) 60 [1.103]. 19 Prenn v Simmonds [1971] 1 WLR 1381 (HL) (as discussed at [5-05]–[5-10]). 20 Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, [2007] Bus LR 1719 (Fiona Trust). 21 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (HL) (The Diana Prosperity). See also Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47, [2011] SLT 184 (a tenant’s proposed construction of an option price clause in a lease was supported by weak purposive and textual arguments, while the landlord’s ultimately successful construction was supported by a raft of stronger arguments) (cf D McLauchlan, ‘A Construction Conundrum’ [2011] LMCLQ 428, 448 (the reasons in favour of the landlord ‘contain rather too much assertion’)); Geys v Societe General [2012] UKSC 63, [2013] 1 AC 523, 542 [35]–[39] (Lord Hope) (a bank employee had the better linguistic justification, fortified by consequentialist and normative arguments, as to the proper construction of a termination payment clause – by contrast, the bank’s narrow construction was only advanced by a weak linguistic argument) (but see [2013] 1 AC 523, 563–64 [103]–[107] (Lord Carnwath)); Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70, (2001) 210 CLR 181, 188 [11], 201–02 [50]–[53] (Gleeson CJ, Gummow and Hayne JJ) (an inventor relied upon strong linguistic arguments to establish the perpetual operation of a confidentiality agreement) (see further [7-18]).

144  The Practice of Contract Interpretation

Reardon Smith Line Ltd v Yngvar Hansen-Tangen22 [6-10]   Following the 1973 oil crisis, a sub-charterer of an oil tanker refused to accept delivery of the vessel because it did not match a contractual description. The sub-charter was executed in Shelltime 3 form for a five-year term. It was the last in a chain of charters set up by a Japanese company. Each charter in the chain had been executed before the vessel was built. As such, in each charter, the vessel was identified by reference to its yard or hull number. In the sub-charter, the vessel was identified in the preamble as: Newbuilding motor tank vessel called Yard No 354 at Osaka.23

A dispute arose because, due to the subcontracting of the build, the vessel was in fact built in a different yard (in Oshima), such that it had the yard number ‘Oshima 004’.24 [6-11]  The House of Lords dealt with the case largely as a matter of interpretation.25 The interpretive question focused on the nature of the vessel that had to be delivered. Was a vessel built in, or built as, yard number 354 in Osaka required? Or was a vessel identifiable as ‘yard number 354 at Osaka’ ­sufficient? The House of Lords concluded that the latter was intended.26 The correct inference of intention was clear.27 It was reinforced by textual,28 purposive,29 linguistic30 and contextual31 arguments. By comparison, the sub-charterer’s construction

22 The Diana Prosperity [1976] 1 WLR 989 (HL). 23 A similar description formed the header for additional clauses 43–47 of the sub-charter, and it was entered, by addendum, in the intermediate charter. 24 [1976] 1 WLR 989, 995C (Lord Wilberforce) (HL). See further McMeel (2017) 81–82 [1.143]–[1.144]. 25 The House of Lords held that sale of goods law did not apply to the sub-charter: see [1976] 1 WLR 989, 998C–H (Lord Wilberforce), 1000D (Viscount Dilhorne) (HL). See further M Bridge, ‘Reardon Smith Lines Ltd v Yngvar Hansten-Tangen, The Diana Prosperity’ in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Contract (Hart Publishing, 2008). 26 [1976] 1 WLR 989, 997G–H (Lord Wilberforce) (Viscount Dilhorne, Lord Simon and Lord Kilbrandon agreeing), 1001E (Lord Russell) (HL). The conclusion on interpretation left the question of whether such a vessel had been delivered to be decided through factual characterisation: see [7-45]. 27 See Bridge (n 25) 336 (‘plainly right’). 28 Clause 24 and form B described the specifications of the vessel in detail: see [1976] 1 WLR 989, 994A (Lord Wilberforce) (HL). 29 The purpose of the sub-charter was ‘to make available a medium-sized tanker suitable for use as such’: see ibid 997D–F (Lord Wilberforce). The purpose of the description was to provide a mere means of identification – ‘some other purpose than indicating construction at a particular yard’: ibid 997H–998A, 999F (Lord Wilberforce). 30 The word ‘called’ in the description denoted a mere means of identification: see ibid 1000F (Viscount Dilhorne). 31 The shipbuilding contracts and upstream charters used a similar description, thereby reinforcing the conclusion that the description was used as a mere means of identification: see ibid 995B–C, 1000B (Lord Wilberforce), 1002D (Lord Russell). The head-contractor was unable to build a vessel of the size required at its yard – hence, it had to subcontract the build to another company at a different yard: see ibid 999E–F (Lord Wilberforce); [1976] 2 Lloyd’s Rep 60, 69 (Lord Denning MR) (CA).

Clear Cases: One-Sided Disputes  145 had scant justification. No feature of the text or background ­reinforced the inference that the vessel had to be built in yard number 354 in Osaka.32 Nor was there any rational purposive or consequentialist explanation for such a conclusion. Hence, the interpretation advanced by the disponent owner was successful; it was supported by a range of persuasive arguments and it triumphed against an interpretation that was largely unjustified by reference to the text or context.

Fiona Trust & Holding Corp v Privalov33 [6-12]   Owners under a series of time charters alleged that the charterers had induced each charter by bribery. The owners sought to rescind the charters on this basis and the charterers sought to have the issue referred to arbitration. The charterers relied upon a broadly drafted arbitration clause. The clause, in Shelltime 4 form, provided that ‘[a]ny dispute arising under this charter’ could be referred to arbitration. It relevantly stated: (a) This charter shall be construed and the relations between the parties determined in accordance with the laws of England. (b) Any dispute arising under this charter shall be decided by the English courts to whose jurisdiction the parties hereby agree. (c) Notwithstanding the foregoing, but without prejudice to any party’s right to arrest or maintain the arrest of any maritime property, either party may, by giving w ­ ritten notice of election to the other party, elect to have any such dispute referred … to arbitration in London.34

[6-13]   The interpretive question was whether disputes as to validity, in particular, bribery claims, could be referred to arbitration.35 The owners sought to restrain the arbitral proceedings instituted by the charterers, arguing that the arbitration clause must be construed narrowly, such that it is limited to either: (i) disputes regarding rights and obligations created by the charters;36 or (ii) disputes that were in the contemplation of the parties at the time of contracting (ie, the clause did not extend to claims of which one party was ignorant).37 [6-14]   The primary construction advanced by the owners was that the arbitration clause only caught disputes regarding rights and obligations created by the charters. This construction was supported by one rather weak linguistic

32 There was perhaps a viable argument based on ‘Osaka Shipbuilding Company’ being named as the shipbuilder in the intermediate charter. But this argument ‘broke down’ against the relevant ­background: see [1976] 1 WLR 989, 999E–F (Lord Wilberforce) (HL) (as discussed at [6-11] (n 31)). 33 Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719. 34 Emphasis added. 35 See [2007] UKHL 40, [2007] Bus LR 1719, 1722 [2] (Lord Hoffmann) (bribery claims), 1726–27 [23] (Lord Hope) (disputes as to rescission). 36 See ibid 1724 [11] (Lord Hoffmann). 37 See ibid 1728 [27] (Lord Hope).

146  The Practice of Contract Interpretation argument. The phrase ‘arising under’ was said to have a restrictive technical meaning e­ stablished by precedent.38 [6-15]   By contrast, the charterers successfully invoked a range of arguments in support of their construction that the arbitration clause extended to claims regarding formation of the charters, including bribery claims.39 First, from a textual standpoint, the arbitration clause did not specifically exclude disputes regarding validity.40 Second, as a matter of legal background, ‘[d]isputes about validity [were] no less appropriate for determination by an arbitrator than any other kind of dispute’.41 Third, the purpose of the arbitration clause was to facilitate the quick, efficient and impartial resolution of all types of dispute regarding the charter – not merely disputes regarding performance to the exclusion of disputes regarding validity.42 Fourth, on the owners’ construction, some disputes would be dealt with by English courts and under English law, while others would be resolved elsewhere and under different law. This outcome made no commercial sense.43 Finally, from a normative perspective, it promotes legal certainty if an arbitration clause is construed liberally.44 Hence, the House of Lords held unanimously for the ­charterers45 in a decision that illustrates ‘the common-sense approach to construction’.46 The decision was clearly sensible because the probable intention of the parties in agreeing the contract was obvious from the sheer number and cogency of arguments; almost all the arguments were in favour of the charterers. Although not as obvious, the correct construction in a given case may be made clear by a particularly cogent argument.

6.4.  Determinative Arguments: Breaking the Deadlock Principle 3: If the arguments in favour of each interpretation are otherwise evenly balanced, a particularly cogent argument is often determinative.

38 See ibid 1724 [11] (Lord Hoffmann). The argument was not particularly persuasive because, inter alia, the draftsman of the Shelltime 4 form had used the phrase ‘arising under this charter’, interchangeably with the phrase ‘arisen out of this charter’: ibid 1724 [12] (Lord Hoffmann). 39 Only disputes ‘as to whether there was ever a contract at all’ fell outside the clause: [2007] EWCA Civ 20, [2007] Bus LR 686, 696 (Longmore LJ) (for the Court). See also G McMeel, ‘Arbitration Agreements: Construction and Distinctiveness – A New Dawn?’ [2007] LMCLQ 292, 294. 40 [2007] UKHL 40, [2007] Bus LR 1719, 1728 [27] (Lord Hope). 41 ibid 1728 [27] (Lord Hope). 42 A purpose apparently derived from an appreciation of business common sense: ibid 1723 [6]–[7] (Lord Hoffmann). 43 ibid 1728 [28] (Lord Hope). 44 ibid 1728 [26] (Lord Hope). See further [3-28]. 45 [2007] UKHL 40, [2007] Bus LR 1719, 1725 [15] (Lord Hoffmann) (Lord Scott, Lord Walker and Lord Brown agreeing), 1726–29 [23]–[31] (Lord Hope) (Lord Brown agreeing). 46 McMeel (2017) 306 [7.34].

Determinative Arguments: Breaking the Deadlock  147 [6-16]  Interpretive disputes are sometimes quite finely balanced. That is to say, each construction is advanced by a collection of arguments of roughly equal strength, making it hard to determine which construction was probably intended.47 However, in some cases, the deadlock is clearly broken by a determinative argument. The decisive contention may be textual in nature. This can be seen in Investors Compensation Scheme Ltd v West Bromwich Building Society:48 the reference to claims ‘sounding in rescission for undue influence’ as an example of ‘any claim’ was ‘very strange’.49 Alternatively, the determinative argument may be normative, such as in Bank of Credit and Commerce International SA v Ali,50 or it may be consequentialist in nature, such as that which was decisive in Rainy Sky SA v Kookmin Bank.51

Rainy Sky SA v Kookmin Bank52 [6-17]  Six identical shipbuilding contracts required payment by five equal instalments, four of which were to be paid in advance while the vessel was under construction. Payment of the first instalment was conditional upon the builder delivering a refund guarantee: a guarantee by a bank that, in certain circumstances, it would refund any instalments paid by the purchasers. Meeting this condition, identical refund guarantees were issued to each purchaser and the first instalments were paid (one purchaser also paid the second instalment). Shortly thereafter, the shipbuilder took steps towards insolvency. The question was whether the guarantee responded in the event of the shipbuilder’s insolvency. This was a basis for a refund under the shipbuilding contracts. However, the guarantee was structurally ambiguous (and arguably inconsistent) on the question whether it was triggered in the event of insolvency. [6-18]   Although not labelled as such, paragraph 2 of the guarantee resembled a recital. It stated that the relevant purchaser was entitled to a refund under the linked shipbuilding contract and listed the circumstances in which the purchaser 47 See [6-08]. 48 ICS [1998] 1 WLR 896 (HL) (discussed at [5-14] (text at nn 37–38)). 49 ibid 912A (Lord Hoffmann). 50 Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251, 263 (BCCI v Ali). 51 Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 (Rainy Sky). See also McCann [2000] HCA 65, (2000) 203 CLR 579 (as discussed at [6-75]–[6-79] (in particular, n 243)); Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13, (2019) 93 ALJR 582, 592 [46]–[48] (Kiefel CJ, Gageler, Nettle and Gordon JJ), 600 [83] (Edelman J) (arbitration clauses in a series of settlement deeds were construed broadly so as to capture validity claims because, the linguistic considerations being neutral, it was clear that the object of the agreements was to maintain confidentiality); Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173 (Wood) (the narrow object of an indemnity in a share sale agreement was determinative, considering that the linguistic arguments regarding the indemnity clause were not persuasive) (discussed at [6-55]–[6-60]). 52 Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900.

148  The Practice of Contract Interpretation was so entitled. However, it omitted the insolvency of the builder as such a circumstance. Paragraph 3 then contained the operative guarantee. It provided that, ‘[i]n consideration of [the purchaser’s] agreement to make the pre-delivery instalments under the [shipbuilding] contract’, the bank undertook to pay to the purchaser on demand ‘all such sums due to you under the contract’. Set out in full, paragraphs two and three stated: [2] Pursuant to the terms of the contract, you are entitled, upon your rejection of the vessel in accordance with the terms of the contract, your termination, cancellation or rescission of the contract or upon a total loss of the vessel, to repayment of the predelivery instalments of the contract price paid by you prior to such termination or a total loss of the vessel (as the case may be) and the value of the buyer’s supplies delivered to the shipyard (if any) … [3] In consideration of your agreement to make the pre-delivery instalments under the contract and for other good and valuable consideration (the receipt and adequacy of which is hereby acknowledged), we hereby, as primary obligor, irrevocably and unconditionally undertake to pay to you … all such sums due to you under the contract.

[6-19]  On a purely textual analysis, the arguments were ‘finely balanced’.53 The bank claimed that the phrase ‘all such sums’ in paragraph 3 referred to the limited repayments enumerated in paragraph two.54 Hence, so the bank argued, paragraph 2 fulfilled the purpose of exhaustively defining the circumstances in which the purchaser could call on the guarantee.55 The purchasers, on the other hand, claimed that ‘all such sums’ in paragraph 3 was a reference to the purchaser’s ‘agreement to make the pre-delivery instalments under the [shipbuilding] contract’ (at the commencement of the paragraph).56 Hence, it was submitted, paragraph 2 merely served as a preamble.57 This explanation of paragraph 2 was not particularly persuasive58 – the paragraph was neither expressed, nor positioned, as a preamble. But the bank’s contention that paragraph 2 was meant to crystallise the scope of the guarantee also had its problems. In particular, paragraph 2 referred to the purchaser’s entitlement to be repaid for not only ‘the pre-delivery instalments’, but also ‘the value of … supplies delivered to the shipyard’. Hence, paragraph 2 could not define the scope of the guarantee because the bank’s liability was capped at precisely the amount of the pre-delivery instalments. There was no room for payment for delivered supplies.59

53 ibid 2912 [35] (Lord Clarke). See also ibid 2914 [40] (Lord Clarke). 54 ibid 2904 [9] (Lord Clarke). 55 ibid 2911 [32] (Lord Clarke). See also [2010] EWCA Civ 582, [2010] 1 CLC 829, 845 [49] (Patten LJ) (Thorpe LJ agreeing) (overruled) (‘obvious purpose’). 56 [2011] UKSC 50, [2011] 1 WLR 2900, 2904 [9] (Lord Clarke). 57 ibid 2912 [34] (Lord Clarke). 58 ibid 2911 [32], 2914 [40] (Lord Clarke). See also [2010] EWCA Civ 582, [2010] 1 CLC 829, 837–38 [21] (Sir Simon Tuckey), 845 [48] (Patten LJ) (overruled). 59 [2011] UKSC 50, [2011] 1 WLR 2900, 2914 [38] (Lord Clarke).

Determinative Arguments: Breaking the Deadlock  149 [6-20]   The purchasers succeeded before the Supreme Court.60 The text being ambiguous, the commercial consequences of the competing interpretations were paramount.61 Ordinarily, a first-class security, such as the guarantees, would respond in the event of insolvency. In fact, insolvency would be the key risk mitigated by such a security. Hence, the bank’s construction would give rise to the ‘surprising and uncommercial’ result that the guarantees in question would not fulfil this rudimentary function.62 Such a result could not have been intended without clear words, particularly considering that the outcome lacked a ‘credible commercial’ explanation.63 The correct inference of intention was therefore reasonably clear in light of the commercial realities at hand: ‘business common sense [acted] as a tie breaker between two tenable readings of the contract’.64 That is to say, the consequentialist argument in favour of the purchasers broke the deadlock between finely balanced textual and purposive considerations. By contrast, in BCCI v Ali, it was a normative argument that ultimately determined the dispute.

Bank of Credit and Commerce International SA v Ali65 [6-21]   The ex-employee of a bank had executed a broad release upon being made redundant. The release was granted in exchange for payments going beyond his statutory entitlements. The release was expressed to apply to all or any claims whether under statute, common law or in equity of whatsoever nature that exist or may exist.

The question was whether the release barred ‘stigma’ claims for breach of contract that came to light after execution of the release.66 The liquidators of the employer bank contended that the release barred all claims arising from the employment relationship, including ‘stigma’ claims. The employee, on the other hand, argued that the release was limited to claims relating to termination of the employment relationship. [6-22]   In support of their construction, the liquidators relied primarily on a linguistic argument that the phrase ‘all or any claims … that exist or may exist’

60 ibid 2916 [45] (Lord Clarke) (Lord Phillips, Lord Mance, Lord Kerr and Lord Wilson agreeing). 61 cf ibid 2916 [45] (Lord Clarke) (the purchasers’ construction was ‘consistent with the commercial purpose of the bonds in a way in which the bank’s construction [was] not’). 62 ibid 2914–15 [41] (Lord Clarke). 63 ibid 2916 [44] (Lord Clarke). cf Carter (2013) 548 [16-23] (‘Both constructions were tenable, and neither was commercially absurd’). 64 McMeel (2017) 96 [1.173]. 65 BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251. 66 ‘Stigma’ claims are claims for damages for loss arising from an association with an employer where the association has handicapped the employee in obtaining other employment: ibid 258 [4] (Lord Bingham).

150  The Practice of Contract Interpretation meant ‘all possible claims’.67 This certainly seemed to be the ordinary meaning of the words.68 However, the argument was not particularly persuasive in terms of supporting the bank’s narrow construction. The liquidators could not simply claim that the release extended to ‘all possible claims’. Some claims were clearly outside the scope of the release, for example, any claim for repayment of moneys deposited with the bank. As Lord Bingham noted, ‘acceptance of these claims involve[d] acceptance that the clause d[id] not mean all it might be thought to say’.69 [6-23]  Turning to the employee’s construction, it was advanced primarily by what amounted to a consequentialist argument. It would be unreasonable or absurd for the parties to have agreed a release of claims of which neither party was aware.70 [6-24]  The competing linguistic and consequentialist factors took centre stage in the dispute. Each party justified its construction on a purposive basis in that each party could explain why the bank had made payments beyond the employee’s statutory redundancy entitlements. For the liquidators, the aim of the additional payment was to extinguish unknown claims – to ‘mop up any other claims which [the employee] might have’ and ‘draw a final line under the employment ­relationship’.71 For the ex-employee, the benefit to the bank in the additional payment was to resolve and avoid proceedings regarding claims arising from termination.72 Hence, not much could be taken from an analysis of the commercial objects of the release.73 [6-25]  In the end, the deadlock was broken by a normative argument in favour of the ex-employee. A majority of the House of Lords was persuaded by the proposition that clear words were required to release a party from claims of which neither party was aware.74 This argument was supported by long-standing authority.75 For Lord Bingham, with whom Lord Browne-Wilkinson agreed, this amounted to ‘a fair construction’ of the release.76 For Lord Clyde, it was simply ‘improbable’ that a release of all future unknown claims was intended by the words 67 See [1999] ICR 1068, 1076 [6], 1078 [12] (Lightman J) (Ch); [2001] UKHL 8, [2002] 1 AC 251, 282 [80] (Lord Clyde). 68 See [2000] ICR 1410, 1414 [7] (Sir Richard Scott VC) (‘the language … read literally’), 1430 [55] (Chadwick LJ) (‘apt, as a matter of language’) (CA). 69 [2001] UKHL 8, [2002] 1 AC 251, 263 [18] (Lord Bingham). See also [2001] UKHL 8, [2002] 1 AC 251, 282 [80] (Lord Clyde). 70 ibid 284 [85]–[86] (Lord Clyde). 71 ibid 268 [34] (Lord Nicholls), 272 [47] (Lord Hoffmann). 72 This object followed from the nature and legal significance of the form of the release (an industrial relations form) and the quantum of the payment (one-twelfth of the employee’s gross annual salary): see ibid 283 [84] (Lord Clyde). 73 But see ibid 271 [47] (Lord Hoffmann) (dissenting on the interpretive issue) (‘To exclude unknown claims makes the release nonsensical’). See also ibid 283–84 [84]–[85] (Lord Clyde). 74 ibid 260 [10] (Lord Bingham). See also ibid 266 [29] (Lord Nicholls) (‘the scope of general words of a release depends upon the context’). 75 See, eg, Lyall v Edwards (1861) 6 H & N 337, 347; 158 ER 139, 143 (Pollock CB) (Ex). 76 [2001] UKHL 8, [2002] 1 AC 251, 264 [19] (Lord Bingham) (Lord Browne-Wilkinson agreeing).

Strict Literal Interpretation: A Lack of Sensible Justification  151 chosen: ‘words more precise than the generalities … used’ were needed to convey such an intention.77 For Lord Nicholls, there was ‘something inherently unattractive in treating [the] parties as having intended to … release a claim which, as a matter of law, did not then exist and whose existence could not then have been foreseen’.78 Only Lord Hoffmann was persuaded by the liquidators’ interpretation. His judgment was influenced by purposive considerations79 and his disdain for arguments derived from precedent.80 Nonetheless, for the majority, the determinative consideration was essentially one of principle: the normative argument that a release should not be construed so as to encompass unknown claims. It broke the impasse between otherwise finely balanced arguments. Such a dispute can be distinguished from those cases in which one party advances a strict literal interpretation, that is, an interpretation that is based solely on a linguistic argument.

6.5.  Strict Literal Interpretation: A Lack of Sensible Justification Principle 4: A strict literal interpretation (ie, an interpretation that is advanced solely by the meaning of the words) fails against a construction that is supported by a range of persuasive arguments. [6-26]   A ‘strict literal interpretation’ is anchored by one tenable argument: a linguistic argument. The construction advanced by the owners in Fiona Trust81 was a strict literal interpretation.82 The owners claimed that only disputes regarding rights and obligations created by the charters could be referred to arbitration. In advancing this construction, the owners relied exclusively on the linguistic argument that the words ‘arising under’ dictated such a conclusion. This was an argument derived from precedent and one that was not particularly persuasive.83 Hence, it was rejected by the House of Lords.84 77 ibid 284 [85]–[86] (Lord Clyde). 78 ibid 268 [35] (Lord Nicholls) (emphasis in original). The action for breach of an employer’s implied duty of trust and confidence was only recognised in case law that followed execution of the release: see ibid 268 [35] (Lord Nicholls). 79 See [6-24] (nn n 72–73). 80 See [2001] UKHL 8, [2002] 1 AC 251, 272–78 [50]–[67] (Lord Hoffmann). In Lord Hoffmann’s view, to resort to such arguments was to invoke, or ‘retrieve’, ‘old intellectual baggage’: see [2001] UKHL 8, [2002] 1 AC 251, 277 [62] (Lord Hoffmann) (see further ICS [1998] 1 WLR 896, 912 (Lord ­Hoffmann) (HL)). 81 Fiona Trust [2007] UKHL 40, [2007] Bus LR 1719. 82 See [6-12]–[6-15]. 83 See [6-14] (n 38). 84 See [6-15]. See also McMeel, ‘Arbitration Agreements’ (n 39) 292 (‘linguistic niceties’ shall no longer ‘undermine a decision to refer disputes in relation to a transaction to arbitration’), 294 (‘semantic refinements should be a thing of the past’).

152  The Practice of Contract Interpretation [6-27]  The strict literal interpretation that was rejected in Fiona Trust was based on a particularly weak linguistic argument. However, even if the ­argument were quite persuasive, the owners still would not have succeeded. This is because modern courts rarely construe a contract in a strict literal manner if a sensible alternative is put forward, that is, if there is an opposing interpretation that is advanced by a range of persuasive arguments.85 In such a case, the court holds that the parties have made an obvious error86 or it simply ‘reads down’ one provision by reference to another.87 This reflects the shift in contract interpretation from traditional literalism to modern contextualism:88 some tenable purposive or consequentialist explanation is usually needed.89 Chartbrook Ltd v Persimmon Homes Ltd90 and Re Sigma Finance Corp91 are illustrative examples.92

Chartbrook Ltd v Persimmon Homes Ltd93 [6-28]   An owner of land had granted a licence authorising the construction of a mixed commercial and residential development. The owner was entitled to separate amounts for the sale of commercial premises, residential flats and residential car parking. The dispute focused on the amount due for sales of residential flats. The pricing formula was complex. It included two components. First, the owner was entitled to a guaranteed minimum amount, equalling £4.648 million.

85 A strict literal interpretation still succeeds if the opposing interpretation is quite weak, see, eg, Thompson v Goblin Hill Hotels Ltd [2011] UKPC 8, [2011] 1 BCLC 587 (as discussed at [6-82]–[6-87]) (Goblin Hill). cf Lewison (2015) 63 [2.08] (‘When the words of a contract are clear, the court must give effect to them even if they have no discernable commercial purpose’), 433 [7.18] (‘Where a construction would produce an unfair result, the court will often require clear words to support the construction in question’). 86 See [3-56]–[3-60]. 87 See [3-55]. 88 See, eg, BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, 274 [54] (Lord Hoffmann); McMeel (2017) 28–33 [1.39]–[1.52]. 89 In the case of contracts that use standard language, courts may be more willing to adopt a strict literal construction: see [5-70]; McCann [2000] HCA 65, (2000) 203 CLR 579 (as discussed at [6-75]–[6-79]). 90 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 (Chartbrook). 91 Re Sigma Finance Corp [2009] UKSC 2, [2010] BCC 40 (Re Sigma). 92 See also Durham v BAI (Run Off) Ltd [2012] UKSC 14, [2012] 1 WLR 867 (an insurer relied unsuccessfully on the linguistic argument that ‘sustained’ meant ‘diagnosed or manifested’ in denying a mesothelioma claim – by contrast, the claimant relied upon a raft of textual, purposive and consequentialist arguments). Contrast Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45, (2011) 86 ALJR 1 (disposing of an application for special leave from the decision in Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137). 93 Chartbrook [2009] UKHL 38, [2009] 1 AC 1101.

Strict Literal Interpretation: A Lack of Sensible Justification  153 Second, the owner was entitled to a ‘balancing payment’ (or ‘Additional Residential Payment’) to be calculated as: 23.4 per cent of the price achieved [on the sale of all residential flats] in excess of [the guaranteed minimum, ie, £4.648 million].94

[6-29]   The ‘balancing payment’ or ‘Additional Residential Payment’ was the focus of contention. The owner relied exclusively on the ordinary meaning of the pricing formula.95 It claimed that the balancing payment was calculated by: (i) establishing the amount by which the price achieved on the sale of all residential flats exceeded the guaranteed minimum; and (ii) multiplying that figure by 23.4 per cent. On this interpretation, the owner was entitled to an additional £4.484 million. The difficulty for the owner was that its interpretation lacked tenable purposive or consequentialist justification.96 It was founded solely on the meaning of the words in the formula. [6-30]   In opposition, the developer argued that the balancing payment was a contingency. It was calculated by: (i) multiplying the price achieved on the sale of all residential flats by 23.4 per cent; and (ii) determining the extent to which that figure exceeded the guaranteed minimum. On this interpretation, the owner was only entitled to an additional £897,051. The developer’s construction did not quite fit with the ordinary meaning of the words in the formula.97 However, it



94 The

relevant definitions stated in full:

‘Price’ means the aggregate of the Total Land Value and the Balancing Payment. ‘Total Land Value’ means the aggregate of the Total Residential Land Value, the Total Commercial Land Value and the Total Residential Car Parking Land Value. ‘Total Residential Land Value’ shall be £76.34 per square foot multiplied by the Residential Net Internal Area … ‘Balancing Payment’ means the Additional Residential Payment. ‘Additional Residential Payment’ means 23.4 per cent of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives. ‘Minimum Guaranteed Residential Unit Value’ means for each Residential Unit the Total ­Residential Land Value divided by the number of Residential Units for which Planning Permission is granted. 95 See [2009] UKHL 38, [2009] 1 AC 1101, 1111 [10], 1112 [16] (Lord Hoffmann) (an interpretation ‘in accordance with ordinary syntax’); [2007] EWHC 409 (Ch), [2007] 1 All ER (Comm) 1083, 1098 [53] (Briggs J) (overruled) (‘the ordinary meaning of the definition of ARP seems to me clearly to point towards [the owner’s] rather than [the developer’s] construction’). Contrast [2009] UKHL 38, [2009] 1 AC 1101, 1132 [86] (Lord Walker) (the definition was ‘undoubtedly ambiguous’). 96 [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 387, 406 [92] (Lawrence Collins LJ) (dissenting, but accepted by the House of Lords) (‘it is very difficult (and probably impossible) to discern the commercial sense behind [the owner’s] construction’). But see [2007] EWHC 409 (Ch), [2007] 1 All ER (Comm) 1083, 1097 [47] (Briggs J) (overruled) (alleged purposive justification in favour of owner) (‘The aim or object of the ARP formula is … to provide to [the owner] a share in the residential sales revenue, by way of addition to the guaranteed minimum payments’). 97 See [6-29] (n 95).

154  The Practice of Contract Interpretation was justified as a matter of commercial purpose and practical consequence. The object of the balancing payment was to create a contingency that allowed the owner to benefit from a rise in the property market.98 Importantly, this commercial object was evident from the text as a whole. In particular, the ‘guaranteed’ amount was described as a ‘minimum’ (see paragraph 1 of Schedule 6) and the provisions governing payment under the contract referred to ‘the date of payment if any of the [balancing payment]’ (see paragraph 3.3 of Schedule 6).99 The notion that the balancing payment was meant to operate as a contingency also followed from the fact that, on the developer’s construction, the obligation to pay the balancing payment accrued once sales exceeded a specific ‘trigger point’, namely, £228,000  per 700-square-foot flat.100 By comparison, on the owner’s construction, the additional payment would always accrue, unless there was a ‘catastrophic market crash’; in particular, the market for the units would need to fall at least 66 per cent below ‘anticipated selling prices’.101 The problem for the owner (in advancing such purposive justification) was that the payment mechanism did not make commercial sense as a safeguard against a market crash because the figure chosen was not only very low, it was also arbitrary.102 As Lord Hoffmann remarked, having calculated the expected minimum amount per unit to be £53,438: If the parties were wanting to guess at some extraordinary fall in the market against which Chartbrook was to be protected, why £53,438? Why not £50,000 or £60,000, or £100,000? A figure chosen to represent someone’s fears about a possible collapse in the market could only have been based upon wild speculation, not the kind of calculation which produces a figure like £53,438.103

The lack of a rational commercial explanation for its construction was effectively the death knell for the owner.104 Hence, the developer’s construction was unanimously adopted by the House of Lords.105 The owner’s interpretation was persuasive when the words in the formula were analysed in isolation. But it lost its appeal once one looked beyond those words. The objective intention of the parties – what was intended by the choice of the words – became clear when the 98 [2009] UKHL 38, [2009] 1 AC 1101, 1111 [13] (Lord Hoffmann). 99 See ibid 1112 [16] (Lord Hoffmann), 1134 [90]–[91] (Lord Walker); [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 387, 406 [91] (Lawrence Collins LJ) (dissenting, but accepted by the House of Lords). See further McMeel (2017) 93–94 [1.168]. 100 [2009] UKHL 38, [2009] 1 AC 1101, 1111 [13] (Lord Hoffmann). 101 See [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 387, 406 [92] (Lawrence Collins LJ) (dissenting, but accepted by the House of Lords). A consequence established from background, ie, ‘anticipated selling prices’. 102 See [2009] UKHL 38, [2009] 1 AC 1101, 1134 [91] (Lord Walker); [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 387, 406–07 [92]–[93] (Lawrence Collins LJ) (dissenting, but accepted by the House of Lords) (‘[the owner’s] construction made no sense’). 103 [2009] UKHL 38, [2009] 1 AC 1101, 1113 [19] (Lord Hoffmann). 104 See Daventry DC v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333, 1370 [153] (Toulson LJ) (‘the linguistic argument in favour of the owner’s construction was outweighed by its commercial irrationality’). 105 [2009] UKHL 38, [2009] 1 AC 1101, 1112 [16], 1113 [21] (Lord Hoffmann) (Lord Hope, Lord Rodger and Baroness Hale agreeing), 1134 [91] (Lord Walker) (Baroness Hale agreeing).

Strict Literal Interpretation: A Lack of Sensible Justification  155 contract was construed as a whole in its commercial context. Hence, Chartbrook demonstrates that a modern court is reluctant to embrace a construction that lacks commercial sense, no matter the strength of its linguistic justification, if there is a sensible alternative.106

Re Sigma Finance Corp107 [6-31]   The composition of competing arguments in Re Sigma was quite similar to that in Chartbrook. The dispute surrounded the obligations of a security trustee under a failed investment scheme. The scheme was effected through a structured investment vehicle, Sigma Finance Corp (Sigma). Sigma acquired asset-backed securities using funds raised largely through the issue of medium-term notes. The scheme was thought to be insolvency proof, but was brought down during the global financial crisis. Sigma defaulted under its liquidity facility and this triggered the enforcement provisions and a 60-day ‘Realisation Period’ under the security trust deed. During this period, clause 7.6 required that the security trustee realise assets and pool funds for distribution among short-term and long-term note holders. The final sentence of the clause also stated: During the Realisation Period, the Security Trustee shall so far as possible discharge on the due dates there for any Short Term Liabilities falling due for payment during such period.

[6-32]   A class of note holders (referred to as ‘party A’) claimed that they were entitled to payment in full. The party A note holders held ‘Short Term Liabilities’ that fell due for payment at the beginning of the ‘Realisation Period’. Hence, these note holders relied upon the ordinary meaning of the final sentence in clause 7.6 to claim full payment. Such payment would have exhausted funds available for distribution to note holders. Not surprisingly, note holders with later maturity dates claimed that pari passu distribution was intended in the event of a shortfall of assets: (i) the party B note holders claimed pari passu distribution between all short-term liabilities falling due during the ‘Realisation Period’; and (ii) the party C and D note holders argued for pari passu distribution between all short-term and long-term liabilities. Each of these constructions was anchored by clause 7.9 which required a proportionate reduction in the pooled funds if assets could not meet secured debts. Clause 7.9 stated: If the principal amount of the Assets is less than the principal amount of the Issuer’s Total Indebtedness, the Security Trustee shall calculate the proportion borne by the

106 See further McMeel (2017) 93 [1.167] (‘a purposive reading’); D McLauchlan, ‘The ICS ­Principles: A Failed “Revolution” in Contract Interpretation?’ (2016) 27 New Zealand Universities Law Review 263, 290. 107 Re Sigma [2009] UKSC 2, [2010] BCC 40.

156  The Practice of Contract Interpretation deficit to the Issuer’s Total Indebtedness and shall reduce the principal amount of the Assets allocable to the Short Term Pool and each Long Term Pool accordingly.

[6-33]   The party C and D note holders succeeded by majority in the Supreme Court.108 Their interpretation prevailed because it not only had a firm linguistic footing, but it was also justified on a purposive and consequentialist basis. The evident object of clause 7, which contained sub-clause 7.6, was to create shortterm and long-term pools for pro rata distribution.109 It was also clear, from the text as a whole, that sub-clause 7.6 was only meant to apply if there were sufficient assets to cover short-term and long-term liabilities.110 That is, the object of the provision was simply to enable payment during the ‘Realisation Period’ assuming a sufficiency of assets. In addition, it would have been odd for priority to attach merely because indebtedness fell due during the ‘Realisation Period’. This seemed commercially improbable.111 As Lord Mance noted: ‘why [should] realisation period debts … be given priority according to the happenstance that their payment was possible within the realisation period’.112 This contradicted the ‘apparent aim to achieve equity between all creditors’.113 Hence, the construction advanced by the party A note holders lacked commercial justification.114 By comparison, on the interpretation put by the party C and D note holders, the final sentence of clause 7.6 had a sensible commercial object: it only applied if the scheme was solvent.115 [6-34]   The decision in Re Sigma, like that in Chartbrook, demonstrates that a strong linguistic foundation is usually insufficient to advance a construction against an interpretation that is fortified on a linguistic, purposive and consequentialist basis. Some commercial rationale is required.116 A construction is most persuasive

108 ibid 56 [34] (Lord Mance) (Lord Hope, Lord Scott and Lord Collins agreeing). 109 ibid 51 [15]–[17], 55 [32] (Lord Mance). That this was the object of the clause could be inferred from clause 7.6 (to the extent that it required the creation of Short and Long Term pools), clause 7.9 (which dictated proportionate distribution) and clauses 7.11.2 and 7.11.3 (which also referred to ‘pro rata’ distribution). 110 ibid 50–51 [13]–[14] (Lord Mance). The triggering of the enforcement provisions did not ‘necessarily equate with insolvency’. Clauses 7.3 and 7.4 assumed a sufficiency of assets to meet note holder liabilities, eg, clause 7.3 required that the security trustee draw down on liquidity facilities which, in practice, would only be possible with a sufficiency of assets. Clauses 7.6 and 7.7 contemplated matching pools of assets and liabilities (and the contested sentence in clause 7.6 only required distribution, ‘so far as possible’). It was only clause 7.9 that contemplated a shortfall. 111 ibid 52 [21] (Lord Mance). 112 ibid 51 [18] (Lord Mance). 113 ibid 55 [32] (Lord Mance). 114 Contrast [2008] EWCA Civ 1303, [2009] BCC 393, 415 (Rimer LJ) (overruled) (‘pay as you go’ rationale). 115 Re Sigma [2009] UKSC 2, [2010] BCC 40, 50–51 [13]–[14] (Lord Mance) (clauses 7.3–7.8 were evidently drafted on the assumption that there were sufficient assets to cover secured creditors). 116 cf RC Connal, ‘Has the Rainy Sky Dried Up? Arnold v Britton and Commercial Interpretation’ (2016) 20 Edinburgh Law Review 71, 71 (the English position, at least prior to Arnold v Britton [2015] UKSC 36, [2015] AC 1619).

Linguistic Interpretation and Purposive Construction  157 when it is linguistically justified, but also reinforced as a matter of commercial purpose or practical consequence. Hence, more difficult interpretive disputes arise when a linguistic interpretation that has some auxiliary support is pitted against a convincing purposive or consequentialist construction.

6.6.  Linguistic Interpretation and Purposive Construction Principle 5: A linguistic interpretation (ie, an interpretation advanced ­predominantly by a linguistic argument) prevails against a purposive construction (ie, a construction supported primarily by a purposive argument) if the meaning of the words is a better indicator of intention than the purposive considerations. Principle 6: A purposive construction prevails against a linguistic interpretation if the purposive considerations are a better indicator of intention than the meaning of the words. Principle 7: A purposive construction is more persuasive if the alleged contractual objective is evident from the contract text. Principle 8: If the linguistic and purposive factors are evenly matched, a dispute between linguistic interpretation and purposive construction is resolved by analysing the auxiliary justification for each interpretation, including, in ­ ­particular, whether the linguistic interpretation can be rationally explained. [6-35]   Many interpretive disputes involve tension between tenable ­linguistic and purposive constructions.117 For example, on one view, ICS118 involved a tension between a linguistic interpretation and a construction advanced on a purposive basis.119 As was demonstrated in the preceding section, a linguistic interpretation needs sensible purposive or consequentialist justification for it to be convincing in the face of persuasive opposition.120 By comparison, the strength

117 See Arnold v Britton [2015] UKSC 36, [2015] AC 1619, 1628 [17]–[18] (Lord Neuberger). cf E McKendrick, ‘The Interpretation of Contracts: Lord Hoffmann’s Re-Statement’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 140–41; G Leggatt, ‘Making Sense of Contracts: The Rational Choice Theory’ (2015) 131 LQR 454, 472. 118 ICS [1998] 1 WLR 896 (HL). 119 See [5-11]–[5-14]. The case can also be understood as one involving a determinative argument (see [6-16]) or a conflict between linguistic interpretation and consequentialist construction (see [6-98]–[6-99]). 120 Otherwise, it amounts to a ‘strict literal interpretation’ – one that is usually rejected by a court: see [6-05] and [6-26]–[6-34].

158  The Practice of Contract Interpretation of a purposive construction (ie, a construction advanced primarily by a purposive argument) often depends on the extent to which the relevant object can be gleaned from the text itself. [6-36]   As with any interpretive dispute, a tension between linguistic interpretation and purposive construction is resolved by evaluating the relative strengths of the competing arguments. A linguistic interpretation prevails against a purposive construction if – the auxiliary arguments being neutral or not persuasive – the meaning of the words is a stronger indicator of intention than the alleged purposive justification.121 This can be seen in Agricultural and Rural Finance Pty Ltd v Gardiner.122 Of course, the converse proposition is also true: a purposive construction prevails against a linguistic interpretation if, subsidiary arguments aside, the relevant contractual objective (or objectives) are a stronger indicator of intention than the meaning of the words.123 Three cases exemplify such a dispute: Royal Botanic Gardens and Domain Trust v South Sydney City Council,124 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,125 and Wood v Capita Insurance Services Ltd.126 [6-37]  A purposive construction is more persuasive if the relevant objective is evident from the contract text.127 Such a construction can defeat even a quite persuasive linguistic interpretation; that is, it can defeat an interpretation that is justified sensibly both as a matter of meaning and beyond its linguistic roots. Hence, a purposive construction succeeded in Charter Reinsurance Co Ltd v Fagan128 because the object was apparent from ‘the landscape of the instrument as a whole’.129 By comparison, in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd,130 the alleged purpose could not be deduced 121 cf McMeel (2017) 56 [1.95] (‘Commercial purpose may not be enough to override the express contractual language’); Lewison (2015) 63–69 [2.08]; Lewison and Hughes (2012) 40–43 [2.07]. 122 Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57, (2008) 238 CLR 570 (Gardiner). See also Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54, (2012) 247 CLR 129 (a persuasive linguistic interpretation defeated a weak purposive construction). 123 cf Prenn v Simmonds [1971] 1 WLR 1381, 1385 (Lord Wilberforce) (HL); Glynn v Margetson & Co [1893] AC 351, 357 (Lord Halsbury LC) (HL); Lewison (2015) 524–25 [9.09]; Lewison and Hughes (2012) 435–37 [9.09]. 124 Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5, (2002) 240 CLR 45 (Royal Botanic). 125 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, (2015) 256 CLR 104 (Mount Bruce) (certainly in relation to the ‘by whom’ question (see [5-23], [6-49]–[6-54]) and also arguably in relation to the ‘from where’ question (see [5-23], [6-110])). 126 Wood [2017] UKSC 24, [2017] AC 1173. See also Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12, (2017) 261 CLR 544 (Ecosse) (the purposive construction of a covenant in a lease prevailed against a linguistic interpretation, in large part because the relevant commercial objective was clearly stated in the lease). 127 See, eg, Re Sigma [2009] UKSC 2, [2010] BCC 40 (as discussed at [6-33] (n 110)); Ecosse [2017] HCA 12, (2017) 261 CLR 544 (as discussed at [6-36] (n 126)). 128 Charter Reinsurance Co Ltd v Fagan [1997] AC 313 (HL) (Fagan). 129 ibid 384–85 (Lord Mustill). 130 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51, (1979) 144 CLR 596 (Secured Income).

Linguistic Interpretation and Purposive Construction  159 from the text alone. Hence, the construction advanced by that purposive argument failed against a quite convincing linguistic interpretation. [6-38]   If the linguistic and purposive considerations are not determinative in themselves, the dispute is resolved by analysing the broader justification for each interpretation. A particular focus is whether the linguistic interpretation can be rationally explained as a matter of contractual purpose. If so, as can be seen in Victoria v Tatts Group Ltd,131 the linguistic interpretation prevails.132 In cases where the court takes a linguistic focus, such as in the construction of policies of insurance,133 a purposive construction needs to be particularly persuasive to defeat a linguistic interpretation. This can be seen in McCann.134 Before dealing with such difficult examples, the analysis commences with an easier case: Gardiner.

Agricultural and Rural Finance Pty Ltd v Gardiner135 [6-39]   Investment in an agricultural tax-minimisation scheme was facilitated through the execution of contemporaneous loan and indemnity agreements. The borrower was advanced funds to invest in the scheme and was granted indemnification by the manager of the scheme for any demand for repayment under the loan. However, the indemnity was conditional on the borrower having ‘punctually paid’ a principal sum in the first year (pursuant to clause 4.1 of the loan agreement) and interest in advance for the first and second years (pursuant to clauses 3.2 and 3.3(a) of the loan agreement). It was only upon satisfaction of these and other conditions that the indemnity was ‘effective and enforceable’. This was the effect of clause 2 of the indemnity. It relevantly stated: The Indemnity referred to in Clause 1 shall be effective and enforceable if: (a) the Borrower has punctually paid the interest payable pursuant to Clauses 3.2 and 3.3(a) of the Loan Agreement; and (b) the Borrower has punctually paid the reductions of the Principal Sum set forth in Clause 4.1 of the Loan Agreement.

131 Victoria v Tatts Group Ltd [2016] HCA 5, (2016) 90 ALJR 392 (Victoria v Tatts). 132 See also Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54, (2012) 247 CLR 129, 142 [41] (the Court) (the linguistic interpretation of an agreement governing the relations of unitholders under a retail property scheme was reinforced by a sensible articulation of the object advanced by the disputed clause, namely, it restricted the powers of the responsible entity, not the unitholders). 133 See [5-70]. 134 McCann [2000] HCA 65, (2000) 203 CLR 579. 135 Gardiner [2008] HCA 57, (2008) 238 CLR 570.

160  The Practice of Contract Interpretation Pursuant to clause 7 of the loan agreement, the lender agreed that the borrower was not liable under the loan agreement if the indemnity was effective and enforceable. [6-40]   The scheme eventually failed and the lender sought to recover principal and interest from borrowers. One borrower, Mr Gardiner, had made late repayments under three of his four loans in contravention of clauses 3.2 and 4.1. However, the late payments had been accepted by the lender. Hence, Mr Gardiner argued that he was still entitled to the benefit of the indemnity. [6-41]   One disputed issue was a matter of interpretation. The borrower argued that, on the proper construction of the indemnity, the punctuality conditions were satisfied even if payment was late, so long as payment was accepted. This construction was advanced mainly by a purposive argument. It was alleged that the purpose of the punctuality conditions was to ‘emphasise the need on the part of the Borrower to fulfil its obligations to the Lender in the manner upon which the Lender would insist’.136 [6-42]   By contrast, the lender’s construction was that the punctuality condition required payment on or before the due date. It was firmly anchored by the meaning of the words: the word ‘punctual’ bore its ordinary meaning denoting payment on time.137 [6-43]   Each construction also had other weaker forms of justification. The borrower’s construction was reinforced consequentially138 and linguistically.139 And the lender’s interpretation could be explained on a consequentialist,140 purposive141 and textual142 basis. But these arguments were hardly determinative. The dispute was, in essence, between a linguistic interpretation and a purposive construction.

136 [2007] NSWCA 235, [124] (Spigelman CJ) (dissenting). This argument seems to have been rejected by the High Court because it allegedly involved reference to evidence of subsequent conduct: [2008] HCA 57, (2008) 238 CLR 570, 582 [35] (Gummow, Hayne and Kiefel JJ). 137 [2008] HCA 57, (2008) 238 CLR 570, 581 [32] (Gummow, Hayne and Kiefel JJ), 609 [116](1) (Kirby J). 138 It seemed unlikely that late repayment was meant to have an automatic consequence under the indemnity when it had no such effect under the loan: [2007] NSWCA 235, [121] (Spigelman CJ) (dissenting). It also seemed unlikely that late repayment of interest in advance on execution of the loan was meant to nullify the indemnity: [2007] NSWCA 235, [123] (Spigelman CJ) (dissenting). 139 The word ‘punctual’ could have a subordinate meaning: [2008] HCA 57, (2008) 238 CLR 570, 607 [115](1) (Kirby J). 140 It seemed unlikely that the liability of the borrower under a publicly marketed scheme should depend on the unfettered discretion of the lender: ibid 583 [38] (Gummow, Hayne and Kiefel JJ). 141 See [6-44]. 142 The term ‘punctual’ would be rendered nugatory on the borrower’s construction: [2008] HCA 57, (2008) 238 CLR 570, 581 [33] (Gummow, Hayne and Kiefel JJ). As to the presumption against redundancy, see further [3-38] and [5-37].

Linguistic Interpretation and Purposive Construction  161 [6-44]  Not surprisingly, the High Court unanimously accepted the lender’s interpretation.143 Ultimately, the linguistic argument was too strong; the apparent meaning of the words clearly indicated that payment on time was required.144 In addition, the borrower’s purposive argument lacked sense. Why would an indemnifier grant an indemnity conditional on ‘punctual’ payment of a loan merely to emphasise or reinforce the need for the borrower to comply with the loan as required by the lender? The fact that the loan and indemnity were a joint package (as part of the scheme) offered some justification. However, the borrower’s purposive construction did not have a strong foundation in the text. It was hard to infer the alleged commercial objective from the use of the word ‘punctual’. It was essentially a matter of supposition. Hence, the lender succeeded in advancing its linguistic interpretation – an interpretation that was not without rational purposive justification, namely, it secured commercial certainty. By comparison, in Royal Botanic, a purposive construction prevailed against a linguistic interpretation for the simple reason that the relevant contractual objective was a stronger indicator of intention than the apparent meaning of the words in dispute.

Royal Botanic Gardens and Domain Trust v South Sydney City Council145 [6-45]   Recreational land in the heart of Sydney had been leased by a statutory trustee to a local council. The lease was for the construction, operation and maintenance of an underground car park. The car park was for public use and the lease was for a 50-year term. The lease was agreed informally in 1956, but formalised by deed in 1976 with retrospective effect. The dispute focused on the terms of the deed, in particular, the scope for the lessor trustee to increase rent. The original rent payable was $2,000 per annum and the rent could be adjusted triennially by the trustee. Clause 4(b) dealt with the rental adjustment. Clause 4(b)(iv) was the focus of dispute. To understand the clause, it must be borne in mind that the trustee maintained recreational grounds above the car park as well as other areas surrounding the parking station. The clause stated that, in adjusting the rent, the trustee may have regard to additional costs and expenses which they may incur in regard to the [surface above the car park or surrounding the parking station] and which arise out of the construction operation and maintenance of the parking station.

[6-46]  The trustee argued that, on the proper construction of the lease, its power to increase rent was not limited to consideration of the prescribed costs 143 [2008] HCA 57, (2008) 238 CLR 570, 581 [32] (Gummow, Hayne and Kiefel JJ) (Heydon J agreeing), 609–11 [116] (Kirby J). 144 (2008) 238 CLR 570, 581 [32] (Gummow, Hayne and Kiefel JJ), 609 [116](1) (Kirby J). 145 Royal Botanic [2002] HCA 5, (2002) 240 CLR 45.

162  The Practice of Contract Interpretation and expenses.146 It could set a fair and reasonable rent. This construction was advanced by a number of arguments: textual,147 contextual,148 purposive149 and consequentialist.150 But the most striking argument was linguistic. The apparent meaning of the word ‘may’ was permissive: the trustee had the option of considering the prescribed costs and expenses in setting a new rent.151 [6-47]   The council also had a host of arguments in favour of its construction that only increased costs and expenses could be considered in adjusting the rent. Some of those arguments were textual,152 linguistic153 and consequentialist.154 However, its strongest arguments were purposive. First, the lease served a public purpose, namely, the construction and operation of a public car park.155 It was a non-commercial transaction.156 Second, the object of clause 4(b)(iv) was to protect the council from financial disadvantage.157 [6-48]   The council certainly had the weaker of the linguistic arguments: the ordinary meaning of the word ‘may’, as it appeared in clause 4(b)(iv), strongly

146 The trustee was eventually forced to accept that there was some limit on its power, although it failed to properly articulate the nature of that restriction: ibid 76 [90] (Kirby J) (dissenting). 147 Clause 1 conferred a ‘very large power’ on the trustee to determine rent: ibid 72 [78] (Kirby J) (dissenting). Clause 4(b)(iv) did not state that the prescribed costs and expenses were to be the only factors in setting rent: ibid 74 [82] (Kirby J) (dissenting). 148 Legislation restricted the trustee’s power such that it could not act unreasonably in determining the rent: ibid 72 [79]–[81] (Kirby J) (dissenting). 149 The aim of clause 1 and clause 4(b)(iv) was to allow ‘the intervention of new considerations that might properly affect each determination of rent’: ibid 77 [92] (Kirby J) (dissenting). 150 On the council’s construction, the council would be ‘unduly favoured’: ibid 60 [31] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ). 151 ibid 91 [143] (Callinan J). See also ibid 74 [83] (Kirby J) (dissenting) (‘The language of para (iv) is strongly against the proposition advanced by the Council’). 152 Clause 4(b)(iv) did not state that the trustee could have regard to other matters: ibid 62 [36] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ). Clauses 4(b)(iii) and (iv) would not have been necessary if commercial rent was intended: ibid 71 [75] (Kirby J) (dissenting). The original rent, $2,000 per annum, was not an ‘ordinary commercial rent’ – it equated to the trustee’s gardening and related costs: ibid 71 [74] (Kirby J), 92 [149], 94 [154] (Callinan J). 153 The term ‘additional’ meant ‘in addition to the costs and expenses during the previous period’: ibid 62 [36] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ), 92–93 [150] (Callinan J). The word ‘may’, in clause 4(b)(iv), could mean ‘may only’: ibid 72 [75] (Kirby J) (dissenting). 154 On the trustee’s construction, the council would be disadvantaged financially by reason of its ­capital and ongoing maintenance costs: ibid 60 [31] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ). 155 ibid 60 [30] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ), 71 [74] (Kirby J) (dissenting), 94 [154] (Callinan J). This purpose was derived primarily from background, in particular, the fact that both parties were public authorities: see ibid 60 [30] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ), 94 [154] (Callinan J). 156 ibid 62 [37] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ). For example, there was no dispute resolution provision: ibid 62 [37] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ). 157 ibid 60 [30] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ). Under the lease, the council was responsible for the cost of construction, as well as ongoing operational and maintenance costs: ibid 60–61 [32]–[35] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ), 93 [152]–[153] (Callinan J).

Linguistic Interpretation and Purposive Construction  163 supported the interpretation advanced by the trustee. And it is fair to say that the consequentialist and textual arguments were ‘finely balanced’.158 Hence, a majority of the High Court was ultimately persuaded by the purposive arguments in favour of the council.159 The parties had agreed that, in setting a new rent, the trustee ‘may have regard to’ the prescribed additional costs and expenses. Bearing in mind the public purpose of the lease, the reasonable inference was that – by choosing these words – the parties had meant to limit the scope of the trustee’s power to adjust rent. The fact that the word ‘may’ had a recognised permissive meaning was not a sufficiently cogent reason to undermine the communal object of the lease. The case demonstrates that the focus in interpretation is on how words are used in a contract. The apparent meaning of the words can clarify how the words were used. But the object of a contract, even if it is established purely or primarily as a matter of background, can also be a determinative factor in establishing what was objectively intended by the choice of words in a contract.

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd160 [6-49]  Following on from Royal Botanic, Mount Bruce demonstrates that purposive construction is alive and well in contract interpretation. In 1970, mining exploration rights were assigned to Mount Bruce Mining Pty Ltd (MBM). Under clause 3.1 of the assignment, MBM was obliged to pay royalties on ‘ore won by MBM from the MBM area’ on the same conditions as applied under an earlier agreement between the assignor and a related party of MBM. Clause 3.1 stated: Ore won by MBM from the MBM area will be subject to the payment to [the assignor] of a base Royalty of 2.5% on the same conditions as apply to the existing Agreement between [the assignor and a related party of MBM].

The earlier agreement between the assignor and a related party of MBM, by clause 24(iii) (in combination with clause 9), effectively extended the definition of ‘MBM’ to its successors and assigns and all persons or corporations deriving title through or under [MBM] to any areas of land in respect of which an obligation to pay any amount has arisen or may arise.

[6-50]   The rights assigned to MBM were in the nature of ‘temporary reserves’: a statutory right of occupancy that preceded any grant of a mining lease. Several decades after the agreement, ore was being won from the geographical area

158 cf [1999] NSWCA 478, (1999) 10 BPR 18,961, 18,963 [17] (Spigelman CJ). 159 See [2002] HCA 5, (2002) 240 CLR 45, 62 [36] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ), 93–94 [154] (Callinan J). 160 Mount Bruce [2015] HCA 37, (2015) 256 CLR 104.

164  The Practice of Contract Interpretation identified by the temporary reserves. However, it was being won by a different entity: a joint venture composed of one entity that was related to MBM and another that was not so related. Further, it was being won through a different mining right: mining lease ‘ML 265SA’. [6-51]  ML 265SA covered areas identified as ‘Channar A’ and ‘Channar B’. It had been acquired by the joint venture, as is the custom in the mining industry, through the surrender of mining leases over each of Channar A and Channar B. MBM had surrendered the mining lease over Channar B. However, a related entity of MBM had surrendered the mining lease over Channar A. MBM had been assigned the temporary reserves over the Channar A area in 1970, but it had let them expire. Hence, when the assignor claimed royalties over ore won by the joint venturers from Channar A, MBM claimed that it had not been ‘won by MBM’. Even taking into account the extended definition of ‘MBM’ in clause 24(iii), it had not been won by a ‘successor’, ‘assign’ or other ‘person or corporation … deriving title through or under [MBM]’. [6-52]  Put simply, the relevant question of interpretation was: by whom must the ore be won in order for the royalty to be payable? MBM claimed that the ore must be won by a successor or assignee of MBM established by an unbroken chain of title. This construction found favour in the Court of Appeal of the Supreme Court of New South Wales.161 However, it was reinforced largely by the linguistic argument that the phrase ‘title through or under’, in the extended definition of ‘MBM’, had a technical legal meaning. This meaning was said to be derived from precedent: the meaning given to the same phrase under real property legislation.162 Beyond linguistic considerations, the construction advanced by MBM seemed to have sensible purposive justification. At least at first blush, it made commercial sense that MBM would only pay royalties on ore won by successors-in-title. However, on closer inspection, this contention faltered. [6-53]  The High Court held unanimously in favour of the assignor. It was ­entitled to royalties on ore won by the joint venturers from Channar A. But different members of the Court adopted slightly different interpretations. For French CJ, Nettle and Gordon JJ,163 the ore had to be won by MBM or persons with rights bearing ‘a close practical or causal connection’ with the rights originally assigned to MBM. For Kiefel and Keane JJ,164 with whom Bell and Gageler JJ agreed,165 the ore had to be won by MBM or someone exploiting the land through title obtained (in whole or part) by the surrender of rights originally assigned to MBM.



161 [2014]

NSWCA 323, [54]–[63] (Macfarlan JA) (Meagher and Barrett JJA agreeing) (overruled).

162 ibid [55]–[56] (Macfarlan JA) (Meagher and Barrett JJA agreeing) (overruled) (‘of some assistance’). 163 [2015]

HCA 37, (2015) 256 CLR 104, 122 [74] (French CJ, Nettle and Gordon JJ). 133–34 [114]–[115] (Kiefel and Keane JJ). 165 ibid 135 [123] (Bell and Gageler JJ). 164 ibid

Linguistic Interpretation and Purposive Construction  165 [6-54]  Each of these interpretations had an essentially purposive foundation. Clause 24(iii) extended the definition of ‘MBM’ not only to ‘successors and assigns’, but also to those ‘deriving title through or under’ MBM. Bearing in mind the first limb of the extension, something more than mere transfer of title had to be intended by the second limb (ie, the extension to ‘all persons or corporations deriving title through or under’ MBM).166 In particular, the object of the second limb of clause 24(iii)167 was to extend the assignor’s right to royalties to those persons who derived title through the unique processes employed in the mining industry, namely, the surrender of rights to secure other rights, often between related companies.168 This construction fitted with the ‘flexible’169 or ‘protean’170 nature of the phrase ‘through or under’. Hence, the case is appropriately regarded as one where a purposive construction triumphed against a linguistic counterpart because the relevant commercial objective was a more persuasive indicator of intention than the meaning of the words. It is, in its argument composition, quite similar to both Royal Botanic and Wood.

Wood v Capita Insurance Services Ltd171 [6-55]   The dispute in Wood focused on the scope of an indemnity in a share sale agreement. The buyer had purchased all the shares in a specialist insurance broker. Pursuant to clause 7.11 of the contract, the sellers agreed to indemnify the buyer for liability for mis-selling. However, the provision was ‘opaque’ and lacked clarity in its drafting.172 It stated in full: The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against all actions, proceedings, losses, claims, damages, costs, charges, expenses and ­liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected misselling of any insurance or insurance related product or service.

166 ibid 129 [99] (Kiefel and Keane JJ). An application of the presumption against redundancy: see [3-38] and [5-37]. 167 See [2015] HCA 37, (2015) 256 CLR 104, 131 [106] (Kiefel and Keane JJ). 168 See ibid 123 [77], 124 [80] (French CJ, Nettle and Gordon JJ), 131 [106] (Kiefel and Keane JJ). 169 ibid 122 [76] (French CJ, Nettle and Gordon JJ). 170 ibid 128 [96] (Kiefel and Keane JJ). 171 Wood [2017] UKSC 24, [2017] AC 1173. 172 ibid 1183 [24] (Lord Hodge).

166  The Practice of Contract Interpretation [6-56]   The dispute arose because, after the purchase, the buyer conducted an internal review of the company’s sale processes. The review found that the sale processes were unfair and caused customers to suffer detriment. The buyer, along with the company, was obliged to report these findings to the Financial Services Authority. As a result, the buyer entered into a ‘remediation scheme’ pursuant to which it paid compensation to customers. The litigation focused on whether the buyer could recover £2.43 million in losses associated with the scheme (including interest) under the clause 7.11 indemnity. [6-57]  The question of interpretation was whether the indemnity could be triggered in the absence of a claim or complaint by a customer.173 The question arose due to a structural or syntactical ambiguity in the indemnity. The indemnity consisted of two limbs: the first (starting at the beginning of the third line) extended to ‘all actions, proceedings, losses, claims, [etc]’, and the second (­ starting in the middle of the fourth line) encompassed ‘all fines, compensation, [etc]’. The indemnity was ambiguous because it was not clear whether the first limb was limited by the part of the indemnity (starting in the fifth line) that referred to ‘claims or complaints registered with the FSA, [etc]’. The buyer denied such a limitation on the first limb, while the seller claimed that the limitation applied to both limbs. [6-58]   The buyer’s interpretation was anchored by textual or linguistic features in clause 7.11. First, the use of the word ‘claims’, in both the first limb and the alleged limitation, suggested that the limitation did not apply to the first limb.174 Second, the inclusion of a comma after the end of the first limb (ie, after the word ‘incurred’) supported the conclusion that only the second limb was limited to ‘claims or complaints registered with the FSA, [etc]’.175 Finally, the fact that the limitation began with the adjectival participle ‘following and arising out of ’ suggested that it must be limited in its application to the second limb.176 Each of these arguments had its difficulties.177 [6-59]   By contrast, the seller’s construction was driven by a persuasive purposive argument. Set in the framework of the contract as a whole, the purpose of clause 7.11 was to grant to the buyer a narrow indemnity: an indemnity for loss arising from a customer complaint or claim regarding mis-selling. This narrow objective was evident taking into account the ‘30 pages of detailed warranties’ in Schedule 4, which included warranties on compliance and regulatory matters.178 These warranties were subject to a two-year time limit: the seller was not liable for any claim for breach of warranty unless notified within two years of the date of

173 cf

ibid 1182 [23] (Lord Hodge). 1185 [36] (Lord Hodge). 175 ibid 1185 [37] (Lord Hodge). 176 ibid 1185 [38] (Lord Hodge). 177 See [6-60]. 178 [2017] UKSC 24, [2017] AC 1173, 1181–82 [19] (Lord Hodge). 174 ibid

Linguistic Interpretation and Purposive Construction  167 completion. Hence, it made commercial sense for the clause 7.11 indemnity to be narrow in scope: It is not contrary to business common sense for the parties to agree wide ranging ­warranties, which are subject to a time limit, and in addition to agree a further indemnity, which is not subject to any such limit but is triggered only in limited circumstances.179

[6-60]   The seller’s largely purposive construction was unanimously adopted by the Supreme Court.180 It succeeded because the object of clause 7.11 was evident from the text as whole. It followed from the detailed warranties in Schedule 4. It also made sense in light of the fact that the buyer’s interpretation rendered otiose the ‘claims or complaints’ limitation; that is, on the buyer’s interpretation, the ‘claims or complaints’ limitation ‘would not restrict the scope of the indemnity in any way’.181 By comparison, although the buyer could justify its construction as a matter of practical consequence,182 the linguistic basis for its interpretation was not very strong.183 As Lord Hodge noted, ‘[t]hese detailed points of style and syntax are of little assistance in construing an admittedly opaque clause’.184 Hence, on balance, the seller’s construction was more probable. It aligned with the commercial object of the indemnity, which object was evident following ‘a careful examination of the language which the parties [had] used’.185 It was more persuasive than the rather weak linguistic interpretation advanced by the buyer. The dispute would have been harder to resolve if the buyer’s interpretation had a firm linguistic footing. Fagan involved a difficult dispute of this nature.

Charter Reinsurance Co Ltd v Fagan186 [6-61]  Fagan concerned an ‘ultimate net loss clause’ in three contracts of reinsurance. The reinsurer was liable if ‘sums actually paid’ by the reinsured in settlement of an insured claim exceeded a certain threshold. The policy relevantly stated: 2.(a) Liability clause The Reinsurers shall only be liable if and when the Ultimate Net Loss sustained by the Reinsured in respect of interest coming within the scope of the Reinsuring Clause exceeds £3,000,000 or US or Can $6,000,000 … 179 ibid 1186 [40] (Lord Hodge). 180 ibid 1186 [40] (Lord Hodge) (Lord Neuberger, Lord Mance, Lord Clarke and Lord Sumption agreeing). 181 ibid 1184–85 [33], [35] (Lord Hodge). 182 ibid 1186 [39] (Lord Hodge) (on the seller’s construction, the indemnity would not be triggered if the buyer’s obligation to pay compensation was triggered by a whistleblower or, as in fact happened, by management self-reporting a failure to comply). 183 ibid 1185 [36]–[38] (Lord Hodge). 184 ibid 1185 [38] (Lord Hodge). 185 ibid 1186 [42] (Lord Hodge). 186 Fagan [1997] AC 313 (HL).

168  The Practice of Contract Interpretation Ultimate net loss clause (c) The term ‘Net Loss’ shall mean the sum actually paid by the Reinsured in settlement of losses or liability after making deductions for all recoveries, all salvages and all claims upon other Reinsurances whether collected or not and shall include all adjustment expenses arising from the settlement of claims other than the salaries of employees and the office expenses of the Reinsured. (d) All Salvages, Recoveries or Payments recovered or received subsequent to a loss settlement under this Reinsurance shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto.187

[6-62]   The reinsured entered insolvency. Hence, although it settled claims with its insureds, it did not transfer or disburse any funds in discharge of those claims. The question arose whether the reinsurer was liable for these claims. [6-63]   The reinsurer relied primarily upon a linguistic argument: ‘sums actually paid’ could only mean sums transferred or disbursed in discharging a claim.188 Hence, it asserted that, in the case of claims not discharged by payment by the reinsured, the reinsurer was not liable under clause 2(a); that is, there was no ‘Net Loss’ (as defined in clause 2(c)) triggering liability under clause 2(a). The reinsurer’s construction was also justified on a purposive basis. As Staughton LJ commented in dissent in the Court of Appeal, there were a number of ‘possible’ ‘motives’ for requiring that the reinsured transfer or disburse funds before being reimbursed by the reinsurer: (i) it ensured that the reinsured satisfied itself of the claim; (ii) it obviated the risk of the reinsured receiving the money and failing to pay its insured; and (iii) it ensured that any interest accrued to the benefit of the reinsurer (rather than the reinsured) in the case of a delay in payment.189 [6-64]   The reinsured also advanced a purposive explanation for its construction. In fact, its interpretation was overwhelmingly purposive. However, the alleged purpose was evident from an analysis of the clause itself, set against industry and historical background. Clauses 2(c) and (d) provided for deductions on account of salvages, recoveries and other reinsurance claims by the reinsured, that is, salvages, recoveries and other reinsurance claims by the reinsured with respect to claims that it had indemnified.190 This included salvages, recoveries and other reinsurance claims following the settlement of a claim.191 Hence, so the argument went,



187 Emphasis

added. AC 313, 335H (Mance J) (Comm), 383H–383A (Lord Mustill) (HL). 189 ibid 365A–C (Staughton LJ) (dissenting) (CA). 190 See clause 2(c). 191 See clause 2(d). 188 [1997]

Linguistic Interpretation and Purposive Construction  169 the words ‘sums actually paid’ were used to emphasise that the reinsurer was only liable for the net loss resulting from an insured claim, that is, the settled amount minus salvages, recoveries and other reinsurance claims before or after settlement.192 The reinsured’s construction also had linguistic,193 contextual,194 textual195 and consequentialist196 support. But, for most members of the House of Lords, these arguments merely buttressed the reinsured’s purposive justification.197 In the end, the reinsured’s purposive construction was unanimously accepted.198 It prevailed because it was particularly persuasive, evident from the text and in line with the historical development of contracts of reinsurance. Hence, it was sufficient to overcome the reinsurer’s convincing linguistic interpretation. [6-65]  Fagan illustrates purposivism at its peak; a persuasive linguistic interpretation was rejected in favour of a convincing purposive construction that had a strong foundation in the text and background.199 The case can be cited as authority for the proposition that a purposive argument derived from the text is more persuasive than one that is drawn purely from background. As Lord Mustill remarked: The words must be set in the landscape of the instrument as a whole. Once this is done the shape of the policy, and the purpose of the terms which I have grouped as clause 2 become quite clear.200

In short, the object of the ‘ultimate net loss clause’ was apparent from an analysis of the whole contract, in particular, the intricacies of clauses 2(c) and (d). In this sense, Fagan can be reconciled with the decision of the High Court of Australia in Secured Income.

192 [1997] AC 313, 386E–F (Lord Mustill), 395A–B (Lord Hoffmann) (HL). 193 ‘Paid’ could simply mean ‘incur a liability’: see ibid 386F (Lord Mustill), 391D–E (Lord Hoffmann) (HL). 194 Ordinarily, the liability of a reinsurer is ‘wholly unaffected by whether the reinsured has satisfied the claim under the inward insurance’: ibid 387C (Lord Mustill) (HL). See also ibid 392C–395B (Lord Hoffmann) (HL) (‘the history of reinsurance clauses’). 195 Clause 2 was not sufficiently clear to ‘fundamentally’ change ‘the [ordinary] financial structure of the relationship’: ibid 387D (Lord Mustill) (HL). 196 On the reinsurer’s construction, the reinsured would need to maintain sufficient liquidity to discharge the whole of a claim before seeking reimbursement from the reinsurer: see ibid 387A–B (Lord Mustill) (HL). 197 Contrast ibid 395B (Lord Hoffmann) (HL) (a construction driven by ‘[c]onsiderations of history, language and commercial background’). See further McMeel (2017) 85 [1.151]–[1.152]. 198 [1997] AC 313, 386D–F (Lord Mustill) (Lord Goff, Lord Griffiths and Lord Browne-Wilkinson agreeing), 392D (Lord Hoffmann) (HL). 199 For McMeel, the case signalled that ‘the pendulum [had] finally swung fully behind the tenets of the modern approach, spurning the traditional approach’: McMeel (2017) 84 [1.149]. 200 [1997] AC 313, 384H (Lord Mustill).

170  The Practice of Contract Interpretation

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd201 [6-66]   A commercial building was sold on the basis that the purchase price would be reduced if the ‘aggregate rental’ of ‘leases in the subject premises’ did not meet a certain threshold. The relevant clause stated: In the event that … the Vendor shall not be in a position to provide to the Purchaser evidence to the reasonable satisfaction of the Purchaser that the aggregate rental payable per annum under leases in respect of the subject premises does … amount to $227,900.00 then in such case the balance purchase moneys payable in clause 1(a)(iii) hereof shall be reduced.202

The aggregate rental fell well short of the threshold. Hence, the vendor proposed that it would lease back the premises on commercial terms: a term of not less than three years at the going rate. However, assuming that the vendor did not extend the leases beyond the three-year term, the purchaser would only recover a third of the purchase price through the aggregate rental. For this reason, the purchaser rejected the vendor’s proposal. The vendor then sued for damages for breach of contract, alleging that the purchaser had breached its implied duty to co-operate by refusing to accept the lease-back. [6-67]   The High Court held that the purchaser was not obliged to accept the offer of the lease-back from the vendor.203 However, on the assumption that it was obliged to accept the vendor leases, the purchaser argued that those leases could not be counted to reduce the purchase price. This was a matter of interpretation and the purchaser put forward two constructions. It argued that the rental threshold could only be satisfied by rentals under either: (i) non-vendor leases; or (ii) ‘commercial leases’, that is, long-term leases to use the premises to operate a business.204 The second construction was its main contention. It was advanced predominantly by a purposive argument. The aim of the rental threshold, according to the purchaser, was to secure recovery of the purchase price in full over a 10-year period.205 The difficulty for the purchaser was that this commercial objective was not evident following an analysis of the contract text.206 At best, the contract contemplated leases of ‘not less than one year’.207 Further, even if one looked to the background to the transaction, commercial leases in the building were usually

201 Secured Income [1979] HCA 51, (1979) 144 CLR 596. 202 Emphasis added. 203 [1979] HCA 51, (1979) 144 CLR 596, 599 (Barwick CJ), 615 (Mason J) (Gibbs, Stephen and Aickin JJ agreeing). 204 ibid 603 (Mason J). 205 ibid 604–05 (Mason J). Linguistically, it could also be said that ‘leases’ may denote ‘commercial leases’: ibid 604 (Mason J). 206 ibid 604 (Mason J). 207 ibid 605 (Mason J) (see clauses 1(a)(iii) and 1(b)).

Linguistic Interpretation and Purposive Construction  171 for a three-year term with an option to extend for another three years.208 Hence, the purchaser’s alleged purposive justification could only be inferred as a matter of business common sense, perhaps taking into account the likelihood of extension of a three-year commercial lease in the ordinary course. But the High Court was unwilling to take this step. The undoubted aim of the rental threshold was to ensure that the purchaser recovered at least some of its capital commitment from income generated by the acquired asset. However, neither the contract text nor the commercial background established that the object of the threshold was to facilitate full recovery.209 [6-68]   The purchaser’s purposive construction was therefore not a particularly persuasive one. Hence, it was not surprising that the High Court preferred the strong linguistic interpretation advanced by the vendor.210 ‘Leases’ simply meant any type of lease or, at best, a one-year or three-year lease.211 That this was the intention of the parties in choosing the word as part of the rental threshold was reinforced textually,212 purposively213 and consequentially.214 By comparison, the purchaser had little justification for its construction other than its doubtful purposive foundation.215 Hence, the correct construction in Secured Income was quite clear. By comparison, Victoria v Tatts involved a more challenging dispute.

Victoria v Tatts Group Ltd216 [6-69]   In 1991, the Victorian government legalised the gaming machine industry. Upon legalisation, the Victorian government established a duopoly. It issued gaming licences without a fee to two parties, each for a 20-year term. One of the licensees was a statutory body. The other licensee was a private entity, Tatts Group Ltd (Tatts). In 1994, the statutory body was privatised and, as part of the privatisation, the body was charged a licence fee and granted the right to compensation if its licence expired without renewal. To level the playing field, the government negotiated with Tatts to put in place a similar arrangement. This was effected through the ‘1995 Agreement’.

208 ibid 605 (Mason J). 209 ibid 606 (Mason J). 210 ibid 605 (Mason J) (Gibbs, Stephen and Aickin JJ agreeing). 211 ibid 605 (Mason J). 212 The contract did not mention or require long-term leases: see ibid 604–05 (Mason J). 213 The object of the rental threshold was to guarantee the stipulated aggregate rental ($227,900) over a three-year term, ie, a recovery of a third of the purchase price: see ibid 604–05 (Mason J). See [6-67] (text at nn 207–08). 214 The purchaser’s construction would give rise to uncertainty in terms of what constitutes a ‘commercial lease’: [1979] HCA 51, (1979) 144 CLR 596, 604 (Mason J). 215 But see [6-67] (n 205). 216 Victoria v Tatts [2016] HCA 5, (2016) 90 ALJR 392.

172  The Practice of Contract Interpretation [6-70]   Pursuant to clause 3 of the 1995 Agreement, Tatts was obliged to pay an annual licence fee based on its annual net profit (subject to a minimum payment of $35m). Pursuant to clause 7, Tatts was entitled to compensation for wasted investment if a new licence was not issued to it, subject to the proviso that no compensation was payable if the government did not issue a new licence at all. Clause 7 stated: 7.1 If the Gaming Operator’s Licence expires without a new gaming operator’s licence having issued to [Tatts], [Tatts] shall be entitled to be paid, by the [government], an amount of money as compensation for the investment in infrastructure lost. This amount will be equal to the Licence Value of the Gaming Operator’s Licence or the premium payment by the new licensee, whichever is the lesser. 7.2 No amount will be payable pursuant to sub-clause 7.1 if a new gaming operator’s licence is not issued to any person, or is issued to [Tatts] or a related entity of [Tatts].

[6-71]  By 2008, the Victorian government had decided upon a change of direction in terms of gaming regulation. The Premier announced that the duopoly would be disbanded and that new gaming licences would be issued direct to venue operators (these were known as ‘Gaming Machine Entitlements’ or ‘GMEs’). Hence, Tatts’ gaming machine licence (along with the licence of the other duopolist) would not be renewed. When Tatts’ licence expired without renewal in 2012, it sued the government under clause 7.1 claiming approximately $490 million.217 [6-72]   The interpretive dispute focused on the type of right or licence that must be issued, under clause 7.2, for Tatts to be entitled to compensation under clause 7.1. Put simply, what amounted to a ‘new gaming operator’s licence’ for the purpose of clause 7.2? The government claimed that only the issue of a licence under the original 1991 legislation (as amended or replaced) would justify the payment; that is, a duopolistic licence had to be issued. Tatts, on the other hand, claimed that the issue of a statutory authority entitling the holder to substantially the same rights was sufficient. [6-73]   The government’s construction was anchored linguistically. The phrase ‘Gaming Operator’s Licence’ was defined in the agreement by reference to the 1991 legislation. It denoted a licence issued under that legislation.218 By comparison, Tatts’ construction was justified largely on a purposive basis. The aim of clause 7.1 was to facilitate the recovery by Tatts of its capital expenditure.219 This object was evident from the contract itself.220



217 Tatts

also relied upon a statutory entitlement that mirrored the contractual obligation. HCA 5, (2016) 90 ALJR 392, 401–02 [53]–[55] (the Court). 219 [2014] VSCA 311, [135], [154]–[155] (the Court) (overruled). 220 ibid [142] (the Court) (overruled). 218 [2016]

Linguistic Interpretation and Purposive Construction  173 [6-74]  The High Court unanimously overturned the decision of the trial judge and the Court of Appeal of the Supreme Court of Victoria. It held for the government.221 It reached this decision not simply because of the persuasive force of the linguistic argument advanced by the government. (As was put by Tatts, the composite phrase ‘new gaming operator’s licence’, using uncapitalised terms, could denote a right in substantially similar form to the original licence222 or simply any authority to conduct gaming operations.)223 Instead, the High Court was persuaded by the auxiliary purposive justification for the government’s construction.224 The aim of clause 7.1 was to compensate Tatts if it was replaced as a duopolist. The clause was not meant to compensate Tatts if the ­duopoly was abandoned at its expiry due to a change in regulatory strategy.225 As a matter of background, the parties knew that abandonment was a possibility.226 In short, Tatts was to be compensated if its business, as a duopolist, was given to another.227 This amounted to a ‘good commercial reason’ for including clause 7.228 Hence, the government’s interpretation – although based on the definition of ‘gaming operator’s licence’ – could be rationally explained. It was a linguistic interpretation, but one that was persuasively reinforced as a matter of commercial purpose. By contrast, the decision in McCann appeared to turn on the fact that the court often adopts a linguistic focus in the construction of particular types of contract, such as policies of insurance.

McCann v Switzerland Insurance Australia Ltd229 [6-75]   A law firm claimed under its professional indemnity insurance policy for a $8.55 million liability to a client. A partner of the firm had created a fake trust account and enticed the client to deposit $8.7 million into that account. The funds were to be used to purchase a financial instrument with a face value of $10 million. The partner withheld $150,000 of the deposited funds as a secret commission and applied the remaining $8.55 million to the acquisition of the instrument. However, he failed to obtain security for the transaction and lost the funds. This was not the first instance of misappropriation by the partner. Nor was it the first time that he had sought to acquire the particular type of instrument, a ‘prime bank instrument’ – an instrument that, unbeknown to him, did not in fact exist. 221 [2016] HCA 5, (2016) 90 ALJR 392, 405 [75] (the Court). 222 See ibid 400 [46] (the Court). 223 [2014] VSCA 311, [148] (the Court) (overruled). 224 In this sense, the case could be understood as one involving a determinative argument: see [6-05] and [6-16]–[6-25]. 225 [2016] HCA 5, (2016) 90 ALJR 392, 403–04 [68]–[72] (the Court). 226 ibid 404 [72] (the Court). 227 ibid 403 [68] (the Court). 228 It appears that this justification was not put at first instance or in the Court of Appeal: see [2014] VSC 302, [101]–[102] (Hargrave J) (overruled); [2014] VSCA 311, [157]–[158] (the Court) (overruled). 229 McCann [2000] HCA 65, (2000) 203 CLR 579.

174  The Practice of Contract Interpretation [6-76]   The insurer denied indemnification relying on an exclusion in the policy with respect to liability brought about by dishonest conduct: This Insurance shall not indemnify the Assured in respect of any liability … brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured.

The High Court was divided on both the correct characterisation of the partner’s conduct as a matter of fact230 and the interpretive issue of causation. On the matter of interpretation, the law firm had advanced interpretations in the alternative: the particular loss needed to be either an intended231 or a direct232 result of the dishonest act. Neither interpretation was adopted by the High Court. A majority held that the loss did not need to be intended by, or a direct result of, the act – all that was required was that the liability flowed from the act.233 However, the arguments were finely balanced. [6-77]   The insurer’s interpretation was that neither intent nor directness were necessary. This interpretation was advanced by a string of textual and linguistic arguments. First, ‘liability’ had a different meaning to‘loss’.234 Second, the exclusion clause did not refer to ‘intention’235 or directness.236 Third, ‘brought about by’, on its ordinary meaning, did not require intention or directness.237 [6-78]   In opposition, the insured law firm argued that purposive considerations illustrated the need for intention or directness to trigger the exclusion of liability. The reason for including the words ‘brought about by’ was to require something more than mere initiation or contribution to liability.238 That this was the object of the clause was underpinned textually by the use of the phrase ‘directly or indirectly’ in another exclusion clause.239 These words were noticeably absent in the disputed exclusion.240 [6-79]   McCann is a difficult case to explain. Beyond the principal linguistic and purposive contentions, not much could be gained by analysing the commercial consequences; both the insurer’s interpretation and the law firm’s construction produced hypothetical outcomes that were unreasonable.241 Further, the 230 See [7-47] (there was a dispute regarding what consistuted a ‘dishonest or fraudulent act or ­omission’ by the partner). 231 [2000] HCA 65, (2000) 203 CLR 579, 588 [20] (Gaudron J), 595 [51] (Gaudron J), 605 [79] (Kirby J). See also [2000] HCA 65, (2000) 203 CLR 579, 636 [185] (Callinan J) (dissenting). 232 ibid 604–05 [78], 608 [89] (Kirby J). 233 ibid 589 [23] (Gleeson CJ), 594 [49] (Gaudron J), 605 [80] (Kirby J). cf ibid 623 [139]–[141] (Hayne J). 234 ibid 594 [49], 595 [51] (Gaudron J), 606 [82] (Kirby J). 235 ibid 589 [23] (Gleeson CJ) (‘words that are not there’). 236 ibid 606 [84] (Kirby J). 237 ibid 589 [23] (Gleeson CJ), 594 [50] (Gaudron J), 605 [81] (Kirby J). 238 ibid 594 [48] (Gaudron J), 604–05 [78] (Kirby J). 239 ibid 643 [200] (Callinan J) (dissenting). See also ibid 594 [47] (Gaudron J). 240 ibid 604 [78] (Kirby J), 637 [190] (Callinan J) (dissenting). 241 ibid 588–89 [21]–[23] (Gleeson CJ), 604 [77] (Kirby J).

Linguistic Interpretation and Purposive Construction  175 remaining arguments were not particularly strong.242 In addition, considering the law firm’s purposive contentions, the insurer’s argument regarding the meaning of the phrase ‘brought about by’ was not very persuasive. Hence, it seems that much emphasis was placed on the linguistic distinction between ‘liability’ and ‘loss’.243 This was a fine black-letter argument – the type of argument that one might be surprised to find swaying a modern court in the resolution of an interpretive dispute.244 However, insurance policies are a unique form of contract with a rich history. The interpretive focus is usually linguistic in this area.245 Hence, in the construction of an insurance policy, like other contracts using standard language,246 it often takes a quite robust purposive construction to defeat a wellfounded linguistic interpretation. The insured law firm’s purposive justification fell short of this mark. By comparison, it was not as persuasive as the evident object of the ‘ultimate net loss clause’ in Fagan.

Comment [6-80]   The High Court’s decisions in McCann, Secured Income and Gardiner demonstrate that contract interpretation is not all at sea in a tide of purposivism; there is a limit on the scope for purposive construction. As McMeel notes, ‘commercial purpose may not be enough to override the express contractual language’.247 Of course, a strong and sensible linguistic interpretation succeeds against a weaker purposive counterpart, and vice versa.248 However, as Secured Income demonstrates, in comparison to Fagan, a purposive argument built squarely from the text is much stronger than one anchored by background or business common sense. Hence, a construction driven by purposive considerations that are evident from the text has a better chance of success than an interpretation advanced by contextual notions of purpose.249 In the Australian context, this reflects the much-debated

242 In favour of the insured, it was argued that the policy should be construed broadly as it served the ‘social purpose’ of providing indemnification for law firms and clients alike: see ibid 603–04 [76] (Kirby J). In favour of the insurer, it was argued that the insured could have obtained separate fraud and fidelity insurance cover at additional cost: see ibid 607 [85] (Kirby J). 243 ibid 589 [23] (Gleeson CJ) (‘the language of the exclusion clause’), 595 [51] (Gaudron J), 606 [82] (Kirby J). To this end, the case could be understood as one involving a decisive argument: see [6-05] and [6-16]–[6-25]. 244 See [2000] HCA 65, (2000) 203 CLR 579, 637 [190] (Callinan J) (dissenting) (‘The word “liability” cannot be read in a vacuum’). 245 See [5-70]. But see Fagan [1997] AC 313 (HL) (discussed at [6-61]–[6-65]). 246 See [5-70]. 247 McMeel (2017) 56 [1.95]. Contrast H Collins, ‘Objectivity and Committed Contextualism in ­Interpretation’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 205 (‘If a court can identify an object or purpose of the contract, one which should have been obvious to a reasonable person, any interpretation that contradicts or frustrates that purpose cannot be one held by a reasonable promisee’). 248 Except perhaps in the case of a contract using standard language: see [5-70]. 249 See further Catterwell (n 14).

176  The Practice of Contract Interpretation ‘ambiguity gateway’ which (apparently) restricts reference to background.250 Under English law, where the gateway has been abandoned,251 the emphasis on contractual purpose that is derived textually rather than contextually is a natural corollary of the textual focus in contract interpretation. Wood emphasises this point. The interpretive aim is to infer what the parties intended by analysing the choice of words in the contract. If the text unambiguously establishes the answer to an interpretive question, a purposive argument derived from outside the contract does not readily change the outcome. On the other hand, if the linguistic considerations are merely suggestive of the correct intention, a strong purposive construction may prevail even if it has a largely contextual grounding. Hence, the lessees in Royal Botanic succeeded. The fact that the word ‘may’ could bear a permissive meaning was insufficient to defeat the clear public purpose of the lease – a purpose that was evident from the background to the transaction, not the contract text. It follows that the relative strength of a purposive construction depends not only on the degree to which the relevant objective in itself supports the claimed inference of intention, but also the extent to which the alleged purpose is inferred from the text. In the case of conflict between linguistic interpretation and ­consequentialist construction, a similar balance is struck.

6.7.  Linguistic Interpretation and Consequentialist Construction Principle 9: A linguistic interpretation (ie, an interpretation advanced predominantly by a linguistic argument) prevails against a consequentialist construction (ie, a construction supported primarily by a consequentialist argument) if the meaning of the words is a better indicator of intention than the consequences of the competing interpretations. Principle 10: A consequentialist construction prevails against a linguistic interpretation if the consequences of the competing interpretations are a better indicator of intention than the meaning of the words. Principle 11: A consequentialist construction is more persuasive if the allegedly unintended consequences are evident from the contract text. Principle 12: If the linguistic and consequentialist factors are evenly matched, a dispute between linguistic interpretation and consequentialist construction is resolved by analysing the auxiliary justification for each interpretation, including, in particular, whether the linguistic interpretation can be rationally explained.



250 See 251 See

[3-14]. But see [3-18] (n 84). [3-14].

Linguistic Interpretation and Consequentialist Construction  177 [6-81]  Recent English cases demonstrate that interpretive disputes often boil down to a conflict between linguistic interpretation and consequentialist construction. Such disputes are resolved like any other type of dispute, namely, by evaluating the competing arguments to determine the interpretation that was probably intended. A consequentialist construction is a construction that is advanced primarily by an argument about the consequences of the competing interpretations. A linguistic interpretation prevails against a consequentialist construction if – the auxiliary arguments being neutral or not persuasive – the meaning of the words is a stronger indicator of intention than the consequences of the competing constructions.252 This can be seen in the decision of the Supreme Court of the United Kingdom in Goblin Hill.253 Likewise, a consequentialist construction defeats a linguistic interpretation if, putting to one side ­auxiliary justification, the consequences are a better indicator of intention than the meaning of the words,254 as was the case in Antaios Compania Naviera SA v Salen Rederierna AB255 and L Schuler AG v Wickman Machine Tool Sales Ltd.256 Obviously, the tension between linguistic interpretation and consequentialist construction is harder to resolve if the relevant consequentialist and linguistic arguments are evenly matched. Such a dispute is usually determined by analysing the broader textual or purposive justification for each interpretation. Hence, in Arnold v Britton,257 a linguistic interpretation prevailed against a ­consequentialist counterpart because the former was justified on a purposive basis. By comparison, in ICS,258 a consequentialist construction succeeded because it was reinforced by the text. However, to begin our analysis of the tension between linguistic interpretation and consequentialist construction, let us focus on a much easier example: Goblin Hill.

Thompson v Goblin Hill Hotels Ltd259 [6-82]  During the early 1970s, a vacation home development in Jamaica was established via a share and leasehold structure. The shareholding was split into three classes. Class A and B shareholders were to hold leases of villa units.

252 cf Carter (2013) 543 [16-17] (‘the preference in favour of reasonable results cannot be applied to contradict the expressed intention of the parties’). 253 Goblin Hill [2011] UKPC 8, [2011] 1 BCLC 587. 254 Except perhaps in the case of a contract using standard language: see [5-70]. 255 Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 (HL) (The Antaios). 256 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (HL) (Schuler). See also Watson v Phipps (1985) 63 ALR 321, 324 (Lord Brightman) (PC) (the linguistic argument that a lease, on its ordinary meaning, granted a right to ‘offer’ to purchase the demised land was rejected in favour of a consequentialist argument that a grant of an option must have been intended). 257 Arnold v Britton [2015] UKSC 36, [2015] AC 1619. 258 ICS [1998] 1 WLR 896 (HL). 259 Goblin Hill [2011] UKPC 8, [2011] 1 BCLC 587.

178  The Practice of Contract Interpretation Class C shares were not linked to any leasehold interest. These shares were issued to the developers effectively as an incentive.260 [6-83]   The articles of association obliged ‘each member’ to bear maintenance costs and expenses (including water and tax rates, insurance premiums, and so on) ‘in proportion to his shareholding in the Company’.261 Each lease also included a similar provision.262 The obligation only arose after the conclusion of the 20-year ‘incentive period’, with each lease being granted for a 99-year term at J$1.00 per annum. Article 91 of the articles of association relevantly stated: After the twentieth anniversary of the date specified for the commencement of Goblin Hill San San … the Directors shall at the beginning of each financial year or as soon thereafter as possible estimate the total sum of money required for the maintenance of the Company and the cost of carrying on the operation and performing the obligations of the Company with regard to the villa units or apartments at Goblin Hill San San and the grounds used therewith for the ensuing year and in particular but without prejudice to the generality of the foregoing words the amount of all water rates taxes rates insurance premiums and other outgoings and the cost of repairs and replacements and the necessary expenses of upkeep maintenance operation and any fees payable under any management contract entered into by the Company and in addition any amount to create a reasonable reserve for the purposes aforesaid and such amount as will meet any deficit incurred in any previous year of operations and the said total sum of money shall be borne by each member in proportion to his shareholding in the Company.263

[6-84]   By 1994, the ‘incentive period’ had elapsed and the company began apportioning maintenance expenses and costs among only those shareholders with leasehold interests, in effect, the class A shareholders.264 Those shareholders sought declaratory relief to the effect that the costs were to be apportioned between all shareholders, whether or not they also held leasehold interests – in effect, the class A and class C shareholders. [6-85]   The Privy Council accepted the class A shareholders’ interpretation of the articles of association (and, in turn, the lease).265 The class A shareholders advanced two strong linguistic arguments. First, the phrase ‘each member’, in the articles of association, must bear its ordinary meaning; that is, it denoted each shareholder in each class of issued share capital.266 Second, the words ‘in proportion to his shareholding in the Company’ must mean ‘the proportion that a member’s shareholding bears to the entire issued share capital of the company’.267

260 ibid

590 [4] (Lord Dyson) (for the Board). art 91. 262 See clause 5(b). 263 Emphasis added. 264 No class B shares were issued as Phase 2 never commenced. 265 [2011] UKPC 8, [2011] 1 BCLC 587, 595 [25] (Lord Dyson) (for the Board). 266 ibid 593 [16] (Lord Dyson) (for the Board). 267 ibid 593 [17] (Lord Dyson) (for the Board). 261 See

Linguistic Interpretation and Consequentialist Construction  179 [6-86]  The respondent company, in arguing for a more limited construction, relied upon three consequentialist arguments.268 However, none of these arguments were very persuasive. First, the construction advanced by the class A shareholders could not be accepted, it was said, because the class C shareholders would gain no benefit from maintenance of the holiday homes yet have to pay towards such maintenance.269 The Board rejected this argument because, in limited circumstances, the class C shareholders could participate in earnings.270 Second, the company argued that the appellant shareholders’ construction would result in ‘chronic underfunding’ because class C shareholders would not pay and the company could not force them to do so.271 This argument was rejected because it was based on the unacceptable assumption that an obligor would breach a contractual promise.272 Finally, it was put in simple terms that the class A shareholders’ interpretation gave rise to a ‘very bad bargain’ for class C s­ hareholders. Those shareholders would have to pay 15 per cent of maintenance costs and expenses for 79 years. This was such a bad deal, it was argued, that it was one that the class C shareholders were ‘unlikely to have made’.273 The Board was reluctant to accept this contention. The class C shareholders (ie, the developers) had acquired all the remaining unissued class C shares in 1994, after the conclusion of the incentive period. They ‘must have had their own commercial reasons for doing so’.274 It was for the company to ‘prove … absurdity’ in order to overcome the strong ‘literal interpretation’ advanced by the class A shareholders, and it failed to do so.275 [6-87]   Hence, the class A shareholders succeeded. They put forward an interpretation that was firmly anchored by the meaning of the words in contention. And the consequentialist justification for the construction advanced by the company was not particularly persuasive. Two of the three consequentialist arguments were not made out, and the third consequentialist argument was not based in the text itself. The dispute can therefore be understood as one between a rather weak consequentialist construction and an interpretation that had a solid linguistic foundation but limited auxiliary support (ie, a ‘strict literal interpretation’).276 Hence, the case demonstrates that, in some disputes, the court is simply looking for the most probable interpretation.277

268 It had only weak linguistic arguments: see ibid 593 [16]–[17] (Lord Dyson) (for the Board). 269 ibid 593 [19] (Lord Dyson) (for the Board). 270 ibid 594 [20] (Lord Dyson) (for the Board). See art 4(3). 271 For example, the company could not forfeit relevant leases, as it could with class A shareholders: see ibid 593 [19]. 272 ibid 594 [21] (Lord Dyson) (for the Board). 273 ibid 594 [24] (Lord Dyson) (for the Board). 274 ibid. 275 ibid 595 [24]–[25] (Lord Dyson) (for the Board). 276 As to strict literal interpretation, see further [6-05] and [6-26]–[6-34]. 277 cf D McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ [2015] LMCLQ 406, 422 (the reasoning in the case represents a ‘departure from the ICS principles’ – it ‘is identical to the traditional approach’).

180  The Practice of Contract Interpretation

Antaios Compania Naviera SA v Salen Rederierna AB278 [6-88]  The Antaios provides a good point of contrast with Goblin Hill. Charterers breached their charter by issuing inaccurate bills of lading. The owners purported to terminate, relying on an express termination clause entitling it to terminate ‘on any breach of this charter party’. Clause 5 relevantly stated: [F]ailing the punctual and regular payment of the hire or on any breach of this charter party the owners shall be at liberty to withdraw the vessel from the service of the charterers without prejudice to any claim they (the owners) may otherwise have against the charterers.279

[6-89]   The question of interpretation was straightforward: what type of breach triggered the termination right under clause 5? Both parties advanced linguistic arguments regarding the meaning of the phrase ‘any breach’. The owners said that the words bore their ordinary meaning: the owners could withdraw the vessel, and terminate the charter, in the event of any breach by the charterers. The charterers, on the other hand, claimed that the phrase had a narrow meaning: only a breach of an essential term or a fundamental breach gave rise to a right of withdrawal and termination.280 It is fair to say that the owner’s linguistic argument was the more persuasive one. But the charterers advanced a convincing consequentialist argument that ultimately determined the dispute.281 The parties could not have intended a termination right to arise for any breach of the charterparty, no matter how trivial.282 Hence, the interpretation put forward by the charterers was unanimously accepted in the House of Lords.283 [6-90]  The Antaios therefore represented a triumph for consequentialism. The charterers put forward a strong consequentialist construction: an interpretation advanced predominantly by a persuasive argument about the consequences of the competing constructions. And it defeated an apparently convincing, but ultimately unpersuasive linguistic interpretation: an interpretation that was anchored by the meaning of the words, but one that lacked additional textual or purposive justification.284 The practical effect of the owners’ interpretation was such that, on balance, it could not have been intended. The parties could not have intended, by clause 5, that the owners had a right to terminate for ‘any breach’, as the apparent

278 The Antaios [1985] AC 191 (HL). 279 Emphasis added. 280 [1985] AC 191, 200E (HL). 281 Hence, the dispute can be understood as one that involved a determinative consequentialist argument, similar to Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900: see [6-05] and [6-16]–[6-25]. 282 See [1985] AC 191, 200H–201D, 205C (Lord Diplock) (HL). 283 ibid 200H–201D, 205C (Lord Diplock) (Lord Keith, Lord Scarman, Lord Roskill and Lord ­Brandon agreeing). 284 Hence, the dispute can be understood as one that involved a strict literal interpretation: see [6-05] and [6-26]–[6-34].

Linguistic Interpretation and Consequentialist Construction  181 meaning of the words suggested. Such an outcome was ‘wholly unreasonable’ and ‘totally uncommercial’.285 Instead, taking into account practicalities, the parties objectively intended a right to withdrawal only upon a breach of an essential term or a fundamental breach. The consequentialist factors were simply a better indicator of intention than the apparent meaning of the words. The decision in Schuler can be understood in a similar light, although the dispute involved a more complex combination of arguments.

L Schuler AG v Wickman Machine Tool Sales Ltd286 [6-91]  Schuler also involved construction in the context of termination for breach. A German manufacturer of panel presses and other automotive parts had engaged an English distributor to promote and sell its products. Clause 7(a) of the distributorship agreement required that the distributor ‘use its best endeavours’ to promote and extend the sale of products produced by the manufacturer. Clause 12(a) imposed general obligations on the distributor with respect to importation, pricing, quotations, invoices, and so on. The focus of the dispute was clause 7(b). It was described as a ‘condition of this agreement’. No other clause bore such a description. Clause 7(b) focused on the sale of panel presses in ­particular. It required that a representative of the distributor visit six prescribed customers once a week to solicit orders for panel presses. The same representative was to make each visit ‘unless there [were] unavoidable reasons’. Clauses 7(a) and 7(b) stated: (a) Subject to clause 17 [the distributor] will use its best endeavours to promote and extend the sale of [the manufacturer’s] products in the territory. (b) It shall be [a] condition of this agreement that: (i) [the distributor] shall send its representatives to visit the six firms whose names are listed in the Schedule hereto at least once in every week for the purpose of soliciting orders for panel presses; (ii) that the same representative shall visit each firm on each occasion unless there are unavoidable reasons preventing the visit being made by that representative in which case the visit shall be made by an alternate representative and [the distributor] will ensure that such a visit is always made by the same alternate representative.

[6-92]   The distributor missed 24 of 240 visits, some with good reason, over the space of nearly two years. As such, the manufacturer purported to terminate the contract in reliance upon an express termination right, clause 11(a), which entitled either party to terminate for a ‘material breach’ unremedied after 60 days’ notice. Once arbitral proceedings were commenced, the manufacturer pleaded in the alternative that it was entitled to terminate at common law because the distributor had breached an essential term, namely, clause 7(b).287 The dispute before

285 See

[1985] AC 191, 200H–201D, 205C (Lord Diplock) (quoting the arbitrators). [1974] AC 235 (HL). 287 ibid 254 (Lord Morris). 286 Schuler

182  The Practice of Contract Interpretation the House of Lords related solely to the alternative plea – the alleged breach of an essential term. It involved a doctrinal application of interpretation:288 the use of interpretation to classify terms for the purpose of establishing common law termination rights.289 In such a case, the interpretive exercise is framed by the doctrinal enquiry – the question of construction is whether any breach of the relevant clause was meant to give rise to a right to terminate.290 Hence, in Schuler, the question of construction was whether the manufacturer was meant to be entitled to terminate for any breach of clause 7(b).291 [6-93]   A majority of the House of Lords answered this question in the negative: clause 7(b) was not meant to be an essential term.292 The designation of the term as a ‘condition’ merely emphasised that any breach was ‘material’ for the purpose of clause 11(a) – the express termination regime. The case involved a conflict between the distributor’s consequentialist construction, which was accepted by the majority, and the manufacturer’s linguistic interpretation. [6-94]  For the manufacturer, the word ‘condition’ was a legal ‘term of art’. It denoted an essential term. This meaning was established by a long line of authority.293 To ensure ‘certainty in commercial contracts’, so the argument went, this meaning had to hold sway.294 [6-95]   For the distributor, the manufacturer’s construction gave rise to the ‘unreasonable’295 and ‘grotesque’296 consequence that any breach, ‘however blameless’,297 entitled the manufacturer to terminate. Such a result could not have been intended, it was argued, considering the sheer number of visits – there were 1,400 in total. Hence, it was argued that the distributor’s construction was to be preferred. [6-96]  Each construction also had purposive justification.298 It was clear from the text as a whole that clause 7(b) was to impose a ‘stricter obligation

288 See further [7-55]–[7-72]. 289 See further [7-63]–[7-65]. 290 See [5-22]. 291 See [1974] AC 235, 251C (Lord Reid), 252F (Lord Morris), 263E (Lord Simon), 270H–I (Lord Kilbrandon) (HL); [1972] 1 WLR 840, 846C (Lord Denning MR), 853A (Edmund Davies J) (CA). 292 [1974] AC 235, 251H–252A (Lord Reid), 259A–B (Lord Morris), 265C–D (Lord Simon), 271F–G (Lord Kilbrandon) (HL). 293 [1972] 1 WLR 840, 851A (Lord Denning MR) (CA). See also [1974] AC 235, 262E–F (Lord Wilberforce) (HL) (dissenting); [1972] 1 WLR 840, 860C (Stephenson LJ) (CA) (dissenting). As to precedential meanings, see [3-13]. 294 See [1974] AC 235, 240B–D (HL). 295 ibid 251G (Lord Reid). 296 ibid 272B–D (Lord Kilbrandon). 297 Hypothetically, even an unavoidable breach due to illness or a refusal by a prescribed customer to accept visitors would suffice: ibid 251G (Lord Reid). 298 The distributor’s construction was also advanced by a weak linguistic argument, namely, the word ‘condition’ could simply bear its ordinary meaning denoting a term or stipulation. This argument was rejected by Lord Reid and Lord Simon: ibid 250E (Lord Reid), 265C (Lord Simon).

Linguistic Interpretation and Consequentialist Construction  183 with respect to panel presses’.299 After all, the clause was the only provision in the contract that was labelled a ‘condition’. For the manufacturer, this reinforced the conclusion that clause 7(b) was meant to be an essential term.300 But the distributor could also explain the special treatment of clause 7(b): the fact that it was designated a ‘condition’ emphasised that any breach was material for the purpose of clause 11(a).301 [6-97]   The fact that the distributor could advance a rational purposive justification for clause 7(b) was significant because it nullified the purposive argument in favour of the manufacturer’s interpretation. As a result, the manufacturer’s interpretation was largely linguistic, and it involved reliance upon a quite technical argument that had its weaknesses. (In particular, the reasonable layperson would not have read the term ‘condition’ as a legal term of art.)302 Hence, the distributor’s consequentialist construction was more persuasive and it was adopted by a majority in the House of Lords.303 The fact that, on the manufacturer’s interpretation, a termination right would arise upon the failure of any one of 1,400 visits was a strong indicator against the conclusion that such a termination right was intended.304 Clearer words were needed to justify such a ‘grotesque’305 outcome.

Investors Compensation Scheme Ltd v West Bromwich Building Society306 [6-98]  In ICS, a compensation fund had agreed to compensate defrauded ­investors in exchange for an assignment of claims against relevant solicitors, ­financial advisers and financier building societies, including West Bromwich

299 See, eg, ibid 250E (Lord Reid). 300 See ibid 258C (Lord Morris). 301 ibid 251H–252A (Lord Reid), 265D (Lord Simon), 271G (Lord Kilbrandon). See also ibid 258G–259A (Lord Morris) (the introductory words to clause 7(b) merely denoted that the clause was ‘specially prominent and significant’). 302 ibid 251A (Lord Reid); [1972] 1 WLR 840, 851H (Lord Denning MR) (CA). For Lord Morris, the precedential nature of the argument also detracted from its force: ibid 256E–F (‘I doubt whether … it is of much value … to consider how courts have interpreted various differing words in various differing contracts’). 303 [1974] AC 235, 251H–252A (Lord Reid), 259A–B (Lord Morris), 265C–D (Lord Simon), 271F–G (Lord Kilbrandon) (HL). 304 In dissent, Lord Wilberforce questioned the underlying normative presumption, namely, the presumption ‘that both parties to this contract adopted a standard of easygoing tolerance rather than one of aggressive, insistent punctuality and efficiency’: see ibid, 263B (Lord Wilberforce) (dissenting). 305 ibid 272C (Lord Kilbrandon). Clause 7(b) merely used ‘the equivocal word “condition”’ – it did not ‘spell … out the consequences [that] should follow upon the slightest breach’: ibid 272C–D (Lord Kilbrandon). 306 ICS [1998] 1 WLR 896 (HL).

184  The Practice of Contract Interpretation Building Society (WBBS).307 A problem arose because the claim form purported to exclude from the assignment: Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the [building society].

[6-99]  ICS asserted that claims for damages against WBBS had not been excluded from the assignment. However, the litigating investors argued for a linguistic interpretation: ‘any claim’ meant ‘all possible claims’, including claims for damages. This construction was also justified on a purposive basis.308 By contrast, the central argument advanced by ICS was that WBBS was the ‘prime target’. Hence, if such claims were excluded from the assignment, the fund would have little prospect of substantive recovery. In this sense, the construction put forward by ICS was essentially consequentialist in nature.309 But it was reinforced textually because the exclusion of claims was expressed in terms that suggested an error. In particular, the claim form referred to claims ‘sounding in rescission for undue influence or otherwise’ as an example of ‘any claim’. This was ‘very strange’.310 It seemed that the exclusion was meant to refer to ‘any claim sounding in rescission (whether for undue influence or otherwise)’.311 In short, the contract contained an obvious error: claims for damages against WBBS were not meant to be excluded. Hence, a majority of the House of Lords accepted the construction advanced by ICS.312 It was (on one view at least) a consequentialist interpretation, but one that was reinforced by an obvious error in the text. As a result, it succeeded against a quite persuasive linguistic interpretation. By comparison, in Arnold v Britton, a linguistic interpretation prevailed because it had the better purposive justification.

Arnold v Britton313 [6-100]  Arnold v Britton concerned contested service charges for holiday homes. Approximately 90 chalets in southern Wales had been leased on almost identical terms from 1970 onwards. The lease term was 99 years and each lessee covenanted to pay maintenance, repair and service costs. The covenant was awkwardly drafted. It stated that the lessee was obliged to pay the fees ‘as a proportionate part’ of the costs, but it then went on to state an indexed sum. Further, the quantification of this indexed sum varied as between those leases executed earlier and those executed later. In the earlier leases, the sum was £90 per annum, increasing by

307 For

a full statement of the facts, see [5-12]. [5-13]. 309 It can also be characterised in other ways: see [6-04] (n 8) and [6-35]. 310 [1998] 1 WLR 896, 912A (Lord Hoffmann) (HL). 311 See [5-14]. 312 See [5-14]. 313 Arnold v Britton [2015] UKSC 36, [2015] AC 1619. 308 See

Linguistic Interpretation and Consequentialist Construction  185 10 per cent every three years. In the later leases, it was £90 per annum, increasing by 10 per cent per annum. The focus of the dispute was the later leases, of which there were 21 in total. The disputed covenant varied slightly as between those leases. In 14 of them, the covenant stated: The lessee hereby covenants … [t]o pay to the lessors without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the lessors in the repair maintenance renewal and renewal [sic] of the facilities of the estate and the provision of services hereafter set out the yearly sum of £90 and VAT (if any) for the first year of the term hereby granted increasing thereafter by ten pounds per hundred for every subsequent year or part thereof.

The variation in indexation made a huge difference. By 2015, under one of the later leases (in particular, one granted in 1980), the charge amounted to £2,500. By 2072, it would exceed £550,000.314 [6-101]   The lessees under the later leases claimed that, on the proper construction of the covenant, the payment was to be a proportionate amount of the costs and expenses. The lessor, on the other hand, claimed that the amount of the charge was the indexed sum. [6-102]  A majority of the Supreme Court held in favour of the lessor. Its construction was advanced primarily by a particularly strong linguistic argument. On its ordinary meaning, the covenant obliged the lessees to pay the indexed sum.315 The lessees were to ‘pay to the lessors … as a proportionate part of the expenses and outgoings … the yearly sum of £90 [increasing by 10 per cent per annum]’.316 The lessees’ main argument, on the other hand, was consequentialist. On the lessor’s construction, the leases gave rise to ‘absurdly high’ annual charges.317 Hence, so the argument went, a variable charge based on actual costs must have been intended. [6-103]   The difficulties for the lessees were twofold. The first problem was that their construction lacked a persuasive textual footing. The high annual charges were self-evident upon performing a simple calculation; that is, the alleged consequences were apparent upon reading the contract text. However, the text did not otherwise offer firm support for the construction advanced by the lessees. The reference to the charge being a ‘proportionate part’ of expenses and outgoings was not sufficient, nor was the omission of words such as ‘quantified in the sum of ’ (which would have made it clear that the indexed sum was the quantification of the ‘proportionate’ charge).318 Neither of these features was as ‘strange’ and suggestive 314 ibid 1631 [30] (Lord Neuberger). cf McMeel (2017) 99 [1.175] (‘The case illustrates the exponential effect of compound interest’). 315 [2015] UKSC 36, [2015] AC 1619, 1629 [24] (Lord Neuberger). 316 Emphasis added. The covenant was in more ambiguous terms in the earlier leases. In particular, it did not include the italicised words ‘as a’. 317 [2015] UKSC 36, [2015] AC 1619, 1626 [10], 1631 [30] (Lord Neuberger). 318 See ibid 1630 [27], [29] (Lord Neuberger).

186  The Practice of Contract Interpretation of error as the specification of claims ‘sounding in rescission for undue influence’ in ICS.319 More was needed to establish that something ‘[had] gone significantly wrong with the wording’,320 particularly considering that the lessor could justify its interpretation on a purposive basis. This was the second difficulty facing the lessees. The lessor’s interpretation secured commercial certainty.321 The aim of the first part of the covenant was to state the obligation to pay, while the object of the second part was to quantify the sum due.322 By comparison, the lessees’ alleged justification for the second part of the covenant was that it operated as a cap on the variable charge.323 This contention did not make a great deal of sense. Accepting the lessees’ position that the second part of the covenant created ‘absurdly high figure[s]’, the alleged cap would be ‘meaningless’.324 Taking a step back and looking more broadly at the transaction, the lessor’s construction also made commercial sense. Most of the leases were agreed at a time of high inflation (over 10 per cent per annum until 1981).325 Hence, the covenant was agreed as a ‘bilateral gamble [on inflation]’.326 [6-104]   Ultimately, for a majority of the Supreme Court, the lessees’ primarily consequentialist case was an insufficient basis to ‘depart … from the natural meaning’327 of the covenant. It involved ‘inserting words that were not there’328 and ‘inventing a lack of clarity’.329 The dispute would probably have been decided differently if the lessor could not sensibly explain the large sums to become due, that is, if the lessor could not explain the covenant as an agreed gamble on ­inflation. Without such an explanation, the lessor’s construction would have amounted to a strict literal interpretation: an interpretation advanced solely by an argument about the meaning of the words.330 And, while the lessor’s ­linguistic argument was persuasive (the covenant clearly stated that a specific indexed amount was due), the covenant also described the charge as a ‘proportionate part’ of expenses and outgoings. Hence, taken as a whole, the covenant did not clearly indicate that the lessor’s interpretation was correct. Nonetheless, the majority decision was sensible considering that the lessor’s linguistic interpretation was commercially justified. Even though the high charges were apparent

319 See [5-14]. 320 [2015] UKSC 36, [2015] AC 1619, 1631 [34] (Lord Neuberger). See further McLauchlan, ‘The ICS Principles’ (n 106) 288–99; Connal (n 116) 75–76. 321 [2015] UKSC 36, [2015] AC 1619, 1630 [26], 1631 [33] (Lord Neuberger). 322 ibid 1630 [28] (Lord Neuberger). 323 ibid 1631 [31] (Lord Neuberger). 324 ibid 1633 [42] (Lord Neuberger). See also Connal (n 116) 76. 325 ibid 1632 [35]. 326 ibid 1632 [36] (Lord Neuberger). 327 ibid 1631 [32] (Lord Neuberger) (Lord Sumption, Lord Hughes and Lord Hodge agreeing). 328 ibid. 329 ibid 1631 [29] (Lord Neuberger) (Lord Sumption, Lord Hughes and Lord Hodge agreeing). 330 Such an interpretation is rejected if there is a sensible alternative: see [6-05] and [6-26]–[6-34].

Linguistic Interpretation and Consequentialist Construction  187 from the text, the lessor could rationally explain the covenant as an agreed division of risk with respect to inflation.331

Comment [6-105]   It has been argued that decisions such as Goblin Hill and Arnold v Britton demonstrate a shift from modern consequentialism back to traditional literalism.332 However, as this chapter has shown, the cases do not evidence a shift in approach. The decisions can be understood within a unified framework. The interpretive aim is to infer objective intention from the choice of words in the contract. In some cases, the meaning of the words is a stronger indicator than potential consequences. In others, the converse applies. And, in the hardest cases, broader textual or purposive justification is determinative. [6-106]   The differences between the cases can also be analysed through the prism of the so-called ‘ambiguity gateway’: results that are merely unreasonable rather than absurd can only be considered if the text is ambiguous.333 Hence, a linguistic interpretation that is fortified by the text and clearly indicates a resolution to the dispute rarely fails. That is, if the text is ‘unambiguous’ in answer to the relevant question of interpretation, a consequentialist construction must be particularly persuasive for it to succeed. The alleged adverse consequences must be absurd rather than merely unreasonable.334 Otherwise, the parties should be held to what was agreed out of respect for the contract as an institution through which rights and obligations are crystallised upon contract formation. On the other hand, a linguistic interpretation may be deficient when set in the context of the contract as a whole; that is, the text may be ‘ambiguous’ in answer to the question of interpretation. In such a case, consequentialist arguments should be more readily considered. Mere unreasonableness may suffice. In this sense, Arnold v Britton can be understood alongside ICS. In the latter case, the text was clearly suggestive of error. Hence, a construction driven by consequentialist considerations succeeded. By comparison, in Arnold v Britton, the text did not evidence an obvious error.335 However, this is not to say that Arnold v Britton was a clearcut case. The contract text did not clearly answer the interpretive question and 331 Contrast McMeel (2017) 103–04 [1.181] (‘The majority of the Supreme Court simply got the balancing exercise wrong. Most importantly, there was over-concentration on the latter half of the disputed clause, rendering the preceding words mere surplusage. Insufficient weight was given to the remainder of the instrument, the relevant background and common sense’); Mitchell (2019) 70 (‘The outcome in Arnold is hard to defend’). 332 See [4-39]. As regards Goblin Hill [2011] UKPC 8, [2011] 1 BCLC 587, in particular, see McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ (n 277) 422. 333 See [3-24]. 334 Although query the practicalities of such a distinction: see [3-24]. 335 Connal (n 116) 76 (‘ignoring the words entirely was not an option’).

188  The Practice of Contract Interpretation the determinative balance was a fine one.336 As Connal notes, ‘[f]aced with a lack of feasible options, the court was stuck in an unpleasant, but unavoidable, culde-sac’.337 One reason why the case was so difficult is that, on one view, it was triggered by an inconsistency in the contract text: the covenant stated that a specified indexed sum was payable, but it also described the charge as a ‘proportionate part’ of expenses and outgoings. Cases of inconsistency are the hardest to resolve because the text itself often does not provide a clear answer.

6.8.  Textual Conflicts and the Search for Auxiliary Support Principle 13: A textual conflict is resolved, in the first instance, by identifying the set of textual indicators that establishes the objective intention of the parties to the highest degree of probability. Principle 14: If the textual indicators are evenly matched, the dispute is resolved by analysing the purposive and consequentialist factors. [6-107]  The most difficult interpretation cases involve conflicting textual ­indicators, that is, cases of inconsistency. Such tension is often resolved by simply analysing the strength and number of the competing textual arguments, as can be seen in the second interpretive question addressed in Mount Bruce.338 But when the textual indicators are evenly matched, one needs to look to see which construction has the better purposive or consequentialist justification. As can be seen in Re Sigma,339 the correct interpretation might be quite clear after this enquiry.340 However, this is not always the case. Rigorous analysis is often necessary. For ­example, some cases turn on the extent to which each party counters opposing textual arguments with a purposive explanation. This can be seen in IATA v Ansett.341 The same approach could also have been applied in Electricity Generation.342 But let us begin with a much simpler example of a textual conflict: Mount Bruce. 336 See further [6-08]. 337 Connal (n 116) 76. 338 Mount Bruce [2015] HCA 37, (2015) 256 CLR 104. 339 Re Sigma [2009] UKSC 2, [2010] BCC 40 (discussed at [6-31]–[6-33]). 340 See also Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900 (discussed at [6-17]–[6-20]); Wood [2017] UKSC 24, [2017] AC 1173 (discussed at [6-55]–[6-60]); Ecosse [2017] HCA 12, (2017) 261 CLR 544 (an ambiguous covenant in a lease requiring that a tenant pay imposts on land was construed in accordance with its evident commercial objective, as stated in the lease, namely, that the lease was to approximate a sale of land in circumstances where such a sale was not possible). 341 IATA v Ansett [2008] HCA 3, (2008) 234 CLR 151. 342 Electricity Generation [2014] HCA 7, (2014) 251 CLR 640.

Textual Conflicts and the Search for Auxiliary Support  189

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd343 [6-108]  Mount Bruce involved disputed mining royalties.344 Mining rights were assigned to Mount Bruce Mining Pty Ltd (MBM) as part of a division of rights between it and another party. The rights were in the form of ‘temporary reserves’: a statutory right of occupancy. Pursuant to clause 3.1, MBM was obliged to pay royalties on ‘ore won by MBM from the MBM area’. Clause 3.1 relevantly stated: Ore won by MBM from the MBM area will be subject to the payment to [the assignor] of a base Royalty of 2.5% on the same conditions as apply to the existing Agreement between [the assignor and a related party of MBM].

The case involved two questions of interpretation. The first was: by whom must the ore be won for the royalty to be payable? This dispute involved tension between linguistic interpretation and purposive construction.345 The second question was: from where and how must the ore be won for the royalty to be payable? This dispute was one of inconsistency. The ‘MBM area’ was defined in clause 2.2 by reference to the numbered identifiers for each assigned ‘temporary reserve’. However, clause 1.4 provided that ‘all references to … reserves include all present and future rights of [the assignor]’. Clauses 1.4 and 2.2 relevantly stated: PREAMBLE … 1.4 All references to blocks or reserves include all present and future rights of [the assignor] in relation to the above blocks and reserves [ie, temporary reserves 4937H to 4967H inclusive] including any extensions of the ore bodies located therein or any adjustments of the present indicated boundaries of the above Temporary Reserves arranged with the Western Australian Government. … DIVISION OF MOUNT BRUCE RESERVES … 2.2 … [the assignor] hereby agrees that its Mount Bruce Temporary Reserves should be divided between [the assignor] and MBM so that in respect of temporary reserves 4947H to 4962H inclusive (hereinafter called ‘Hanwright area’) the entire rights thereto are restored to [the assignor] and in respect to temporary reserves 4937H to 4946H inclusive and 4963H to 4967H inclusive (together hereinafter called ‘MBM area’), MBM acquires the entire rights thereto.346

[6-109]   Ore was eventually won from the geographical area covered by the assigned temporary reserves (ie, ‘temporary reserves 4937H to 4946H inclusive



343 Mount

Bruce [2015] HCA 37, (2015) 256 CLR 104. a fuller statement of the facts, see [6-49]–[6-51]. 345 See further [6-49]–[6-54]. 346 Emphasis added. 344 For

190  The Practice of Contract Interpretation and 4963H to 4967H inclusive’). However, it was won by an entity other than MBM and through a different mining right, namely, a mining lease. The assignor claimed royalties on this ore, but MBM refused to pay, arguing, inter alia, that the ore was not ‘won … from the MBM area’. MBM claimed that, in light of clause 1.4, what was meant by this phrase was that the ore had to be won through the exercise of the rights assigned. In opposition, the assignor argued that royalties were payable on ore won from the geographical area comprising the assigned temporary reserves. [6-110]   The assignor’s interpretation was adopted at first instance,347 by the Court of Appeal of the Supreme Court of New South Wales,348 and by the High Court.349 It was established by numerous textual factors indicating that the division of rights was made on a geographical basis.350 For example, clause 1.1 referred to ‘areas indicated on the attached map’ and clause 2.3 provided that the ‘total area’ of any mining leases would be divided between the assignor and MBM. By comparison, MBM’s reliance on clause 1.4 was not well placed for at least four reasons. First, clause 1.4 still used physical area as an identifying indicia, namely, ‘blocks’ and ‘reserves’.351 Second, clause 1.4 did not state that it was ‘definitive of the “MBM area”’ – it merely stated that references to ‘blocks and reserves’ included ‘all present and future rights’.352 Third, the second part of clause 1.4 reinforced that the MBM area was defined geographically because it referred to extensions of ore bodies and adjustments of boundaries by the Western Australian government.353 Finally, the reference to ‘future rights’ in the first part of clause 1.4 was needed because the agreement effected a division of the assignor’s present and future rights, including rights that might come into existence between the date of the agreement and the date of the division provided for in clause 2.2.354 Hence, the assignor could rationally explain clause 1.4 – it could demonstrate the commercial object of the provision. In addition, looking to the text as a whole, MBM could only point to a few provisions for further support: the oblique references to ‘rights’ in clause 2.2355 and the fact that clause 1.1 referred to ‘temporary reserves in respect of areas’.356 Neither of these indicators was particularly persuasive. Hence, the dispute involved a textual conflict that was easily resolved by reference to the text

347 [2013] NSWSC 536, [98] (Hammerschlag J). 348 [2014] NSWCA 323, [45] (Macfarlan JA) (Meagher and Barrett JJA agreeing). 349 [2015] HCA 37, (2015) 256 CLR 104, 118 [58] (French CJ, Nettle and Gordon JJ), 127 [92]–[93] (Kiefel and Keane JJ) (Bell and Gageler JJ agreeing). 350 Clauses 1.1, 2.3, 3.1, 6.12, 9 and 12: see ibid 118–19 [60]–[64] (French CJ, Nettle and Gordon JJ). 351 ibid 120 [65] (French CJ, Nettle and Gordon JJ). 352 ibid 127 [91] (Kiefel and Keane JJ) (‘words of extension’, not definition). 353 ibid 120 [66] (French CJ, Nettle and Gordon JJ). 354 ibid 120 [65] (French CJ, Nettle and Gordon JJ). 355 This reference could also be seen as reinforcing the assignor’s construction: see [2014] NSWCA 323, [46] (Macfarlan JA) (Meagher and Barrett JJA agreeing). 356 [2015] HCA 37, (2015) 256 CLR 104, 126 [89] (Kiefel and Keane JJ) (emphasis in original).

Textual Conflicts and the Search for Auxiliary Support  191 itself; that is, the inference of intention was clear when the document was read as a whole.357 By contrast, Ansett presented a more challenging interpretive dispute.

International Air Transport Association v Ansett Australia Holdings Ltd358 [6-111]   The International Air Transport Association (IATA) was party to a multilateral agreement with international airlines whereby it provided a clearing house for inter-airline debits and credits. A clearing house was needed because airlines often transport passengers and cargo for other airlines. The clearing house avoided the need for airlines to make and receive payments as between themselves. Instead, IATA netted off credits and debits between airlines on a monthly basis. Airlines then either owed money to IATA or were entitled to a payment from IATA. [6-112]  The interpretive dispute arose because one of the member airlines, Ansett Australia Holdings Ltd (Ansett), entered administration and it executed a Deed of Company Arrangement. Ansett and its administrators refused to acknowledge that the clearing house agreement extinguished inter-airline debts. Hence, each creditor airline had to prove its debt against Ansett. Similarly, airlines in debt to Ansett had to pay the administrators directly. This raised the question of whether any debts were created between airline members under the multilateral agreement. The question was approached as a matter of interpretation:359 was the objective intention of the parties that inter-airline debts would be created? [6-113]   The multilateral agreement contained numerous inconsistent provisions on this point. Ansett claimed that the agreement did create inter-airline debts. Ansett relied primarily on clauses 8.1 and 8.2.3.360 Clause 8.1 stated that ‘each issuing airline agrees to pay each carrying airline the transportation charges’. Clause 8.2.3 stated that ‘the right to payment … arises at the time such services are rendered’. Hence, it was Ansett’s position that a debt was created between member airlines upon the provision of carriage services and that it was only extinguished upon the relevant monthly clearance (or a settlement).361 [6-114]   IATA’s construction, on the other hand, was that the clearing house agreement did not create inter-airline debts. This construction was based on 357 ‘[T]he ordinary and unambiguous meaning of the relevant words’: ibid 118 [55] (French CJ, Nettle and Gordon JJ). 358 IATA v Ansett [2008] HCA 3, (2008) 234 CLR 151. 359 But it could have been dealt with as a matter of legal characterisation: see below [6-120] (text at n 392). 360 [2006] VSCA 242, (2006) 60 ACSR 468, 492 [90] (Nettle JA). 361 See [2008] HCA 3, (2008) 234 CLR 151, 199 [145] (Kirby J); [2006] VSCA 242, (2006) 60 ACSR 468, 497–98 [117] (Nettle JA).

192  The Practice of Contract Interpretation regulation 9(a) of the clearing house regulations, in combination with clause 8.1 of the agreement.362 Clause 8.1 provided that payments between airlines were to be dealt with ‘in accordance with applicable regulations and current clearance procedures’. Regulation 9(a) stated that ‘no liability for payment and no right to recover payment shall accrue between members of the Clearing House’. For IATA, regulation 9(a) made it clear: no debts were to accrue between member airlines at any point.363 [6-115]   Clause 8.1, clause 8.2.3 and regulation 9(a) stated, in full form: 8.1 PAYMENT OF TRANSPORTATION CHARGES Each issuing airline agrees to pay to each carrying airline the transportation charges applicable to the transportation performed by such carrying airline … in accordance with applicable regulations and current clearance procedures of the IATA Clearing House, unless otherwise agreed by the issuing airline and the carrying airline. 8.2 BILLING AND SETTLEMENT … 8.2.3 Except as may otherwise be provided in other agreements, rules or regulations, the right to payment hereunder arises at the time such services are rendered by a party hereto or its agent. EFFECT OF ADMISSION TO MEMBERSHIP 9. The admission to membership in the Clearing House shall constitute a contract between each member and every other member and IATA to the effect following, that is to say: (a) With respect to transactions between members of the Clearing House which are subject to clearance through the Clearing House as provided in Regulations 10 and 11 and subject to the provisions of the Regulations regarding protested and disputed items, no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House. In lieu thereof members shall have liabilities to the Clearing House for balances due by them resulting from a clearance or rights of action against the Clearing House for balances in their favour resulting from a clearance and collected by the Clearing House from debtor members in such clearance.364

[6-116]   As can be seen, each construction had a compelling textual foundation with little doubt as to the ordinary meaning of each of the competing primary provisions. But the inconsistency did not stop there. Each interpretation was also reinforced by a number of underlying and conflicting textual factors.

362 See [2006] VSCA 242, (2006) 60 ACSR 468, 472 [16] (Maxwell P). 363 See [2008] HCA 3, (2008) 234 CLR 151, 178 [65] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ). 364 Emphasis added.

Textual Conflicts and the Search for Auxiliary Support  193 [6-117]   Ansett relied upon several regulations establishing that ‘claims’ existed between member airlines: regulations 9(b),365 9(c),366 11,367 22–24368 and 49.369 Some of these regulations provided for the enforcement of claims directly between members in discrete circumstances:370 if a court order attached to the claimed amount,371 if a claim was disputed,372 or if a member had its membership terminated or suspended.373 Regulations 12 and 49374 also suggested, more specifically, the creation of inter-airline ‘debts’. For example, regulation 12 deemed ‘all transactions within the scope of a clearance’ to be ‘mutual debts of the parties involved’. If one accepted that ‘parties’ meant issuing and carrying airlines, this regulation seemed to create mutual debts between airlines.375 [6-118]   In opposition, IATA relied on its own suite of subsidiary textual indicators. The regulations detailed a comprehensive ‘clearance system’ or ‘scheme’376 that required: notification of claims;377 clearance of claims at face value following

365 Under regulation 9(b), each airline granted an irrevocable authority to IATA to pay and collect balances – this suggested that each airline retained its claims vis-a-vis other airlines and appointed IATA as its agent: see [2006] VSCA 242, (2006) 60 ACSR 468, 496–97 [112] (Nettle JA) (Bongiorno AJA agreeing) (overruled). 366 Regulation 9(c) provided for the ‘satisfaction and discharge of every claim in a clearance’. Assuming that ‘claims’ meant inter-airline claims, this regulation demonstrated that claims existed prior to clearance: see [2006] VSCA 242, (2006) 60 ACSR 468, 493 [97] (Nettle JA) (Bongiorno AJA agreeing) (overruled). 367 Regulation 11 stated that transactions could be cleared ‘provided the consent of the member against which the claim is raised has first been obtained’: see [2006] VSCA 242, (2006) 60 ACSR 468, 497 [115] (Nettle JA) (Bongiorno AJA agreeing) (overruled). 368 Regulations 22–24 dealt with disputed billings, including the exclusion from clearance of unanimously rejected claims: see [2008] HCA 3, (2008) 234 CLR 151, 199 [143] (Kirby J) (dissenting); [2006] VSCA 242, (2006) 60 ACSR 468, 474 [23] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 369 Regulation 49 provided for the direct enforcement of claims as between members in the event of termination or suspension of a member. 370 See [2008] HCA 3, (2008) 234 CLR 151, 199 [140] (Kirby J) (dissenting). 371 Regulation 9(b): see [2006] VSCA 242, (2006) 60 ACSR 468, 493 [96] (Nettle JA) (Bongiorno AJA agreeing) (overruled). 372 Regulations 22 and 23: see [2008] HCA 3, (2008) 234 CLR 151, 199 [143] (Kirby J) (dissenting); [2006] VSCA 242, (2006) 60 ACSR 468, 474 [23] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 373 Regulation 49: see [2008] HCA 3, (2008) 234 CLR 151, 199 [140] (Kirby J) (dissenting). 374 Regulation 49 provided that the suspension of a member ‘shall not affect the Clearing House’s right to set-off claims’. The notion of set-off was said to be ‘consistent with the idea that the function of the clearing house [was] to set-off debts owed to and by members’: [2006] VSCA 242, (2006) 60 ACSR 468, 497 [119] (Nettle JA) (Bongiorno AJA agreeing) (overruled). 375 [2006] VSCA 242, (2006) 60 ACSR 468, 494 [101] (Nettle JA) (Bongiorno AJA agreeing) (overruled); [2008] HCA 3, (2008) 234 CLR 151, 196 [134] (Kirby J) (dissenting). 376 [2006] VSCA 242, (2006) 60 ACSR 468, 473 [18]–[19] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 377 Regulation 9(b): see ibid 473 [19] (Maxwell P) (dissenting, but accepted by a majority of the High Court).

194  The Practice of Contract Interpretation notification;378 denominated currencies;379 collection of claims upon the first of either payment for services or the rendering of services;380 and the application of funds collected to discharge obligations to IATA.381 IATA’s liability to any airline with respect to a clearance was also subject to payment of balances due to IATA, such that airlines were only entitled to any net credit balance.382 As a whole, it was said, this framework excluded the possibility of inter-airline debts.383 [6-119]   The persuasive force of IATA’s construction did not, however, derive from this textual framework. Instead, it rested in the fact that IATA had the better purposive justification for its construction. First and foremost, clauses 8.1, 8.2.1 and 8.2.2 of the agreement – by requiring payment and settlement in accordance with the regulations – could be seen as having ‘the object and effect of giving primacy to the Regulations’.384 Second, the regulations relied upon by Ansett could be rationally explained in a manner consistent with IATA’s interpretation.385 For example, regulation 12 (which deemed transactions in a clearance to be ‘mutual debts of the parties involved’) could be explained as deeming mutuality between IATA and each airline so as to ‘remove any doubt about the capacity of the clearing house to effect a clearance’.386 Similarly, those regulations providing for the direct enforcement of claims could be justified as facilitating enforcement ‘in the normal way’387 (ie, upon the occurrence of the relevant event), rather than demonstrating the pre-existence of any debts.388 Finally, the object of the dispute regulations

378 Regulations 9(c) and 24: see ibid 474 [19] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 379 Regulation 18: see ibid 474 [19] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 380 Regulation 38: see [2008] HCA 3, (2008) 234 CLR 151, 176 [58] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ); [2006] VSCA 242, (2006) 60 ACSR 468, 474 [19] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 381 Regulation 38: see [2008] HCA 3, (2008) 234 CLR 151, 176 [58] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ); [2006] VSCA 242, (2006) 60 ACSR 468, 474 [19] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 382 Regulation 39: see [2008] HCA 3, (2008) 234 CLR 151, 176-77 [58]-[59] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ); [2006] VSCA 242, (2006) 60 ACSR 468, 473-74 [19] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 383 See [2006] VSCA 242, (2006) 60 ACSR 468, 473 [18]-[19] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 384 [2008] HCA 3, (2008) 234 CLR 151, 175 [54] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ). 385 See [2006] VSCA 242, (2006) 60 ACSR 468, 474–79 [22]–[44] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 386 [2006] VSCA 242, (2006) 60 ACSR 468, 477–78 [38]–[43] (Maxwell P) (dissenting, but accepted by a majority of the High Court) (a ‘plausible’ explanation). This explanation was viable because mutuality was necessary in some jurisdictions for IATA to set-off claims: see [2008] HCA 3, (2008) 234 CLR 151, 166 [21] (Gleeson CJ), 178 [65] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ). 387 [2006] VSCA 242, (2006) 60 ACSR 468, 476 [32]–[33] (Maxwell P) (dissenting, but accepted by a majority of the High Court). 388 See [2008] HCA 3, (2008) 234 CLR 151, 178 [64]–[65] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ).

Textual Conflicts and the Search for Auxiliary Support  195 could be understood as ensuring that each clearance was conducted on the basis of accurate figures and valid claims.389 Hence, IATA succeeded – its construction was accepted by a majority of the High Court.390 But it succeeded in large part because it could advance the better purposive explanation for apparently conflicting textual indicators. [6-120]   IATA’s interpretation was the most sensible and coherent. Ansett, on the other hand, could advance no purposive justification for regulation 9(a).391 Instead, its best counter-argument was that regulation 9(a) should be ignored as a mere label in properly characterising the relationship between the parties.392 However, for the majority, the matter was one of intention, not legal characterisation.393 Nothing in the regulations conflicted with regulation 9(a) ‘to the point where the manifested intention stated in reg 9(a) [could] not be given its stated effect’.394 Ansett was certainly a difficult case. It required a rigorous analysis of the relevant considerations and a fine balancing of the competing arguments. Electricity Generation posed similar difficulties.

Electricity Generation Corp v Woodside Energy Ltd395 [6-121]   In 2004, Verve, a statutory body and major electricity generator and supplier in Western Australia, entered into a long-term gas supply agreement with five prominent gas suppliers (collectively, the Sellers).396 Verve was obliged to pay for an annual minimum amount of gas (AMQ) regardless of whether it took delivery of the gas.397 Each day, it would nominate its gas requirements.398 The Sellers were obliged to provide a minimum daily amount (MDQ).399 In addition, pursuant to clause 3.3(a), the Sellers had to ‘use reasonable endeavours’ to make available an additional daily amount up to a fixed limit (SMDQ).400 However, 389 [2006] VSCA 242, (2006) 60 ACSR 468, 474–75 [24] (Maxwell P) (dissenting, but accepted by a majority of the High Court). But see [2008] HCA 3, (2008) 234 CLR 151, 199 [143] (Kirby J) (dissenting). 390 [2008] HCA 3, (2008) 234 CLR 151, 167 [23] (Gleeson CJ), 179 [70] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ). 391 To the contrary, the litigious background to the drafting of the clause suggested it had been prepared to deal specifically with this problem: [2008] HCA 3, (2008) 234 CLR 151, 164–65 [16], 166 [22] (Gleeson CJ). But see [2008] HCA 3, (2008) 234 CLR 151, 194 [127] (Kirby J) (dissenting) (a prohibited ‘search … for what the parties to a contract subjectively intended’). 392 See, eg, [2006] VSCA 242, (2006) 60 ACSR 468, 497–98 [117]–[119] (Nettle JA) (Bongiorno AJA agreeing) (overruled); [2008] HCA 3, (2008) 234 CLR 151, 195 [132], 197 [136] (Kirby J) (dissenting). 393 As to legal characterisation, see further [7-49]–[7-54]. 394 [2008] HCA 3, (2008) 234 CLR 151, 178 [65] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ). 395 Electricity Generation [2014] HCA 7, (2014) 251 CLR 640. 396 Verve had separate contracts with each Seller, albeit contained within the same document. 397 Clause 4.2. 398 Clause 9.1(a). 399 Clause 3.2. 400 SMDQ came at a higher price: see clause 6.1(d) (the ‘Tranche 3’ price).

196  The Practice of Contract Interpretation pursuant to clause 3.3(b), the Sellers could ‘take into account all relevant commercial, economic and operational matters’ in determining whether it was ‘able to supply SMDQ’. Clauses 3.3(a) and (b) stated in full: (a) If in accordance with Clause 9 (‘Nominations’) the Buyer’s nomination for a Day exceeds the MDQ, the Sellers must use reasonable endeavours to make available for delivery up to an additional 30TJ/Day of Gas in excess of MDQ (‘Supplemental Maximum Daily Quantity’ or ‘SMDQ’). (b) In determining whether they are able to supply SMDQ on a Day, the Sellers may take into account all relevant commercial, economic and operational matters and, without limiting those matters, it is acknowledged and agreed by the Buyer that nothing in paragraph (a) requires the Sellers to make available for delivery any quantity by which a nomination for a Day exceeds MDQ where any of the following circumstances exist in relation to that quantity: (i) the Sellers form the reasonable view that there is insufficient capacity available throughout the Sellers’ Facilities (having regard to all existing and likely commitments of each Seller and each Seller’s obligations regarding maintenance, replacement, safety and integrity of the Sellers’ Facilities) to make that quantity available for delivery; (ii) the Sellers form the reasonable view that there has been insufficient notice of the requirement for that quantity to undertake all necessary procedures to ensure that capacity is available throughout the Sellers’ Facilities to make that quantity available for delivery; or (iii) where the Sellers have any obligation to make available for delivery quantities of Natural Gas to other customers, which obligations may conflict with the scheduling of delivery of that quantity to the Buyer.

[6-122]   Gas supply in Western Australia was dominated by the Sellers and another company, Apache Energy Ltd. In 2008, an explosion at an Apache gas plant caused demand to exceed supply. The domestic gas price skyrocketed and it quickly exceeded the SMDQ price. As such, the Sellers informed Verve that they would not be supplying SMDQ at the SMDQ price. Initially, the Sellers declined to supply SMDQ for a month. However, the gas shortage continued and, as such, the Sellers declined to supply SMDQ for an additional three months. During this four-month period, the Sellers sold gas at market rates. Even Verve, under protest, bought gas from the Sellers, paying at market value, well above the SMDQ price. [6-123]   Early in 2009, Verve instituted proceedings claiming, inter alia, that the Sellers had breached clause 3.3(a). This gave rise to a question of interpretation, albeit difficult to define. Could each Seller refuse to supply SMDQ merely because it was more profitable to sell its gas at market? Was this what the parties had objectively intended by agreeing clause 3.3? [6-124]   Verve claimed that each Seller was not free to sell at greater profit. In the event of a nomination by Verve, each Seller was obliged to supply SMDQ

Textual Conflicts and the Search for Auxiliary Support  197 if it was practically capable or able.401 This construction was advanced primarily by the reference to ‘reasonable endeavours’ in clause 3.3(a) (a concept that naturally related to ability rather than willingness) and the use of the adjective ‘able’ in clause 3.3(b).402 Verve’s interpretation was also justified on a purposive basis: the reference to ‘commercial’ and ‘economic’ matters in clause 3.3(b) merely emphasised that each Seller was not obliged to supply SMDQ at a loss.403 Finally, Verve’s interpretation was reinforced as a matter of consequence. On the Sellers’ construction, the clause 3.3(a) reasonable endeavours obligation and the fixing of the SMDQ price under clause 6.1(d) would be rendered ‘elusive, if not illusory’.404 If the market rose above the SMDQ price, the Sellers would go to market; if it fell, Verve would do so.405 [6-125]   The Sellers’ interpretation was, in essence, that each Seller was not obliged to supply SMDQ if it could sell its gas at a higher price. Like Verve’s construction, this interpretation also had a strong textual foundation. Clause 3.3(b) was clearly meant to condition or qualify the clause 3.3(a) ‘reasonable endeavours’ obligation.406 The Sellers were to take into account commercial, economic and operational matters in determining whether they were reasonably able to supply SMDQ. The Seller’s interpretation also had additional textual support, namely, the non-exhaustive examples of circumstances in which the Sellers would not breach clause 3.3(a) (found at the end of clause 3.3(b)) were ‘not confined to “capacity” (or capacity constraints)’.407 In addition, the construction advanced by the Sellers was reinforced linguistically: precedent was said to establish that the term ‘reasonable endeavours’ denoted consideration of ‘independent business interests’.408 It could also be explained as a matter of commercial purpose: the gas supply agreement served a ‘chief commercial purpose’ (the supply of MDQ) and a ‘supplementary commercial purpose’ (the supply of SMDQ).409

401 [2014] HCA 7, (2014) 251 CLR 640, 664 [62] (Gageler J) (dissenting). At trial, the Sellers conceded that they had gas available for supply during the period: see [2013] WASCA 36, [16] (McLure P). 402 [2014] HCA 7, (2014) 251 CLR 640, 664 [62] (Gageler J) (dissenting); [2013] WASCA 36, [19] (McLure P) (Newnes JA agreeing) (overruled), [128] (Murphy JA) (overruled). But see [2014] HCA 7, (2014) 251 CLR 640, 659 [38], 661 [47] (French CJ, Hayne, Crennan and Kiefel JJ). 403 [2014] HCA 7, (2014) 251 CLR 640, 664–65 [63]–[64] (Gageler J) (dissenting). 404 ibid 663 [59]–[60] (Gageler J) (dissenting). 405 JW Carter, W Courtney and G Tolhurst, ‘“Reasonable Endeavours” in Contract Construction’ (2014) 32 Journal of Contract Law 36, 61. 406 [2014] HCA 7, (2014) 251 CLR 640, 658–59 [38] (French CJ, Hayne, Crennan and Kiefel JJ). 407 ibid 661 [47] (French CJ, Hayne, Crennan and Kiefel JJ). Clause 3.3(b)(i) – which did relate to capacity – excused non-supply if the Sellers formed the reasonable view that there was insufficient capacity ‘having regard to all existing and likely commitments’. Hence, on one view at least, clause 3.3(b)(i) contemplated non-supply of SMDQ due to sales committed elsewhere: see [2011] WASC 268, [69] (LeMiere J). 408 [2014] HCA 7, (2014) 251 CLR 640, 659 [41] (French CJ, Hayne, Crennan and Kiefel JJ). 409 ibid 660–61 [45]–[46] (French CJ, Hayne, Crennan and Kiefel JJ).

198  The Practice of Contract Interpretation [6-126]  The Sellers’ interpretation was adopted by a majority of the High Court.410 However, both Gageler J’s dissent and the reasons of the Court of Appeal were compelling. The case is hard to explain because the competing arguments were so finely balanced. Clause 3.3 was internally inconsistent. Clause 3.3(a) imposed a ‘reasonable endeavours’ obligation and clause 3.3(b) described this obligation as involving a determination as to ability. To this extent, the provision made sense. The problem was that clause 3.3(b) then went on to permit consideration of commercial and economic matters. This made clause 3.3 inconsistent because such considerations do not quite fit with a determination as to ability or capacity. Hence, the dispute can be understood as a textual conflict. In this regard, adopting a similar approach to that taken in Ansett, it could be argued that Verve advanced the more persuasive construction because it put forward a better explanation for the textual indicators relied upon by the Sellers. Verve claimed that the Sellers were obliged to supply SMDQ if practically capable or able. The clause 3.3(b) stipulation that the Sellers be allowed to take into account c­ ommercial and economic matters merely meant that the Sellers were not obliged to sell at a loss. By comparison, the Sellers did not advance a rational justification for clause 6.1(d), which set the SMDQ ‘Tranche 3’ price. As Gageler J concluded in dissent: Had reasonable commercial parties in the position of the Sellers and [Verve] meant the price fixed by cl 6.1(d) of the GSA to operate as a floor price at which the Sellers might choose to supply gas to [Verve] up to SMDQ only if and when the Sellers considered selling at that price to be to their commercial advantage, then it is difficult to see why, as reasonable commercial parties, they would have structured cl 3.3 as they did.411

In short, Verve could point to a more convincing explanation for the textual indicators that were adverse to its case. Hence, on balance, it probably advanced ‘[t]he better construction’.412

Comment [6-127]   The complexity of both Electricity Generation and Ansett demonstrate that inconsistency is one of the most difficult interpretive problems. It is also quite common in commercial contracts. This is because inconsistency is often a by-product of contractual negotiation – it is a result of the give-and-take inherent in the process. Each party successfully advances its position in one part of the clause or contract. The result is an incoherent contract or contractual provision. This can lead a court down the difficult path of searching the purposive and

410 ibid 661 [47]–[48] (French CJ, Hayne, Crennan and Kiefel JJ). 411 ibid 663–64 [61] (Gageler J) (dissenting). 412 ibid 664 [62] (Gageler J) (dissenting). For further analysis of the majority reasoning, see Carter, Courtney and Tolhurst (n 405) 60–66.

Conclusion  199 consequentialist factors for a basis to resolve the dispute. It is a challenging exercise. It highlights the limits of interpretation as a tool employed to resolve deficiencies in the contract text. In a small number of cases, it is quite hard to determine what was objectively intended, in answer to the question of interpretation, by analysing the choice of words in the contract.

6.9. Conclusion [6-128]   The cognition of contract interpretation is evident in leading English and Australian judgments. That is to say, as this chapter has demonstrated, it can be seen in action in those parts of the judgments in which interpretive problems are resolved. In each case, the process of reasoning begins with the definition of a question of interpretation, and it is followed by the identification of competing answers and the formulation of interpretive arguments from admissible materials. The process then concludes with an evaluation of the arguments so as to arrive at the interpretation that was probably intended. [6-129]   An analysis of the key cases also reveals a great deal about how competing considerations are weighed and balanced to determine the correct construction. Each case of interpretation involves a bespoke collection of arguments that is unique to the parties. However, interpretive disputes come in common forms depending on the nature and type of arguments in favour of each interpretation. That is to say, contract interpretation involves recurring patterns of argument, and cases with a similar argument composition are decided in a similar way. Hence, the balancing exercise is a principled one. In some cases, the correct interpretation is quite clear because all or most of the arguments point towards a particular construction or because a prominent argument is decisive. In others, one party puts forward a strict literal interpretation (ie, an interpretation advanced solely by the apparent meaning of a key word or phrase), with such an interpretation usually being rejected if a persuasive alternative is available. Most interpretive disputes, however, involve a tension between linguistic interpretation and purposive or consequentialist construction, and the tension is often resolved by examining the text as a whole and auxiliary considerations. And cases of inconsistency are the hardest to determine because it is difficult to find an answer in the contract text. [6-130]   The proposed principled approach to the balancing exercise in construction explains how apparently conflicting decisions, such as ICS, Chartbrook, Rainy Sky and Arnold v Britton, can be reconciled.413 In Arnold v Britton, the lessor relied primarily on the ordinary meaning of the covenant. But it also had a sound purposive justification for its construction. In the end, the lessees were relying almost exclusively upon the excessive quantum of the charges and the lessor could explain

413 See

[4-39]–[4-40] and [5-71]. See also Catterwell (n 14).

200  The Practice of Contract Interpretation the amounts to become due as a mutual gamble on inflation. By comparison, ICS succeeded in advancing its largely purposive or consequentialist construction – contrary to the ordinary meaning of the carve-out clause – because it had a persuasive textual footing. ‘[N]o lawyer in his right mind who intended simply to say that all claims against [the building society] were reserved to the investor would have used the parenthesis.’414 Similarly, the developer in Chartbrook managed to overcome the apparent meaning of the pricing formula because the owner could not establish a sensible commercial rationale for its linguistic interpretation. The owner was, in effect, relying on a strict literal interpretation. And the purchasers in Rainy Sky had the far better commercial justification, making the case a rather easy one considering that the poorly drafted guarantees were structurally ambiguous on the point in issue. Hence, the Supreme Court of the United Kingdom was right in recently claiming that ‘Rainy Sky and Arnold were saying the same thing’.415 That is, to borrow from McMeel, the alleged ‘change of emphasis’ in construction ‘which prioritises the language of the document over context and commercial commonsense’ is ‘over-stated and irreconcilable with … the actual results in a significant number of cases including decisions of the Supreme Court’.416 In short, judicial preference between linguistic interpretation and purposive or consequentialist construction is usually not determinative; it is the composition of competing arguments that drives the resolution of an interpretive dispute. There is simply a ‘search for the most coherent rationalisation of text and available context’.417 Contract interpretation can be explained in a unified and consistent way. As the next chapter demonstrates, clarity regarding interpretation also brings clarity in contract law.

414 ICS [1998] 1 WLR 896, 914 (Lord Hoffmann) (HL). 415 Wood [2017] UKSC 24, [2017] AC 1173, 1180 [14] (Lord Hodge) (Lord Neuberger, Lord Mance, Lord Clarke and Lord Sumption agreeing). 416 McMeel (2017) 47 [1.79]. See also McMeel (2017) 104 [1.182] (‘an aberration or over-correction’). 417 ZX Tan, ‘Beyond the Real and the Paper Deal: The Quest for Contextual Coherence in Contract Interpretation’ (2016) 79 MLR 623, 637.

7 The Role of Interpretation in Contract Law 7.1. Introduction [7-01]  The English common law of contract consists of a combination of ­ doctrinal rules and underlying techniques. Contract doctrine deals with matters such as formation, performance, discharge, remedies and vitiation of the contract. The principle of freedom of contract is also a fundamental tenet of contract doctrine: subject to narrow exceptions, the court must give effect to the contract. Contract law techniques, on the other hand, facilitate the application of contract doctrine. Interpretation is the most fundamental of such techniques. It is the primary means through which the court defines what was agreed – it is the main tool employed to give effect to the principle of freedom of contract. However, it is not the only technique that features in contract law. Other prominent techniques include implication, rectification and characterisation. [7-02]   This chapter distinguishes between interpretation and related techniques. There is a need to draw such a distinction because interpretation and related ­techniques are often described in a similar way, namely, as matters of ‘construction’. This chapter illustrates how the cognitive process underlying each technique is ­different. It works from the starting point that contract interpretation is a fourstage process – a process through which objective intention is inferred from the choice of words in a contract. It then distinguishes interpretation from related techniques by relying on empirical analysis, that is, an analysis of the reasoning evident in leading cases applying each technique.1 The chapter demonstrates that interpretation is distinct from related techniques2 and it explains how it is distinct.3 In particular, the chapter shows that interpretation can be distinguished from: a.

Other processes engaged to define the content of a contract, namely, implication, rectification and the approach employed to establish rules in oral and partly oral contracts.

1 For a more detailed account of this aspect of the empirical investigation, see [1-38], [1-41]. For a selection of the key cases, see Table of Cases, ‘Leading English and Australian Cases on Related ­Techniques’ (35 decisions) (many more cases were the subject of analysis as part of the empirical study, but, in the interests of brevity, those cases are not listed). 2 The finding of the quantitative analysis: see [1-41]. 3 The finding of the qualitative analysis: see [1-41].

202  Role of Interpretation in Contract Law b. The process through which the identity of the parties to a contract is established. c. The process of factual characterisation and the process of legal characterisation. d. The non-interpretive means through which questions of intention are resolved in applying contract doctrine. The distinctions between interpretation and related techniques are summarised by way of principles set out in this chapter.4 [7-03]   Beyond simply distinguishing interpretation from related techniques, the chapter also explains (to a limited extent) the cognition of contract law. That is to say, the chapter explains the relationship between contract doctrine and underlying techniques. It shows that the range of techniques employed in contract law are needed to facilitate the application of contract doctrine. The start of this chapter focuses on the cognition of contract law, before it moves to the distinction between interpretation and related processes.

7.2.  The Cognition of Contract Law Principle 1: The law of contract comprises doctrinal (and statutory) rules and a range of techniques that are employed to apply those rules. Principle 2: The contractual relationship is effectively governed by a combination of rules: doctrinal rules, a few statutory rules, and the rules making up the contract. [7-04]  To understand the role of interpretation in contract law, one needs to explore the cognition of contract law. That is to say, one needs to explore the composition of contract law and what is involved in the application of its rules and techniques. The orthodox view of the common law of contract is that it consists of a range of rules dealing with matters such as formation, terms, performance, discharge, remedies, and vitiation of the contract.5 To put it differently, contract law is usually understood as a body of common law ‘doctrines’6 (which is

4 The principles are also set out collectively at [1-32]. 5 See, eg, HG Beale, Chitty on Contracts, 33rd edn (Sweet & Maxwell, 2018) (Chitty); E Peel, Treitel on the Law of Contract, 14th edn (Sweet & Maxwell 2015); J Beatson, AS Burrows and J Cartwright, Anson’s Law of Contract, 30th edn (Oxford University Press, 2016); A Burrows, A Restatement of the English Law of Contract (Oxford University Press, 2016); JD Heydon, Heydon on Contract (Thomson Reuters, 2019); JW Carter, Contract Law in Australia, 7th edn (LexisNexis Butterworths, 2018); NC Seddon and RA Bigwood, Cheshire & Fifoot Law of Contract, 11th Australian edn (LexisNexis Butterworths, 2017). 6 See, eg, SA Smith, Contract Theory (Oxford University Press, 2004) 165.

The Cognition of Contract Law  203 supplemented by statute in limited circumstances).7 Many of the doctrinal (and statutory) rules that make up the law of contract are in a simple deductive form: if p, then q.8 For example, a contract is formed if all the following criteria are satisfied: the parties reach agreement, the parties intend to contract, the agreement is sufficiently certain and complete, and the agreement involves an exchange of consideration.9 Likewise, a contract is terminated at common law if a party elects to terminate in the event of either a breach of an essential term, a fundamental breach of an intermediate term, or a repudiation.10 [7-05]   Until recently at least, an often-overlooked aspect of contract law was that it encompasses a range of techniques that are employed to apply contract doctrine.11 For example, the most fundamental doctrinal rule is the principle of freedom of contract: subject to narrow exceptions, the contract must be enforced.12 As Jessel MR stated in Printing and Numerical Registering Co v Sampson:13 [I]f there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice.14

Likewise, in more recent times, Lord Toulson remarked in Prime Sight Ltd v Lavarello:15 Parties are ordinarily free to contract on whatever terms they choose and the court’s role is to enforce them.16

Contract law includes a range of techniques that are employed to give effect to the principle of freedom of contract, that is, a range of techniques that are employed to define the content of a contract. The most prominent technique is interpretation. It is the tool used to infer what was agreed from the choice of 7 See generally Sale of Goods Act 1979 (UK); Supply of Goods and Services Act 1982 (UK); Unfair Contract Terms Act 1977 (UK); Consumer Rights Act 2015 (UK); Sale of Goods Act 1923 (NSW); Competition and Consumer Act 2010 (Cth) sch 2, pt 2-3. See P Atiyah and SA Smith, Atiyah’s Introduction to the Law of Contract, 6th edn (Oxford University Press, 2005) 25. 8 On one view at least, the law of contract also encompasses an array of ‘principles’ that guide the application of its rules and techniques, such as the principles discussed in this book: see [1-28] and [1-32]. 9 See generally Chitty (n 5) chs 2 and 4; Seddon and Bigwood (n 5) chs 3–6; Heydon (n 5) chs 2–5. 10 See generally Chitty (n 5) ch 24; Seddon and Bigwood (n 5) 1102 [21.8]. 11 Contract law techniques have been a recent focus of scholarship, see, eg, Carter (2013) (construction); Calnan (2017) (interpretation); McMeel (2017) (interpretation, implication and rectification); Mitchell (2019) (interpretation). 12 See Atiyah and Smith (n 7) 5–20; Calnan (2017) 19–24 [1.30]–[1.51]; Burrows, A Restatement of the English Law of Contract (n 5) 48 §5 (‘so fundamental to the English law of contract that it may be thought unnecessary to spell it out’). cf Smith (n 6) 59; HLA Hart, The Concept of Law, first published 1961, 3rd edn (Oxford University Press, 2012) 43. 13 Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462 (Ch). 14 ibid 465 (Jessel MR). 15 Prime Sight Ltd v Lavarello [2013] UKPC 22, [2014] AC 436. 16 ibid 450 [47] (Lord Toulson) (for the Board) (a case focusing on estoppel by convention).

204  Role of Interpretation in Contract Law words in a contract. However, the rules in a contract are also defined through implication, rectification and the unique approach applied in the case of oral or partly oral contracts.17 Distinct from the definition of the contract is the process that is engaged to identify the parties to a contract. It involves factual investigation, rather than an interpretive enquiry.18 Another key technique in contract law is factual characterisation. It is employed to determine whether the factual components in a rule are met. It is needed to establish whether doctrinal and statutory rules are satisfied. It is also used to determine whether the rules in a contract are met. For example, if a rule in a contract for sale of goods requires payment of $100, it is a matter of factual characterisation whether $100 was in fact paid.19 Factual characterisation is distinct from legal characterisation. The latter involves the determination whether legal criteria in a doctrinal (or statutory) rule are satisfied. For example, legal characterisation is needed to determine whether the penalties rule applies.20 Usually, legal characterisation entails the characterisation or categorisation of: a rule in a contract; the contract as whole; or some other document. Labels used by the parties are not determinative.21 Often as part of the process of legal characterisation, contract doctrine requires the resolution of a specific question of intention as a matter of ‘construction’.22 For example, to establish a right to terminate for breach at common law, the relevant term must be classified as essential, intermediate or a mere warranty. The correct classification depends on whether the parties objectively intended a right to terminate for any breach of the term. This is said to be a ‘question of construction’. However, the question is rarely resolved on an interpretive basis; that is, it is rarely resolved by inference from the choice of words in a contract because the contract text usually does not address the issue.23 [7-06]   One way to understand the cognition of contract law is to appreciate that the contractual relationship is regulated by a combination of ‘agreementcentred or intention-based rules on the one hand and externally imposed or policy-based rules on the other’.24 The ‘agreement-centred or intention-based rules’ are those that make up a contract.25 The ‘externally imposed or policy-based rules’ are those found in contract doctrine and statute. The rules in a contract are

17 See [7-08]–[7-36]. 18 See [7-37]–[7-43]. 19 See [7-45]–[7-48]. 20 See [7-53]. 21 See [7-49]–[7-54]. 22 See [7-55]–[7-72]. 23 See [7-63]–[7-65]. 24 A Burrows, ‘Lord Hoffmann and Remoteness in Contract’ in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann: A Festschrift in Honour of Lord Leonard (Hart Publishing, 2015) 261. See also G Rosen, ‘Textualism, Intentionalism and the Law of Contract’ in A Marmor and S Soames (eds), Philosophical Foundations of Language in the Law (Oxford University Press, 2011) 135. 25 cf H Collins, Regulating Contracts (Oxford University Press, 2002) 13 (‘the judge treats contracts as creating binding rules of law between the parties’); McMeel (2017) 5 [1.02], 8 [1.07].

The Cognition of Contract Law  205 defined through interpretation, implication or rectification.26 These rules are then given effect, subject to narrow exceptions, according to the principle of freedom of contract.27 However, the scope of the principle of freedom of contract is difficult to define. That is to say, the synergy between the principle of freedom of contract and other doctrinal rules is complex. Only a few doctrinal rules cannot be modified or displaced by contractual agreement.28 The court does not enforce an agreement that is illegal or contrary to public policy.29 It does not enforce an agreement that amounts to a penalty30 or an unreasonable restraint of trade.31 Beyond such examples, there are not many other irrebuttable rules in contract law. Instead, most doctrinal rules apply by ‘default’ – the rules can be abrogated by the parties.32 That said, at least in the context of secondary obligations, it is often difficult to displace a doctrinal rule through interpretation.33 This is because, among other reasons, there is an interpretive presumption that contracting parties do not intend to abandon remedies for breach arising at common law.34 Hence, clear words are required to limit liability in damages for breach of contract.35 For example, merely agreeing a regime permitting a principal to recover increased costs under a building contract does not extinguish the builder’s common law rights to damages.36 To similar effect, unequivocal language must be used to exclude common law termination rights;37 such rights are not usually displaced by simply

26 A unique approach is employed to determine the rules that make up an oral or partly oral contract: see [7-10]–[7-12]. 27 See further [7-05]. 28 Such rules need to be established by clear authority: see, eg, Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10, (2008) 234 CLR 237, 258 [57] (the Court) (there is no ‘proposition of law’ precluding parties from agreeing the essentiality of a term). 29 See generally Chitty (n 5) ch 16. 30 See generally [7-53]. 31 See generally Chitty (n 5) 1305–47 [16-106]–[16-174]. 32 Mitchell (2019) 3; J Paterson, A Robertson and A Duke, Principles of Contract Law, 5th edn (Thomson Reuters, 2015) 18 [1.45], 336 [Pt VI.10]. cf Rosen (n 24) 136; JW Carter and W Courtney, ‘Unexpressed Intention and Contract Construction’ (2017) 37 OJLS 326, 331–32 (‘presumptions of intention’). 33 Unless the rule itself provides for such an inference, as under the frustration doctrine: see [7-66]–[7-71]. 34 See eg, Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, 717 (Lord  Diplock) (HL); Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 850–51 (Lord  Diplock) (HL); Beaufort Developments (NI) Ltd v Gilbert-Ash (NI) Ltd [1999] 1 AC 266, 279 (Lord Hoffmann), 286–87 (Lord Hope) (HL); Carter (2013) 560–65 [16-36]–[16-40]. See further Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 353–54 (in the context of remoteness of loss). 35 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 850–51 (Lord Diplock) (quoted in Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82, (1986) 161 CLR 500, 508 (the Court)); Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27, 39 [22] (Moore-Bick LJ). 36 Mancorp Pty Ltd v Baulderstone Pty Ltd (No 2) (1992) 60 SASR 120, 126 (Debelle J) (SC). 37 Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574, 585 (Lord Goff) (HL); Concut Pty Ltd v Worrell [2000] HCA 64, (2000) 176 ALR 693, 699–700 [23] (Gleeson CJ, Gaudron and Gummow JJ); Peel (n 5) 1006–07 [18-072]; Paterson, Robertson and Duke (n 32) 444 [21.10].

206  Role of Interpretation in Contract Law agreeing an express termination regime.38 Hence, in these instances, the party seeking to infer an intention so as to displace a doctrinal rule arguably bears a more onerous burden than would otherwise apply in contract interpretation.39 [7-07]  The remainder of this chapter analyses the different contract law techniques and it distinguishes between the cognition of interpretation and the cognition underlying each technique. The chapter also explains how the range of techniques fit within contract law; namely, the techniques facilitate the application of contract doctrine. The most important techniques are those employed to define the content of a contract. These techniques are critical to contract law because the fundamental tenet of the common law of contract is the principle of freedom of contract: subject to narrow exceptions, the court must give effect to the contract.

7.3.  The Definition of the Contract Principle 3: The principle of freedom of contract requires that, subject to narrow exceptions, the contract be enforced. Principle 4: The content of a contract is defined through interpretation, implication, rectification, and the approach applied in the case of oral and partly oral contracts. Principle 5: The rules agreed in an oral or partly oral contract are defined as a question of fact, although the process is interpretive to the extent that it involves the inference of intention from any choice of words by the parties. Principle 6: Implication in fact is distinct from interpretation because: (i) it is employed when the contract does not address a disputed issue; and (ii) it involves a different approach to establishing intention. Principle 7: Common mistake rectification is distinct from interpretation because: (i) it is a process through which a mistake in a contractual document is rectified; (ii) it involves greater scope to correct error; and (iii) it involves a different approach to establishing intention.

38 See, eg, W & R Pty Ltd v Birdseye [2008] SASC 321, (2008) 102 SASR 477, 484–85 [33]–[36] (Doyle CJ), 513 [194] (Anderson J) (FC); Seddon and Bigwood (n 5) 1098–99 [21.3] (the express termination regime must ‘constitute an exclusive code governing termination for breach’). Contrast Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27, 37–38 [18]–[20] (Moore-Bick LJ). 39 See [5-68].

The Definition of the Contract  207 [7-08]   Contract law includes a range of techniques that are employed to define the content of a contract. These techniques are needed so that the court can give effect to the principle of freedom of contract, that is, so that the court can enforce the contract. For the most part, a contract consists of rules: ‘agreement-centred or intention-based rules’.40 In combination with contract doctrine, these rules govern the relationship between the parties. Interpretation is the primary tool employed to define the rules in a contract; it is the means through which the court infers what was agreed from the choice of words in a contract. However, interpretation is not the exclusive means for defining the content of a contract. The rules agreed in an oral or partly oral contract are often determined on the totality of the evidence, rather than by inference from words chosen by the parties. Further, a rule in a written contract or an oral or partly oral contract may be established as a matter of implication. The rectification of a document in equity may also effectively define a rule in a written contract (or a partly oral contract, to the extent that it is in writing).41 [7-09]   In terms of timing, both implication and rectification logically follow interpretation.42 For example, in Reigate v Union Manufacturing Co (Ramsbottom) Ltd,43 an agency contract was construed to establish that it was of definite duration before considering whether a term could be implied permitting the principal to terminate by ceasing business. In short, the rules that make up a written contract are inferred from the contract text before the court considers any supplementation or modification through implication or rectification.44 Likewise, in the case of an oral or partly oral contract, the court seeks to identify terms agreed by the parties before searching for any necessary implication. 40 Borrowed from Burrows, ‘Lord Hoffmann and Remoteness in Contract’ (n 24) 261. A contract usually also consists of ancillary matters, not strictly ‘rules’, such as recitals, statements regarding the identity or capacity of the parties (see further [7-37]–[7-43]), and, occasionally, statements regarding whether the parties intended to contract (see further [7-59]–[7-60]). 41 There are other ways in which rules in a contract may be defined. For example, an allegedly uncertain rule can be clarified through evidence of performance (see Carter (2013) 629–30 [18-37]; Hillas & Co Ltd v Arcos Ltd (1932) 43 Lloyd’s Rep 359 (HL)) and the rules that make up contracts using standard language (ie, leases, policies of insurance, building and construction contracts, and standard form contracts) are often effectively defined or presumed by precedent: see [3-13] (nn 54–57); McMeel (2017) 36–38 [1.58]–[1.59], 75–76 [1.133]–[1.134]. 42 As to rectification, see Lovell & Christmas Ltd v Wall (1911) 104 LT 85, 88 (Cozens-Hardy MR) (CA) (‘The question of construction logically comes first’); Heydon (n 5) 1090 [30.20]. As to implication, see Trump International Golf Club Scotland Ltd v Scottish Ministers [2015] UKSC 74, [2016] 1 WLR 85, 98 [35] (Lord Hodge) (interpretation is ‘the precursor of implication’); Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, [2016] AC 742, 756–57 [28] (Lord Neuberger) (Marks and Spencer); Heydon (n 5) 428 [10.20]. cf Mitchell (2019) 105. Contrast Carter (2013) 445 [13-36] (implied terms constitute part of the whole contract for the purpose of construction). 43 Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 (CA). 44 A document may be rectified to clarify a rule in circumstances where the rule cannot be inferred through interpretation due to uncertainty: see, eg, National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365, 381 (Sheller JA) (NSWCA).

208  Role of Interpretation in Contract Law

Rules in Oral and Partly Oral Contracts [7-10]   While the interpretation of a contract wholly integrated in writing is a question of law,45 identifying the terms agreed in an oral or partly oral contract is a question of fact.46 This distinction is a relic of the civil jury system.47 Nonetheless, it remains significant in that a different approach is taken in defining what was agreed in an oral or partly oral contract.48 It is true that the rules in such a contract are still inferred as a matter of intention from the perspective of the reasonable person and that, in this sense, the process is ‘objective’.49 However, the scope of admissible material is broader.50 The exclusionary rule does not apply.51 Hence, evidence of negotiations,52 subsequent conduct,53 and even subjective intention54 is admissible.55 [7-11]   Despite the fact that a broader range of materials is admissible, the interpretive process of inference still plays a role in figuring out what was agreed in an oral or partly oral contract. For example, in the case of a partly oral contract, a rule may be inferred from that part of the contract that is recorded in writing.56 Similarly, an interpretive approach is often taken if the words constituting an oral or partly oral agreement are clearly identified. In particular, ambiguity and inconsistency are resolved by weighing and balancing the competing arguments, with proper emphasis on the words agreed and due allowance for arguments derived from background.57 For example, in J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd,58 an oral 45 Pioneer Shipping v BTP Tioxide Ltd [1982] AC 724, 736 (Lord Diplock) (HL) (The Nema); McMeel (2017) 9–11 [1.10]–[1.13]. 46 Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776, 800 [82] (Lord Neuberger); Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, (2016) 260 CLR 1, 13–14 [26]–[27] (French CJ, Kiefel and Bell JJ); Carter (2013) 137 [4-32]; McMeel (2017) 10–12 [1.14]–[1.18]. 47 See, eg, Behn v Burness (1863) 3 B & S 751, 756–57; 122 ER 281, 283 (Williams J) (KB); Moore v Garwood (1849) 4 Exch 681, 689–90; 154 ER 1388, 1391–92 (Patteson J) (Ex); Carmichael v National Power Plc [1999] 1 WLR 2042, 2048 (Lord Hoffmann) (HL). 48 cf Burrows, A Restatement of the English Law of Contract (n 5) 85 §14 (‘it would appear that the same principles apply to interpreting an oral contract’). 49 Carmichael v National Power Plc [1999] 1 WLR 2042, 2050–51 (Lord Hoffmann) (HL); Blue v Ashley [2017] EWHC 1928 (Comm), [64] (Leggatt J); Carter (2013) 384 [11-28]; McMeel (2017) 161 [3.68]. 50 McMeel (2017) 10 [1.14]. 51 ibid 246–49 [5.154]–[5.159]. 52 See, eg, Carmichael v National Power Plc [1999] 1 WLR 2042 (HL). 53 See, eg, Maggs v Marsh [2006] EWCA Civ 1055; Carmichael v National Power Plc [1999] 1 WLR 2042, 2051 (Lord Hoffmann). 54 Carmichael v National Power Plc [1999] 1 WLR 2042, 2050 (Lord Hoffmann) (HL); Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776, 800 [82] (Lord Neuberger). 55 Contrast Khan v Khan [2007] EWCA Civ 399, [36]–[38] (Arden LJ). As to the nature of such evidence, see [3-30]. 56 See, eg, Finucane v NSW Egg Corp (1988) 80 ALR 486, 521–22 (Lockhart J) (FC). 57 Under Australian law, signed written terms may override oral terms: see Equuscorp Pty Ltd v ­Glengallan Investments Pty Ltd [2004] HCA 55, (2004) 218 CLR 471, 484 [36] (the Court); Seddon and Bigwood (n 5) 452 [10.20]. 58 J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 (CA). See also Devani v Wells [2019] UKSC 4, [2019] 2 WLR 617, 627 [26] (Lord Kitchin) (Lord Wilson, Lord Carnwath and

The Definition of the Contract  209 assurance that shipping containers would be stored under deck was construed so as to override a general exclusion of liability in standard printed terms.59 [7-12]   A common difficulty in defining the content of an oral or partly oral contract is evidentiary: it is hard to establish the precise words that were agreed by the parties. Hence, in some cases, the rules are simply derived from the totality of evidence.60 That is, the ‘bargain itself is “constructed”’61 – the court ‘look[s] at all the evidence from start to finish in order to [ascertain] the bargain  … struck between the parties’.62 Clear evidence of an agreement or consensus is still required.63 But broader circumstances may be a better or stronger indicator of what was agreed than any specific words, including words in a signed document.64 For example, in Carmichael v National Power Plc,65 tour guides had been engaged pursuant to partly oral contracts. Each guide had signed an offer of ‘Casual Employment’, agreeing to employment ‘on a casual as required basis’. The acceptance letter stated: I am pleased to accept your offer of employment as a station guide on a casual as required basis.

Despite this wording, a common intention was inferred that the guides were not obliged to undertake work, nor was the company obliged to provide work. The intention was clear, taking into account evidence of the parties’ common understanding66 and evidence of subsequent conduct, including that guides were not disciplined for failing to work.67 Hence, on the totality of the evidence, it was clear that the parties had agreed on casual employment without any obligation to provide or undertake work. In the absence of agreement, a rule can still be implied in an oral or partly oral contract as a matter of necessity.68 Lord S­ umption agreeing), 634–35 [60] (Lord Briggs) (a prospective vendor and a sales agent agreed that the sales agent would be entitled to a commission of ‘2% plus VAT’, without stating the event that would trigger payment of the commission – from these words, taken in context, it was inferred that commission was to be payable ‘upon any sale [of the property] to a person or persons introduced by [the agent]’). 59 J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078, 1084C (Roskill LJ), 1085B–C (Geoffrey Lane LJ) (CA). 60 See, eg, Maggs v Marsh [2006] EWCA Civ 1055, [24] (Smith LJ). cf Carmichael v National Power Plc [1999] 1 WLR 2042, 2050 (Lord Hoffmann) (HL); Blue v Ashley [2017] EWHC 1928 (Comm), [64] (Leggatt J) (‘unless a recording was made, the court cannot know the exact words spoken nor the tone in which they were spoken, nor the facial expressions and body language of those involved’). 61 Carter (2013) 137 [4-32]. 62 J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078, 1083 (Roskill LJ). cf Devani v Wells [2019] UKSC 4, [2019] 2 WLR 617, 634 [59] (Lord Briggs) (‘there are occasions … where the context in which the words are used, and the conduct of the parties at the time when the contract is made, tells you as much, or even more, about the essential terms of the bargain than do the words themselves’). 63 See, eg, Khan v Khan [2007] EWCA Civ 399, [27] (Auld LJ), [47] (Arden LJ) (due to a lack of evidence of agreement, it could not be inferred that a division of partnership assets was intended as a full and final settlement of all claims). Without clear agreement, a rule in an oral or partly oral contract may still be implied: see [7-22] (n 126). 64 cf Blue v Ashley [2017] EWHC 1928 (Comm), [64] (Leggatt J). But note [7-11] (n 57). 65 Carmichael v National Power Plc [1999] 1 WLR 2042 (HL). 66 ibid 2045F (Lord Irvine), 2050F–G (Lord Hoffmann). 67 ibid 2045F, 2047E (Lord Irvine), 2050E (Lord Hoffmann). 68 See [7-22] (n 126).

210  Role of Interpretation in Contract Law

Implication [7-13]   Terms are implied into a contract (whether the contract be written, oral or partly oral) as a matter of law or a matter of fact.69 Most terms are implied in law into specific classes of contract as ‘default rules’.70 This involves a process of legal characterisation: the categorisation of the contract to determine whether it fits within a prescribed class.71 For example, a term is implied in law into a lease requiring that the landlord take reasonable care to maintain common areas.72 The determination whether a rule should be implied into a class of contract is clearly policy driven.73 Hence, rules implied in law are more appropriately understood as doctrinal (or statutory) rules, rather than ‘agreement-centred or intention-based rules’.74 [7-14]   The distinction between implication and interpretation is more blurred when one considers the duty to co-operate and the duty of good faith. The duty to co-operate has two limbs. First, it requires that each party do all that is necessary to enable the other party to perform its obligations and to ensure that the other party has the benefit of the contract.75 Second, it imposes a negative obligation not to hinder or prevent fulfilment of contractual purpose.76 The duty is occasionally described as a principle of construction.77 However, it is generally regarded as a term implied in law into all contracts.78 Since the duty imposes substantive 69 See, eg, Marks and Spencer [2015] UKSC 72, [2016] AC 742, 752–53 [15] (Lord Neuberger); Commonwealth Bank of Australia v Barker [2014] HCA 32, (2014) 253 CLR 169, 185–86 [21] (French CJ, Bell and Keane JJ) (Barker); McMeel (2017) 15 [1.22]; Burrows, A Restatement of the English Law of Contract (n 5) 91 §15(2). In limited circumstances, a rule can also be implied as a matter of custom or usage: see, eg, Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14, (1986) 160 CLR 226; McMeel (2017) 410–11 [12.02]. 70 Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 458 (Lord Steyn) (HL) (Hyman); Barker [2014] HCA 32, (2014) 253 CLR 169, 215 [113] (Gageler J); McMeel (2017) 15 [1.23]. See, eg, L ­ iverpool City Council v Irwin [1977] AC 239, 254 (Lord Wilberforce) (HL); Supply of Goods and Services Act 1982 (UK) s 13. cf Burrows, A Restatement of the English Law of Contract (n 5) 91 §15(1). 71 As to legal characterisation, see [7-49]–[7-54]. 72 Liverpool City Council v Irwin [1977] AC 239 (HL). 73 See Atiyah and Smith (n 7) 156; McMeel (2017) 331 [9.08]. cf Smith (n 6) 67. 74 Borrowed from Burrows, ‘Lord Hoffmann and Remoteness in Contract’ (n 24) 261. 75 McKay v Dick (1881) 6 App Cas 251, 263 (Lord Blackburn) (HL); Butt v M’Donald (1896) 7 QLJ 68, 70–71 (Griffith CJ) (QSC); Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51, (1979) 144 CLR 596, 607 (Mason J) (Secured Income); Barker [2014] HCA 32, (2014) 253 CLR 169, 187–88 [25] (French CJ, Bell and Keane JJ), 201 [61] (Kiefel J). 76 Shepherd v Felt & Textiles of Australia Ltd [1931] HCA 21, (1931) 45 CLR 359, 378 (Dixon J); Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 638, (1993) 45 FCR 84, 94 (Gummow J). 77 See, eg, Barker [2014] HCA 32, (2014) 253 CLR 169, 187–88 [24]–[25], 194 [37] (French CJ, Bell and Keane JJ); Secured Income [1979] HCA 51, (1979) 144 CLR 596, 607 (Mason J); McKay v  Dick (1881) 6 App Cas 251, 263 (Lord Blackburn); E Peden, ‘“Cooperation” in English Contract Law: To Construe or Imply’ (2000) 16 Journal of Contract Law 56. 78 See, eg, Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 638, (1993) 45 FCR 84, 94 (Gummow J); Butt v M’Donald (1896) 7 QLJ 68, 70–71 (Griffith CJ) (QSC); Lewison (2015) 347–49 [6.15]; Lewison and Hughes (2012) 258–61 [6.13].

The Definition of the Contract  211 obligations, usually in the absence of any specific agreement, it is properly conceptualised as a standard implication, rather than a feature of interpretation. It is essentially a doctrinal rule, rather than a rule implied into a contract. [7-15]   By comparison, the duty of good faith can be understood as a feature of interpretation, at least under the law in Australia. In broad terms, the duty requires that contracting parties be honest, be loyal to the contract, have due regard to the interest of co-parties, and surrender foregone interests.79 Such a duty is not universally recognised under English law.80 However, Australian courts often apply the duty as a restraint on the exercise of contractual rights, powers or discretions,81 especially those regarding termination.82 To the extent that the duty fulfils this function, it reflects the role of fairness as a factor in the resolution of interpretive questions regarding contract performance.83 Hence, at least in this respect, the duty is appropriately understood as a feature of, or influence on, ­interpretation.84 That said, beyond acting as a restraint on the exercise of express powers, the duty of good faith may also impose positive obligations.85 In this role, the duty is properly understood as a technique through which rules in a contract are implied either in law86 or in fact.87

79 Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187, (2001) 69 NSWLR 558, 570 [171] (Sheller, Beazley and Stein JJA); Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [63], [67]–[68] (Barrett J); E Peden, ‘Contractual Good Faith: Can Australia Benefit from the American Experience?’ (2003) 15 Bond Law Review 186, 189–93; SJ Burton, ‘Breach of Contract and the Common Law Duty to Perform in Good Faith’ (1980) 94 Harvard Law Review 369. 80 McMeel (2017) 40–42 [1.67]. But see Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), [2013] 1 CLC 662; Burrows, A Restatement of the English Law of Contract (n 5) 93 §15(3)–(4). 81 See, eg, Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, 369 (Sheller JA) (NSWCA); Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 268 (Priestley JA) (NSWCA). See also Barker [2014] HCA 32, (2014) 253 CLR 169, 195–96 [42] (French CJ, Bell and Keane JJ). 82 See, eg, CGU Workers Compensation (NSW) Ltd v Garcia [2007] NSWCA 193, (2007) 69 NSWLR 680, 705 [135] (Mason P) (citing JW Carter and E Peden, ‘Good Faith in Australian Contract Law’ (2003) 19 Journal of Contract Law 155, 155). 83 See further [3-27] and [3-43]. 84 cf Central Exchange v Anaconda Nickel Ltd [2002] WASCA 94, (2002) 26 WAR 33, 50 [53] (Steytler J) and Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [66] (Barrett J), citing E Peden, ‘Incorporating Terms of Good Faith in Contract Law in Australia’ (2001) 23 Sydney Law Review 222. See further Barker [2014] HCA 32, (2014) 253 CLR 169, 195–96 [42] (French CJ, Bell and Keane JJ). See also Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), [2013] 1 CLC 662, 696 [148] (Leggatt J). 85 See, eg, Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [75]–[76] (Barrett J). See also Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), [2013] 1 CLC 662, 702–03 [158]–[165] (Leggatt J). 86 Usually in certain classes of contracts: see, eg Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, 369 (Sheller JA) (NSWCA); CGU Workers Compensation (NSW) Ltd v Garcia [2007] NSWCA 193, (2007) 69 NSWLR 680, 705 [134] (Mason P). Contrast Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, [62] (Barrett J) (all ‘commercial contracts’). 87 The dominant view: see, eg, Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228, [25] (Buchanan JA); Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), [2013] 1 CLC 662, 696 [132] (Leggatt J).

212  Role of Interpretation in Contract Law [7-16]   The implication of terms in fact has a much closer connection with interpretation than the implication of terms in law. This is because rules are implied in fact on an ad hoc basis as a matter of presumed intention.88 Hence, it has been argued that implication in fact is but an instance of interpretation89 and that ‘no infallible logical criterion separates the two processes’.90 Counter to this position, the Supreme Court of the United Kingdom has stated that, while each process is employed to define ‘the scope and meaning of the contract’,91 the two techniques involve ‘different processes governed by different rules’.92 The Supreme Court is correct in the sense that interpretation and implication in fact involve different cognitive processes. Through interpretation, rules are inferred from the choice of words in a contract; the aim is to infer the rules that were agreed by the parties. By contrast, rules are implied in fact as a matter of presumed intention. The focus is not what was agreed, but rather what can be implied on the basis of necessity and obviousness:93 a ‘more exacting standard’.94 The two processes can also be distinguished, at least in some cases, by the circumstances that trigger the application of each technique. Interpretation is engaged when the parties have chosen words that address the relevant disputed issue; implication is used in the absence of such a connection.

88 The Moorcock (1889) 14 PD 64, 68 (Bowen LJ) (CA); Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24, (1982) 149 CLR 337, 346 (Mason J) (Codelfa). 89 See, eg, Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988, 1993–94 [17]–[21] (Lord Hoffmann) (Belize); R Hooley, ‘Implied Terms after Belize Telecom’ (2014) 73 CLJ 315; D McLauchlan, ‘Construction and Implication: In Defence of Belize Telecom’ [2014] LMCLQ 203; McMeel (2017) 16–18 [1.25]–[1.26], 361 [10.08] (‘an element of the overall technique of construction’), 369–77 [10.29]–[10.50]; Lewison (2015) 28 [2.01] (‘the process of implying terms is part of the interpretation of contracts’). cf A Robertson ‘The Foundations of Implied Terms: Logic, Efficacy and Purpose’ in S Degeling, J Edelman and J Goudkamp (eds), Contract in Commercial Law (Thomson Reuters, 2016) 149 (‘there is necessarily an area of overlap’); Burrows, A Restatement of the English Law of Contract (n 5) 91 §15(3). Contrast JW Carter and W Courtney, ‘Belize Telecom: A Reply to Professor McLauchlan’ [2015] LMCLQ 245. 90 HK Lücke, ‘Ad Hoc Implications in Written Contracts’ (1973) 5 Adelaide Law Review 32, 47. See also FM Douglas, ‘Modern Approaches to the Construction and Interpretation of Contracts’ (2009) 32 Australian Bar Review 158, 172 (‘difficult to separate’); IH Schwenzer, P Hachem and C Kee, Global Sales and Contract Law (Oxford University Press, 2012) 307 [26.66] (‘In civil law systems, supplementation … is considered an integral part of the field of contract interpretation’). cf Mitchell (2019) 98–104. 91 Marks and Spencer [2015] UKSC 72, [2016] AC 742, 756 [26] (Lord Neuberger). 92 ibid 756 [26] (Lord Neuberger) (Lord Sumption and Lord Hodge agreeing). See also ibid 769–70 [76]–[77] (Lord Clarke); Devani v Wells [2019] UKSC 4, [2019] 2 WLR 617, 628 [28] (Lord Kitchin) (Lord Wilson, Lord Carnwath and Lord Sumption agreeing); Codelfa [1982] HCA 24, (1982) 149 CLR 337, 345 (Mason J); Barker [2014] HCA 32, (2014) 253 CLR 169, 186 [22] (French CJ, Bell and Keane JJ). cf Lord Grabiner, ‘The Iterative Process of Contract Interpretation’ (2012) 128 LQR 41, 41 (‘The law of implication is properly within the superstructure of interpretation, but it is an intrusive process’). 93 See [7-22]. Under Australian law, a unique approach applies to the implication of terms in an oral or partly oral contract: see [7-22] (n 126). 94 McMeel (2017) 15 [1.21].

The Definition of the Contract  213

Textual Connection [7-17]   Interpretation requires a foothold in the words chosen by the parties; it is a process through which objective intention is inferred from the choice of words in a contract. Implication, on the other hand, is employed when the parties have not agreed words that specifically address the relevant issue, that is, ‘when the instrument does not expressly provide for what is to happen when some event occurs’.95 Put simply, implication ‘is concerned with issues … which are not addressed by the express terms’.96 Hence, through implication, the court can: ‘plug what it perceives to be gaps in the express terms’;97 add ‘a proposition which is not expressly there already’;98 ‘interpolat[e] … terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision’;99 and ‘supplement [the] instrument with terms additional to those expressly chosen by the parties’.100 [7-18]   In short, implication is employed to define a rule when the rule cannot be inferred from the choice of words in a contract. This is a fine distinction.101 It ultimately depends on whether the contract text (in the case of a written contract) contains a sufficient reference to ground an interpretive inference. In some cases, the requisite textual connection is quite clear. For example, in Maggbury Pty Ltd v Hafele Australia Pty Ltd,102 a deed of confidentiality obliged a party to ‘treat the Information … as confidential’, ‘not at any time hereafter use the Information for any purpose whatsoever’ and ‘forever observe the obligations of confidence’ set out in the document. Hence, it was quite clear that any rule dealing with the scope of the party’s obligations of non-disclosure was to be defined on ‘a proper construction of the text’, not through implication.103 [7-19]   Beyond straightforward examples like Maggbury, it is difficult to distinguish between interpretation and implication in terms of the textual connection required to trigger each process. This is particularly so if one looks to the borders of interpretation. Insofar as interpretation is employed to resolve ambiguity, the scope to infer intention from the choice of words in a contract is quite broad. For example, in Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd,104 a contract to provide security services at a sporting club was construed such that 95 Belize [2009] UKPC 10, [2009] 1 WLR 1988, 1993 [17] (Lord Hoffmann). 96 Robertson (n 89) 148. 97 McMeel (2017) 329 [9.04]. 98 Lücke, ‘Ad Hoc Implications in Written Contracts’ (n 90) 47. 99 Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472, 481 (­Bingham MR) (CA). 100 PS Davies, ‘Recent Developments in the Law of Implied Terms’ [2010] LMCLQ 140, 140. See also PS Davies, ‘Interpretation and Implication in the Supreme Court’ (2019) 78 CLJ 267, 269 (‘When one is implying a term or a phrase, one is not construing words, as the words to be implied are ex hypothesi not there to be construed’). 101 Lücke, ‘Ad Hoc Implications in Written Contracts’ (n 90) 48 (a ‘fluid distinction’). 102 Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70, (2001) 210 CLR 181 (Maggbury). 103 ibid 193 [28] (Gleeson CJ, Gummow and Hayne JJ). 104 Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140.

214  Role of Interpretation in Contract Law the sporting club was obliged to use the security provider – it could not engage other providers. The exclusivity of the engagement was inferred, as a matter of interpretation, from the mere agreement to ‘engag[e] the Contractor to provide the Service’.105 This is not to say, however, that interpretation involves a limitless scope to infer intention from vague or tenuous textual foundations. It seems that the text must reference the substantive right or obligation in some way.106 For example, in Shirlaw v Southern Foundries (1926) Ltd,107 a rule precluding a company from removing its managing director during his term of office was implied in fact – it could not be inferred as a matter of interpretation from a clause providing that the director ‘shall hold the said office for the term of ten years’. The contract referenced the director’s entitlement, not a restrictive obligation imposed on the company. Similarly, in Marks and Spencer,108 a tenant had to rely on implication to establish its claim for repayment of rent. Pursuant to a break clause, the tenant had paid a ­quarter of ‘basic rent’ in advance. However, the lease terminated midway through the quarter. As such, the tenant sought to recover rent paid for the remainder of the quarter, that is, for the period following termination of the lease. The lease did not ‘expressly oblige’ the landlords to make any such repayment.109 And the fact that ‘basic rent’ was to be ‘paid yearly and proportionally for any part of a year’ was insufficient to ground an interpretive inference that such an obligation was intended.110 For completeness, the lease relevantly stated: 2.1 The Landlord demises the Premises to the Tenant … for a term of years starting on 25 January 2006 and ending on 2 February 2018 paying during the Term by way of Rent; (a) the basic rent which shall be … paid yearly and proportionately for any part of a year by equal quarterly instalments in advance on the Quarter days … 8.1 … the Tenant may determine this Lease on the First Break date by serving on the Landlord written notice on or prior to the First Break Notice date.

Since the lease did not reference any obligation on the part of the landlord to make repayment of rent, the tenant’s claim depended on the implication of a rule.111 105 ibid [29] (Allsop P) (‘the task is to give content to the terms of the engagement’). ‘The Service’ was defined as: ‘The provision of … Security Operatives … in accordance with the Club’s requirements on a weekly basis’. The rule followed as a matter of interpretation from an analysis of other provisions in the contract: see ibid [26]–[37] (Allsop P) (eg, the security provider was obliged to follow directions of the club, obtain approvals and obtain insurance, and the club was obliged to make instructions available and answer any queries). 106 cf B Kain, ‘The Implication of Contractual Terms in the New Millenium’ (2011) 51 Canadian ­Business Law Journal 170, 181–82 (‘one possibility is that interpretation ends, and implication begins, when the effect of the court’s process is to recognize a new right or obligation that is not express’) (emphasis in original). Contrast Hooley (n 89) 332–33. 107 Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 (CA) (affirmed in [1940] AC 701 (HL)). 108 Marks and Spencer [2015] UKSC 72, [2016] AC 742. 109 ibid 752 [14] (Lord Neuberger). 110 Emphasis added. See ibid 758–59 [35]–[36] (Lord Neuberger) (discussing this point in the context of implying an obligation). 111 The tenant did not succeed: see [7-24].

The Definition of the Contract  215 [7-20]   By contrast with cases of ambiguity, it is more difficult to infer intention through interpretation so as to correct an alleged error. That is to say, it is more difficult to infer an intended rule from the choice of words in a contract if the rule conflicts with the apparent meaning of the words. In such a case, the contract must contain an obvious error.112 Ironically, when an error cannot be corrected through interpretation, implication is occasionally employed to augment or supplement the relevant rule113 (falling short of contradicting it).114 The basis for such implication is a narrow articulation of the allegedly omitted issue. For example, in Hyman,115 articles of association granted directors a broad and unfettered discretion to issue bonuses under life insurance policies. The relevant article stated: [T]he directors shall … declare what amount … may, in their opinion, be divided by way of bonus, and they shall apportion the amount of such declared surplus by way of bonus among the holders of the participating policies on such principles, and by such methods, as they may from time to time determine.

As a matter of interpretation, the discretion was absolute; what was intended by the choice of words in the contract was clear. However, a specific restriction on the exercise of the discretion was implied: the directors could not declare a bonus rate different from that stated in the relevant policies.116 Similarly, in Aberdeen City Council v Stewart Milne Group Ltd,117 a sale of land contract provided for a profit share uplift in the event of, inter alia, a subsequent sale or lease of the land by the purchaser. The profit share was to be a percentage of the ‘gross sale proceeds or lease value’. The contract relevantly stated: In addition to the purchase price detailed in Clause 2 hereof, the Purchasers and the Sellers have agreed that the Sellers shall be entitled to a further payment (‘the Profit Share’) … The Sellers’ entitlement to the relevant part of the profit-share will … be triggered by the purchasers disposing either by selling or by granting a lease of the whole or part of the subjects. … ‘the Profit Share’ means 40% of 80% of the … gross sale proceeds or lease value less the Allowable Costs as herein defined.

A dispute arose because the purchaser sold the land to a related company. Hence, the vendor argued that the profit share had to be calculated by reference to a market valuation, rather than gross sale proceeds. Such a rule could not be inferred as a matter of interpretation because the contract text did not outline a process for 112 See [3-56]–[3-60] and [7-29]. 113 Lücke, ‘Ad Hoc Implications in Written Contracts’ (n 90) 46–48. cf McMeel (2017) 403 [11.18]–[11.19]. 114 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, 283 (Lord Simon, Viscount Dilhorne and Lord Keith) (PC) (an implied term ‘must not contradict any express term of the contract’); Marks and Spencer [2015] UKSC 72, [2016] AC 742, 757 [28] (Lord Neuberger) (‘a cardinal rule’). 115 Hyman [2002] 1 AC 408 (HL). 116 ibid 458G–459H (Lord Steyn). 117 Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56, [2012] SLT 205 (Aberdeen).

216  Role of Interpretation in Contract Law calculating profit share in the event of a sale to a related party. Nonetheless, a rule requiring a market valuation of the land in the event of a sale otherwise than at arm’s length was established as a matter of implication – the contract ‘not expressly stat[ing] anywhere’ that gross sale proceeds had to be used in valuing the uplift on such a sale.118 [7-21]   In all cases, the textual distinction between interpretation and implication is essentially one of degree: ‘the degree of particularity of that which is being added’.119 The extent to which intention can be inferred from the choice of words in a contract (ie, as a matter of interpretation) varies from judge to judge. To a significant degree, it depends on whether the allegedly omitted issue is defined in broad or narrow terms. For example, a quite specific articulation of the disputed issue, such as in Aberdeen,120 can open the door for implication of a rule in circumstances where the alleged rule cannot be established through interpretation. That said, a rule can only be derived through implication (ie, in the absence of a textual connection) if it is necessary or obvious.

A Different Cognitive Approach [7-22]   The cognition of interpretation and the cognition of implication are different. Interpretation is a process through which objective intention is inferred from the choice of words in a contract. The aim is to establish what was agreed. Implication in fact, on the other hand, involves a different approach to establishing intention. The goal is to infer presumed intention: what the parties did not agree, but one can presume they intended.121 Under English law, a term is implied in fact if it is necessary or obvious.122 By contrast, under Australian law, the five-point test from BP Refinery (Westernport) Pty Ltd v Hastings Shire Council123 continues to apply to wholly written contracts.124 Hence, strictly speaking, a rule must be 118 ibid 209 [18]–[20] (Lord Hope). 119 Lücke, ‘Ad Hoc Implications in Written Contracts’ (n 90) 47. 120 Aberdeen [2011] UKSC 56, [2012] SLT 205, 209 [18] (Lord Hope). See also Extra MSA Services Cobham Ltd v Accor UK Economy Hotels Ltd [2011] EWHC 755 (Ch) (a restriction on an express termination right was established ‘either’ as a matter of construction or implication). Contrast Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57, [2017] AC 73 (no restriction was implied limiting the scope of an exclusion clause in a professional indemnity insurance policy). 121 The Moorcock (1889) 14 PD 64, 68 (Bowen LJ). 122 Marks and Spencer [2015] UKSC 72, [2016] AC 742, 754–55 [21] (Lord Neuberger); Burrows, A Restatement of the English Law of Contract (n 5) 91 §15(4). cf Foo Jong Peng v Phua Kiah Mia [2012] SGCA 55, [2012] 4 SLR 1267, 1287–88 [36] (Andrew Phang Boon Leong JA) (for the Court) (Singapore). 123 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, 283 (Lord Simon, Viscount Dilhorne and Lord Keith) (PC) (‘(1) [the alleged term] must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract’). 124 Barker [2014] HCA 32, (2014) 253 CLR 169, 185 [21] (fn 89) (French CJ, Bell and Keane JJ). cf Heydon (n 5) 448 [10.650].

The Definition of the Contract  217 both necessary and obvious to be implied in fact into such a contract.125 That said, a less onerous test applies under Australian law with respect to oral and partly oral contracts: the rule need only be ‘necessary for the reasonable or effective operation of a contract’.126 [7-23]   At least under the English approach, the process of implication is often straightforward: an allegedly omitted rule is put forward and the court simply determines whether it is obvious or necessary.127 This involves reliance upon the same factors that are relevant in interpretation, namely, the text, background, contractual purpose, and so on.128 For example, to establish whether the implication of a rule should be considered, it must be concluded whether or not the contract text has addressed the relevant disputed issue. That is, it must be determined whether the rule can be inferred from the choice of words in the contract.129 More significantly, in some cases, conclusions regarding commercial purpose dictate whether a rule is a necessary implication.130 Hence, in Hyman,131 a restraint on the power of directors to issue bonuses under life insurance policies was implied so as to satisfy the ‘self-evident commercial object’ of guaranteed annuity rates.132 To similar effect, in Belize,133 a rule was implied in the articles of association of a privatised telecommunications body requiring that directors appointed by a special shareholder be vacated from office. The rule was necessary because: (i) the articles provided no means to remove the directors other than through the special shareholder (who had ceased to hold the ordinary shares required to appoint or remove such directors); and (ii) the articles envisaged a shareholding (and, in turn, a board) that reflected governmental and private interests in the company.134 Hence, the rule

125 See, eg, Auburn Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd [2017] NSWSC 1230, [120]–[132] (Ward CJ in Eq). cf W Courtney and JW Carter, ‘Implied Terms: What is the Role of Construction?’ (2014) 31 Journal of Contract Law 151, 154. 126 Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 422–23 (Brennan CJ, Dawson and Toohey JJ). See further Heydon (n 5) 453 [10.700]. As to the English approach, see, eg, Devani v Wells [2019] UKSC 4, [2019] 2 WLR 617, 627–28 [27]–[29] (Lord Kitchin) (Lord Wilson, Lord Carnwath and Lord Sumption agreeing). 127 See, eg, Ali v Petroleum Co of Trinidad and Tobago [2017] UKPC 2, [2017] ICR 531, 536 [10] (Lord  Hughes) (Ali) (an employment contract provided that a study loan would be waived if the employee completed five years of service – a rule was implied in the contract providing for waiver of repayment if the employer prevented the employee from completing such service). For a similar approach in the Australian context, see Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25, (2002) 202 CLR 588, 609–10 (Gaudron, McHugh, Gummow and Hayne JJ) (a rule was implied extinguishing a debt over proceeds of a sale on the basis that the contract expressly provided for a trust over such proceeds). 128 Marks and Spencer [2015] UKSC 72, [2016] AC 742, 756 [27] (Lord Neuberger); McMeel (2017) 384–85 [10.69]–[10.71]. 129 cf Aberdeen [2011] UKSC 56, [2012] SLT 205, 209 [18] (Lord Hope). 130 See H Collins, The Law of Contract, 4th edn (LexisNexis, 2003) 240; McMeel (2017) 376–77 [10.50]; Robertson (n 89) 156–61 (implication may be ‘[n]ecessary to avoid defeating a contractual purpose’). 131 Hyman [2002] 1 AC 408 (HL). 132 ibid 459E–H (Lord Steyn). See further [7-20]. 133 Belize [2009] UKPC 10, [2009] 1 WLR 1988. 134 ibid 1995–96 [28]–[30] (Lord Hoffmann).

218  Role of Interpretation in Contract Law was needed ‘to avoid defeating … the overriding purpose of the machinery of appointment and removal of directors’.135 [7-24]  As Belize demonstrates, textual and purposive analysis can guide the process of implication. But the implication of a rule sometimes bears an even stronger resemblance to interpretation in that it depends on the weighing and balancing of competing arguments built propositionally from interpretive materials. Marks and Spencer136 is an illustrative recent example. In that case, the Supreme Court of the United Kingdom refused to imply a rule requiring that a landlord repay an apportioned sum of rent. The tenant had paid a quarter of rent in advance before it had elected to terminate the lease pursuant to a break clause, with the lease terminating midway through the relevant quarter.137 As such, the tenant sought repayment of the rent it had paid for that part of the quarter following termination. Textual and consequentialist factors suggested that a rule to this effect was a necessary implication in the lease: rent was paid as a quid pro quo for occupation;138 the lease required that rent be ‘paid yearly and proportionally for any part of a year’;139 and, without the implication, apportionment would depend on the happenstance of whether the break clause was triggered before the quarter date.140 Despite these considerations, the alleged necessity of the rule was undermined by the ‘very detailed’ nature of the lease. It made provision for a ‘large number of contingencies’, including with respect to the payment of sums upon exercise of the break clause.141 Further, it was ‘established legal background’ that rent paid in advance was not apportioned on a time basis.142 Hence, the rule was not necessary and it was not implied.143 [7-25]   It follows that a similar process of inference to that in interpretation guides the process of implication.144 However, this is not always the case.145 Further, even if it is, the focus remains different. The aim in implication is to ascertain the presumed intention of the parties by analysing whether a rule is necessary or obvious (or both) – the focus is not the inference of objective intention from the choice of words in the contract.146 Nonetheless, as McMeel notes, the courts often 135 ibid 1997 [32] (Lord Hoffmann). 136 Marks and Spencer [2015] UKSC 72, [2016] AC 742. 137 The relevant contractual provisions are set out at [7-19]. 138 Marks and Spencer [2015] UKSC 72, [2016] AC 742, 758 [33] (Lord Neuberger). 139 ibid 758 [35] (Lord Neuberger). 140 ibid. 141 ibid 759 [38]–[40] (Lord Neuberger). See further McMeel (2017) 382 [10.62]–[10.63] (there is ‘[l]imited scope for implication where [the] contract is detailed’). 142 Marks and Spencer [2015] UKSC 72, [2016] AC 742, 760–61 [42]–[46] (Lord Neuberger). 143 ibid 762 [49]–[50] (Lord Neuberger). 144 cf McMeel (2017) 362 [10.09] (‘the modern approach to implication uses the same principles as have been established for the interpretation of terms’). 145 See [7-23] (text at n 127). 146 cf J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 129 (‘the standard of strict necessity’).

The Definition of the Contract  219 use interpretation, ‘working in tandem with the process of implication, to find the solution [to a problem of incompleteness] in the interstices of the contract’.147 In many if not most cases, the two processes produce the same rule.148 By contrast, the point of rectification is to remedy errors in a contract that cannot be corrected through interpretation.

Rectification [7-26]  The Supreme Court of the United Kingdom recently described the distinction between interpretation and rectification as ‘not simply an academic issue of categorisation’ and a ‘difficult point’.149 However, if one views the two processes as different techniques employed to define the content of a contract, the distinction is quite clear.150 Through interpretation, objective intention is inferred from the choice of words in a contract. Rectification, on the other hand, is a discretionary equitable remedy.151 It is a technique employed to modify a document, rather than a contract per se.152 And it is a technique that involves a different cognitive process from that in interpretation. [7-27]   To explore the distinction between the cognition of interpretation and the cognition of rectification, it must be noted that there are two different forms of rectification: rectification for common mistake and rectification for unilateral mistake.153 A contractual document is rectified for unilateral mistake to prevent one party taking unconscientious advantage of another party’s erroneous belief as to the content of the document.154 This form of rectification clearly has a policy 147 McMeel (2017) 6 [1.04]. 148 See, eg, Extra MSA Services Cobham Ltd v Accor UK Economy Hotels Ltd [2011] EWHC 755 (Ch), [46] (Vos J) (rule established ‘either’ by construction or implication); Guthrie v News Ltd [2010] VSC 196, (2010) 27 VR 196, 206 [27] (Kaye J) (alleged rule not established as a matter of construction or implication); Re Lehman Brothers International (Europe) [2009] EWHC 2545 (Ch), [87]–[88] (Briggs J). 149 Marley v Rawlings [2014] UKSC 2, [2015] AC 129, 148 [40]–[41] (Lord Neuberger). See also R Buxton, ‘“Construction” and Rectification after Chartbrook’ (2010) 69 CLJ 253, 253 (the two processes ‘live … in uneasy parallel with each other’); PS Davies, ‘Interpreting Commercial Contracts: A Case of Ambiguity?’ [2012] LMCLQ 26, 28 (demarcation would be ‘particularly desirable’); McMeel (2017) 18–19 [1.29]. 150 Tartsinis v Navona Management Co [2015] EWHC 57 (Comm), [13] (Leggatt J) (‘very different exercises’); Simic v New South Wales Land and Housing Corp [2016] HCA 47, (2016) 260 CLR 85, 95 [18] (French CJ) (‘different processes’) (Simic). cf McMeel (2017) 18–19 [1.29], 530–31 [17.29]–[17.35] (‘Differences between construction and rectification’). 151 Hence, it is subject to the bars and principles governing equitable relief: see Carter, Contract Law in Australia (n 5) 470–71 [21-03]; Heydon (n 5) 1121–25 [30.620]–[30.760]; Daventry DC v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333, 1354–55 [83] (Etherton LJ). 152 See, eg, Mackenzie v Coulson (1869) LR 8 Eq 368, 375 (Sir WM James VC). 153 Chitty (n 5) 373 [3-057]. 154 A Roberts & Co v Leicestershire County Council [1961] Ch 555 (Ch); Etablissements Georges Et Paul Levy v Adderley Navigation Co Panama SA [1980] 2 Lloyd’s Rep 67, 72 (Mustill J) (QB) (The Olympia Pride); Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1 (VSCA); McMeel (2017) 534–35 [17.41]–[17.42]; Burrows, A Restatement of the English Law of Contract (n 5) 187 §35(6)(b). cf Heydon (n 5) 1116–17 [30.490].

220  Role of Interpretation in Contract Law component, namely, the prevention of, and protection against, ‘unconscionability’ or ‘bad faith’.155 Hence, it can be distinguished from interpretation, which is driven purely by intention. [7-28]   By comparison, rectification for common mistake is closely linked to interpretation because it involves a search for common intention. In particular, a claim for rectification for common mistake requires factual proof of a common concurrent intention – a common intention at the time of contracting that is inconsistent with the contractual document.156 It follows that interpretation and rectification for common mistake, although similar, can be distinguished on at least two bases:157 (i) the scope to correct error; and (ii) the approach to establishing intention.

Scope to Correct Error [7-29]   The scope to construe a contract otherwise than in accordance with the apparent meaning of its words is, not surprisingly, quite limited. Leading authorities provide that the contract must contain an obvious error and the appropriate correction must be clear.158 Investors Compensation Scheme Ltd v West Bromwich Building Society159 and Chartbrook Ltd v Persimmon Homes Ltd160 represent a high-water mark for the correction of error through interpretation. In the former case, the specification of claims ‘sounding in rescission for undue influence’ as an example of ‘any claim’ clearly established an error.161 In the latter case, a lack of commercial justification for a literal reading of the relevant price formula meant that it could be construed according to business common sense.162 By comparison, the lessees in Arnold v Britton163 could not establish an error in a covenant requiring payment of exorbitant service charges because the covenant made sense as a bilateral gamble on inflation.164 Ultimately, a rule is rarely inferred through interpretation such that it contradicts the clear meaning of the words agreed. For this to be the case, persuasive purposive or consequentialist justification is needed. Usually, such justification must be found in, or at least reinforced by, the contract text.165 155 cf A Burrows, ‘Construction and Rectification’ in A Burrows and E Peel (eds), Contract Terms (Oxford University Press, 2007) 88. 156 See [7-31] (n 172). 157 For further points of distinction, see McMeel (2017) 530–31 [17.29]–[17.35]; Daventry DC v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333, 1381 [198] (Lord Neuberger). 158 See [3-56]–[3-60]. 159 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL). 160 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 (Chartbrook). 161 See [5-11]–[5-14]. 162 See [6-28]–[6-30]. 163 Arnold v Britton [2015] UKSC 36, [2015] AC 1619. 164 See [6-100]–[6-104]. 165 See [6-06], [6-80] and [6-105]–[6-106].

The Definition of the Contract  221 [7-30]   By contrast, issues of proof and equitable discretion aside, there is no limit on the scope to correct mistakes in a contractual document through rectification. Through rectification, words can be added, deleted or modified. Due to its scope, rectification is commonly employed to fix errors that cannot be corrected through interpretation;166 that is, it is employed when ‘the meaning of the document is clear’.167 For example, Joscelyne v Nissen168 involved the sale of a business by a father to his daughter. Clause 7 of the contract relevantly stated: [The daughter] shall discharge all expenses in connection with the whole premises.

The contractual document was rectified so that clause 7 read: [The daughter] shall until she sells the business and out of the proceeds of the business discharge [the father’s] expenses in respect of gas, coal, electricity and home help.169

Similarly, in Australasian Performing Right Association Ltd v Austarama Television Pty Ltd,170 a broadcasting licence agreement clearly provided for a fixed licence fee in the amount of 1 per cent of annual gross earnings. The agreement relevantly stated: In consideration of the Licence hereby granted the Licensee shall pay to the Association the following licence fees: For the nine (9) months ending the Thirtieth day of June 1965 and each succeeding period of twelve (12) months during the currency of this Agreement, an amount equal to 1% of the gross earnings of the Licensee.

Hence, the only rule that could be inferred through interpretation was to this effect: the licence fee was 1 per cent of annual gross earnings for the duration of the agreement. However, the rule was effectively modified through rectification such that the percentage rate increased over the duration of the contract. In particular, the contractual document was rectified such that the licence fee was: 1% for the period from 1st October, 1964, to 30th June, 1965. 1% from 1st July, 1965, to 30th June, 1966. 1% from 1st July, 1966, to 30th June, 1967. 1¼% from 1st July, 1967, to 30th June, 1968. 1½% thereafter.171

166 cf McMeel (2017) 550 [17.80]. See, eg, Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, (2009) 76 NSWLR 603. 167 National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365, 381 (­Sheller  JA) (NSWCA). See also Daventry DC v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333, 1384 [211] (Lord Neuberger). 168 Joscelyne v Nissen [1970] 2 QB 86 (CA). 169 ibid 99 (Russell LJ) (for the Court). See further Burrows, ‘Construction and Rectification’ (n 155) 85. 170 Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467 (NSWSC). 171 ibid 474 (Street J).

222  Role of Interpretation in Contract Law To establish its claim for rectification, the licensor had to prove a common i­ ntention at the time of contracting as a matter of fact.

A Different Cognitive Approach [7-31]   A rule in a contract is modified through common mistake rectification if it is proved that the contractual document does not accord with a common intention held by the parties at the time of contract formation.172 Hence, the focus in rectification is proving intention as a matter of fact.173 The process is not interpretive; it does not involve the inference of objective intention from the choice of words in the contract.174 Instead, in rectification, the alleged intention is proved by evidence on the balance of probabilities.175 However, ‘convincing proof ’ of the alleged intention is ultimately required ‘to counteract the evidence of the parties’ intention displayed by the instrument itself ’.176 [7-32]  In terms of proving a contrary common intention for the purpose of rectification, the exclusionary rule does not apply.177 Hence, the admissible evidence extends to evidence of negotiations,178 subsequent conduct,179 and subjective intention.180 There is debate, particularly in England, regarding the extent to which the approach is ‘objective’.181 However, what is clear is that 172 Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1123 [48] (Lord Hoffmann) (quoting the fourpoint test stated in Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560, [2002] 2 EGLR 71, 74 [33] (Peter Gibson LJ)); Agip SpA v Navigazione Atla Italia SpA [1984] 1 Lloyd’s Rep 353, 359 (Slade LJ) (CA) (The Nai Genova); Simic [2016] HCA 47, (2016) 260 CLR 85, 117 [103]–[104] (Gageler, Nettle and Gordon JJ); D McLauchlan, ‘Refining Rectification’ (2014) 130 LQR 83, 83–84; Burrows, A Restatement of the English Law of Contract (n 5) 184 §35(6). A prior concluded contract is also sufficient: see, eg, The Olympia Pride [1980] 2 Lloyd’s Rep 67, 72 (Mustill J) (QB); FSHC Group Ltd v GLAS Trust Corp Ltd [2019] EWCA Civ 1361, [176] (Leggatt LJ) (Rose and Flaux LJJ agreeing). 173 See further [7-55]–[7-72]. 174 Contrast McMeel (2017) 550 [17.80] (if the exclusionary rule was abandoned in construction, ‘the remedy of “common mistake” rectification would be redundant’); Burrows, ‘Construction and Rectification’ (n 155) 99 (rectification has been ‘rendered largely superfluous’ by the modern approach to construction). 175 Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560, [2002] 2 EGLR 71, 74 [34] (Peter Gibson LJ); The Nai Genova [1984] 1 Lloyd’s Rep 353, 359 (Slade LJ) (CA); McMeel (2017) 558–61 [17.98]–[17.105]. 176 Tartsinis v Navona Management Co [2015] EWHC 57 (Comm), [85] (Leggatt J). See also Joscelyne v Nissen [1970] 2 QB 86, 98 (CA); The Olympia Pride [1980] 2 Lloyd’s Rep 67, 73 (Mustill J) (QB) (‘a high degree of conviction’); Pukallus v Cameron [1982] HCA 63, (1982) 180 CLR 447, 452 (Wilson J); Simic [2016] HCA 47, (2016) 260 CLR 85, 102 [41] (Kiefel J) (‘proved to a high standard’). 177 McMeel (2017) 562 [17.106]; Buxton (n 149) 253; Heydon (n 5) 1090 [30.20]. See further [3-29]–[3-31]. 178 Tartsinis v Navona Management Co [2015] EWHC 57 (Comm), [12] (Leggatt J) (‘generally essential’). As to the nature of such evidence, see [3-30]. 179 Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1128 [65] (Lord Hoffmann). As to the nature of such evidence, see [3-30]. 180 Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1127–28 [64]–[65] (Lord Hoffmann). Contrast Burrows, ‘Construction and Rectification’ (n 155) 95. As to the nature of such evidence, see [3-30]. 181 See, eg, Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1125–28 [59]-[66] (Lord Hoffmann); Daventry DC v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333, ­1355–56

The Definition of the Contract  223 the common intention must manifest itself through words or conduct.182 ‘Mere ­coincidence of uncommunicated subjective intentions is not enough.’183 That said, a prior concluded contract is not required:184 a ‘tacit agreement’ or ‘understanding’ is sufficient.185 [7-33]   Unlike interpretation, the party seeking to modify a rule in a contract through rectification bears the onus of proof.186 A clear and certain intention must be proved.187 It must amount to a common mistake as to the content of the contractual document,188 not a mistake as to the nature or subject matter of the transaction.189 [7-34]   Hence, the focus in rectification is evidence and proof, while the interpretive aim is the inference of objective intention from the contract text. In Australasian Performing Right Association Ltd v Austarama Television Pty Ltd,190 a common intention that a licence fee would increase could not be inferred from the choice of words in the contract. This was because the contract text clearly stated an ongoing fee of 1 per cent of annual gross earnings and neither the admissible background, [85]–[89] (Etherton LJ), 1374–76 [173]–[177] (Toulson LJ); Tartsinis v Navona Management Co [2015] EWHC 57 (Comm), [89]–[99] (Leggatt J); Simic [2016] HCA 47, (2016) 260 CLR 85, 103–04 [46]–[49] (Kiefel J); FSHC Group Ltd v GLAS Trust Corp Ltd [2019] EWCA Civ 1361, [148]–[153] (Leggatt LJ); Calnan (2017) 174–88 [9.20]–[9.79]; Burrows, A Restatement of the English Law of Contract (n 5) 184–85 §35(6)(a); McLauchlan, ‘Refining Rectification’ (n 172); D McLauchlan, ‘The Many Versions of Rectification for Common Mistake’ in S Degeling, J Edelman and J Goudkamp (eds), Contract in Commercial Law (Thomson Reuters, 2016) 204–07; PS Davies, ‘The Meaning of Commercial Contracts’ in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann: A Festschrift in Honour of Lord Leonard (Hart Publishing, 2015) 236–37. 182 For Australian authorities, see Simic [2016] HCA 47, (2016) 260 CLR 85, 103 [43] (Kiefel J), 117 [104] (Gageler, Nettle and Gordon JJ); Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467, 473 (Street J) (NSWSC); cf Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65, (2007) 69 NSWLR 603, 667–68 [316] (Campbell JA) (the relevant intention is ‘subjective’, but it must be ‘disclosed’). The English test is arguably stricter, requiring ‘an outward expression of accord’: Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1123 [48] (Lord Hoffmann); FSHC Group Ltd v GLAS Trust Corp Ltd [2019] EWCA Civ 1361, [176] (Leggatt LJ) (Rose and Flaux LJJ agreeing); McLauchlan, ‘Refining Rectification’ (n 172) 84; Heydon (n 5) 1098 [30.180]. See further McLauchlan, ‘The Many Versions of Rectification for Common Mistake’ (n 181) 229. 183 Tartsinis v Navona Management Co [2015] EWHC 57 (Comm), [89] (Leggatt J). See also D ­ aventry DC v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333, 1354 [80] (Etherton LJ). 184 See, eg, Joscelyne v Nissen [1970] 2 QB 86 (CA). 185 FSHC Group Ltd v GLAS Trust Corp Ltd [2019] EWCA Civ 1361, [81] (Leggatt LJ) (Rose and Flaux LJJ agreeing). 186 See, eg, McMeel (2017) 530 [17.33]. 187 Pukallus v Cameron [1982] HCA 63, (1982) 180 CLR 447, 452 (Wilson J); McMeel (2017) 558 [17.97]. 188 Knowledge, upon signing, that the document incorrectly states the bargain will ordinarily defeat a claim for rectification: see, eg, Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23, (1973) 128 CLR 336. 189 The Olympia Pride [1980] 2 Lloyd’s Rep 67, 72 (Mustill J) (QB); Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1126 [59] (Lord Hoffmann); Pukallus v Cameron [1982] HCA 63, (1982) 180 CLR 447 (a mistake as to whether land sold contained a bore and cultivated land was a mistake as to the transaction itself, not the contractual document). 190 Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467 (NSWSC).

224  Role of Interpretation in Contract Law nor the purposive or consequentialist considerations established that the words were agreed to effect a different intention.191 Nonetheless, the intended fee increase was established as a matter of fact by analysing evidence of negotiations and evidence of subsequent conduct. In particular, the common intention was clear from letters exchanged between the parties and a resolution passed by the licensee authorising entry into the contract.192 By comparison, in Chartbrook,193 the common intention of the parties regarding the development licence fee was established both as a matter of interpretation and through rectification.194 The parties intended that the balancing payment would operate as a contingency. It was what they objectively intended by agreeing the pricing formula: 23.4 per cent of the price achieved [on the sale of all residential flats] in excess of [the guaranteed minimum, ie, £4.648m].

It also clearly represented the consensus reached in correspondence prior to execution of the contract.195

Comment [7-35]   Interpretation, common mistake rectification and implication in fact are simply different tools used to establish the content of a contract; each technique constitutes a different cognitive process through which the intention of the parties is ascertained.196 A party alleging a rule in a contract can argue, in the alternative, that: (i) the rule is properly inferred from the choice of words in the contract; (ii) the rule is obvious or necessary;197 or (iii) the contractual document must be rectified in equity to accord with a common intention proved by evidence. For example, in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd,198 an Egyptian purchaser claimed that a sale of ‘horsebeans’ was meant to be a sale of a particular form of horsebean known as ‘feveroles’. The case was decided as a matter of rectification. However, the purchaser could have argued in the alternative that: (i) by agreeing a sale of ‘horsebeans’, a sale of ‘feveroles’ was objectively intended;199 (ii) as a matter of 191 The proper interpretation of the contract was not, it seems, in issue. 192 [1972] 2 NSWLR 467, 474 (Street J) (NSWSC) (‘almost a copybook case for the exercise of the jurisdiction to rectify’). See further [7-30]. 193 Chartbrook [2009] UKHL 38, [2009] 1 AC 1101. 194 See further [6-28]–[6-30]. 195 Chartbrook [2009] UKHL 38, [2009] 1 AC 1101, 1128 [66] (Lord Hoffmann) (Lord Hope, Lord Rodger and Baroness Hale agreeing). 196 cf Burrows, ‘Construction and Rectification’ (n 155) 77 (interpretation and rectification); Calnan (2017) 171 [9.04] (interpretation and rectification); McMeel (2017) 6 [1.04], 360–62 [10.05]–[10.14] (interpretation, implication and rectification). 197 Or, in Australia, that it meets the test in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, 283 (Lord Simon, Viscount Dilhorne and Lord Keith) (PC). 198 Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450 (CA). 199 This argument would have had greater chance of success under the modern approach to interpretation.

The Identity and Capacity of the Parties  225 necessity, the rule providing for a sale of ‘horsebeans’ should be supplemented by implication to limit the sale to ‘feveroles’;200 or (iii) the document should be rectified because it mistakenly does not reflect the parties’ common intention.201 This is not to suggest that the decision in Rose v Pim was wrong. It merely demonstrates how the various techniques can be understood as alternatives. [7-36]  The proposed distinction between interpretation, common mistake rectification and implication in fact is simple and pragmatic. It reflects the vicissitudes of commercial practice in which the techniques are often invoked as alternatives.202 As McMeel notes, ‘[a]ll three techniques may be in play in attempting to discern the meaning and effect of a written agreement’.203 The proposed demarcation between each of the processes also accounts for the fact that, in a given case, it may be hard to say which technique should properly apply.204 The three techniques represent the collective means for defining the rules in a contract as a matter of intention (at least in the case of wholly written contracts).205 Logically anterior to the application of such techniques is the process engaged to establish the identity of the parties to a contract.

7.4.  The Identity and Capacity of the Parties Principle 8: Establishing the identity of a contract party is a factual enquiry. It is not an intentional or interpretive process. Principle 9: Establishing the capacity in which a party contracted is usually a factual enquiry. It is only an interpretive process if the contract text addresses the issue of capacity and the question of capacity is not also a question of identity. [7-37]   The process through which a party to a contract is identified is often described as a matter of construction.206 However, the identification of a party 200 It is hard to see how such an implication was obvious or necessary to make the contract work. 201 Rectification was denied because a mistake was not made in recording the bargain in the contract: see [1953] 2 QB 450, 461 (Denning LJ). See also McLauchlan, ‘The Many Versions of Rectification for Common Mistake’ (n 181) 194–98. 202 Particularly in the case of interpretation and rectification, see National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365, 381 (Sheller JA) (NSWCA); Tartsinis v Navona Management Co [2015] EWHC 57 (Comm); McMeel (2017) 529 [17.28]; Burrows, A Restatement of the English Law of Contract (n 5) 183 §35(6); D Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 LQR 577, 578; Buxton (n 149) 253. 203 McMeel (2017) 362 [10.10]. 204 See, eg, Tartsinis v Navona Management Co [2015] EWHC 57 (Comm), [13] (Leggatt J) (it is ‘not always easy’ to separate rectification and construction). 205 cf McMeel (2017) 4 [1.01] (implication and rectification are ‘related doctrines which have an impact on the meaning and effect of written contracts and instruments’). 206 See [7-39] (n 208).

226  Role of Interpretation in Contract Law is not an interpretive process; it involves a factual enquiry. The question is which person entered into the contract, not what the contracting parties intended by the choice of words in the contract. Nonetheless, to the extent that the contract text purports to identify a party, a textual process of inference similar to that in interpretation may be employed in the process of identification. [7-38]   The question of who entered into a contract is often tied up with the question whether a person signed a contract merely as agent or witness. Hence, in such a case, the enquiry as to the capacity in which the party contracted must be factual. Nonetheless, beyond such cases, the capacity in which a party signed or entered into a contract can be determined as a matter of interpretation if the contract text addresses the issue of capacity. This is because the enquiry is not linked to the elementary question: who is it that entered into the contract?

The Identity of a Party [7-39]   Determining the identity of a person who entered into a contract is a baseline enquiry in contract law. It logically precedes any investigation as to the content of the contract. Nonetheless, whether the identification of a party named in a contract involves interpretation is said to be ‘unclear’.207 In some cases, the process is described as constructional or interpretive.208 In others, it is described as involving an analogous209 or simply factual210 approach. The process for identifying a party is not interpretive for at least three reasons. First, it cannot depend on an inference of collective intention.211 Put simply, the question cannot be whether the parties objectively intended one of them to be a party.212 Such an approach is nonsensical. It seeks a collective intention to determine the identity of one of the holders of the intention. Second, interpretation is a process that presupposes identification of the parties. The parties must be identified before a collective ­intention 207 Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 329 (discussing whether the identification of parties involves ‘construction’). See also Seddon and Bigwood (n 5) 298–99 [7.2]. 208 See, eg, Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919, 942 [47] (Lord Hobhouse) (‘construction’); Homburg Houtimport BV v Agrosin Private Ltd [2003] UKHL 12, [2004] 1 AC 715, 754 [73] (Lord Hoffmann) (The Starsin) (‘interpretation’); Pacific Carriers Ltd v BNP Paribas [2004] HCA 35, (2004) 218 CLR 451, 461–63 [20]–[26] (the Court) (Pacific Carriers) (‘construction’). 209 See, eg, The Starsin [2003] UKHL 12, [2004] 1 AC 715, 737 [9] (Lord Bingham) (‘a similar approach’). cf Air Tahiti Nui Pty Ltd v McKenzie [2009] NSWCA 429, (2009) 77 NSWLR 299, 304 [28] (Allsop P and Handley JA). 210 See, eg, The Starsin [2003] UKHL 12, [2004] 1 AC 715, 794 [175] (Lord Millett); GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, 636–37 (McHugh JA) (CA). cf Chitty (n 5) 1408 [18-004] (‘factual difficulties’). 211 Contrast Carminco Gold & Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd (2007) 243 ALR 472, 479 [22] (Finn, Rares and Besanko JJ) (‘a simple question as to who, objectively considered, were intended to be the parties to the contract’); Air Tahiti Nui Pty Ltd v McKenzie [2009] NSWCA 429, (2009) 77 NSWLR 299, 304 (Allsop P and Handley AJA) (a matter of ‘ascertaining between whom the parties objectively intended to contract’); Seddon and Bigwood (n 5) 298–99 [7.2]. 212 cf The Starsin [2003] UKHL 12, [2004] 1 AC 715, 737 [9] (Lord Bingham).

The Identity and Capacity of the Parties  227 can be inferred from the text because the relevant inference is driven in part by the unique features of the parties.213 Finally, interpretation is a technique through which objective intention is inferred from the choice of words in a contract. It is the primary means through which the agreement is defined. Identifying a party to a contract is a different investigation. The aim is to establish who entered into the contract, not what the parties collectively intended.214 It involves a different cognitive process: a factual enquiry as to who performed the act of entering into the contract.215 [7-40]   Nonetheless, it is understandable why the process of interpretation and the process of identifying a contract party are often conflated. Interpretation is a process through which intention is inferred from the choice of words in a contract. Likewise, identifying a party to a contract, at least when the contract is wholly integrated in writing, involves a textual focus.216 Hence, the cognitive process is similar. However, the difference is that, rather than being used as evidence of intention, the words are relied upon as evidence of identity,217 that is, evidence of the identity of the persons who performed the ‘collective act’ of entering into the contract.218 The process remains objective in that the reasonable person’s understanding of the words still guides the way.219 But it is the identity of the parties, not collective intention, that is inferred from the contract text. [7-41]   In practice, the process of interpretation and the process of identifying a party to a contract are quite similar.220 If the text is clear, this concludes the matter.221 However, if the text is ambiguous or inconsistent, the inferential process becomes quite complex, as it does in interpretation. For example, in Coulls v Bagot’s 213 See [3-15]. 214 Contrast [7-39] (n 211). It may be that the issue turns on the intention of each individual party: see, eg, Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919, 965 [125] (Lord Phillips) (‘The court asks the question whether each [party] intended, or must be deemed to have intended, to contract with the other’) (emphasis in original). 215 The Starsin [2003] UKHL 12, [2004] 1 AC 715, 794 [175]–[176] (Lord Millett); McMeel (2017) 486 [16.03] (‘the inquiry is necessarily factual’); Carter (2013) 311 [9-51]. Query whether the same approach applies in identifying a third-party beneficiary capable of suing on a contract, such as under an indemnity or bank guarantee: see, eg, Simic [2016] HCA 47, (2016) 260 CLR 85 (interpretive approack taken to identifying correct beneficiary under performance bonds – error in naming entity could not be corrected through interpretation, but performance bonds were rectified to identify correct party). 216 See, eg, Coulls v Bagot’s Executor and Trustee Co Ltd [1967] HCA 3, (1967) 119 CLR 460, 487 (Taylor and Owen JJ) (‘a question to be resolved upon a consideration of the written instrument itself ’). cf Heydon (n 5) 353 [9.580]. 217 The Starsin [2003] UKHL 12, [2004] 1 AC 715, 794 [176] (Lord Millett) (‘part of the factual evidence of the identity of the party’). 218 cf [4-05] (text at nn 11–12). 219 See, eg, The Starsin [2003] UKHL 12, [2004] 1 AC 715, 738 [15] (Lord Bingham), 754 [74]–[75] (Lord Hoffmann); Pacific Carriers [2004] HCA 35, (2004) 218 CLR 451, 463 [25] (the Court). 220 See, eg, Gilberto v Kenny (1983) 48 ALR 620, 623 (Gibbs CJ) (HCA) (inconsistent references to a purchaser under a sale of land contract were resolved by reference to evidence of background). 221 See, eg, Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919, 942–44 [47]–[49] (Lord Hobhouse). cf Heydon (n 5) 353 [9.580].

228  Role of Interpretation in Contract Law Executor and Trustee Co Ltd,222 a mining royalty agreement provided for payments to be made to a husband and his wife. The contract relevantly stated: Agreement between Arthur Leopold Coulls and O’Neil Construction Proprietary Limited. In consideration of the sum of £5, I, Arthur Leopold Coulls, Anstey’s Hill, Highbury East, give to O’Neil Construction Proprietary Ltd the sole right to quarry and remove stone from [the designated area]. … O’Neil Construction Proprietary Ltd agrees to pay at the rate of 3d per ton for all stone quarried and sold, also a fixed minimum royalty of £12 per week for a period of ten (10) years with an option of another ten (10) years at above basis (£12 per week minimum). … I authorise the above Company to pay all money connected with this agreement to my wife, Doris Sophia Coulls and myself, Arthur Leopold Coulls.

The document was signed by the mining company, the husband and the wife. But the text as a whole established that the contract was between the mining company and the husband: it was titled as such; the husband granted the right to quarry; the husband agreed the royalty with the company; and the husband ‘authorise[d]’ payment to the wife.223 To similar effect, in The Starsin,224 the ‘carrier’ under a bill of lading was expressed to be ‘the party on whose behalf this bill of lading was signed’. The bill of lading was signed on behalf of the charterer. However, several conditions on the back of the bill made it ‘plain that the contract of carriage was made with the owner … of the vessel’.225 This inconsistency was resolved by resort to business common sense, market practice and the notion that greater weight should attach to specifically agreed rather than standard terms.226 Hence, it was the charterer that had contracted as carrier. The identity of the carrier was inferred from the text in a very similar manner to that through which intention is inferred in interpretation. Closely related to the issue of who entered into a contract is the question whether a person signed or entered into a contract in a particular capacity.

The Capacity of a Party [7-42]   A party may enter into, or sign, a contract in a number of capacities. It may enter the contract in its personal capacity, it may sign as agent, trustee or indemnifier, or it may simply sign as a witness. If it is clear that a person is a party 222 Coulls v Bagot’s Executor and Trustee Co Ltd [1967] HCA 3, (1967) 119 CLR 460. 223 ibid 482–83 (McTiernan J), 486–87 (Taylor and Owen JJ). 224 The Starsin [2003] UKHL 12, [2004] 1 AC 715. 225 ibid 736 [8] (Lord Bingham). 226 ibid 737–38 [10]–[15] (Lord Bingham), 747 [45] (Lord Steyn), 769 [128] (Lord Hobhouse). Contrast ibid 795 [182] (Lord Millett) (‘The charterers must simply be taken to have used the wrong form’).

The Identity and Capacity of the Parties  229 to a contract and the contract specifically addresses the person’s capacity, the question of capacity is resolved by inference from the text as a matter of interpretation. On the other hand, if the contract text does not address the question of capacity, the issue is simply resolved as a matter of fact taking into account all relevant evidence, other than evidence of subjective intention.227 That is to say, it involves a different cognitive process. [7-43]   The distinction between interpretive and non-interpretive approaches to establishing contractual capacity is, on one view, straightforward. However, difficulties arise when the question is whether a signatory has signed as a mere agent228 or witness229 rather than binding itself as a contracting party. Such issues are usually dealt with as a matter of ‘construction’.230 However, the determination of the capacity in which the person signed the contract effectively determines whether that person was a party to the contract. Hence, it seems that the process cannot be interpretive because the identification of a party to a contract is a factual investigation, not a matter of common intention.231 Nonetheless, the inferential process often bears a strong resemblance to interpretation; that is, the cognition is similar. For example, in Pacific Carriers,232 a bank officer had signed two letters of indemnity in favour of a carrier. The letters indemnified the carrier for any loss in unloading cargo without a bill of lading. The bank claimed that its officer had merely witnessed or authenticated the execution of the letters by the consignor. The letters of indemnity relevantly stated: To: [The carrier] … [W]e, [the consignor] hereby request you to give delivery of the said cargo to [the consignee] without production of the original Bills of Lading. In consideration of your complying with our above request we hereby agree as follows: 1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any liability loss or damage of whatsoever nature which you may sustain by reason of delivering the goods to [the consignee]. … 227 See, eg, Re Interwest Hotels Pty Ltd (1993) 12 ACSR 78, 118–21 (Eames J) (VSC) (company contracted in its own right, not as trustee); Re Mento Developments (Aust) Pty Ltd [2009] VSC 343, (2009) 73 ACSR 622, 636–37 [60]–[70] (Robson J) (company contracted as trustee). 228 See, eg, Universal Steam Navigation Co Ltd v James McKelvie & Co [1923] AC 492 (HL) (entity signed charterparty as agent, not charterer); Carminco Gold & Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd [2007] FCAFC 194, (2007) 243 ALR 472 (undisclosed principal). See further Heydon (n 5) 340-41 [9.300]. 229 For example, the question may be whether a director signed as a witness or indemnifier: see, eg, Scottish Amicable Life Assurance Society v Reg Austin Insurances Pty Ltd (1985) 9 ACLR 909 (NSWCA). 230 See, eg, Scottish Amicable Life Assurance Society v Reg Austin Insurances Pty Ltd (1985) 9 ACLR 909, 915–17 (Kirby P) (NSWCA); Pacific Carriers [2004] HCA 35, (2004) 218 CLR 451, 461–63 [20]–[26] (the Court); Carter (2013) 314–16 [9-54]–[9-56]. 231 See [7-39]–[7-40]. Contrast Harris v Burrell and Family Pty Ltd [2010] SASCFC 12, [20]-[30] (Doyle CJ) (the question whether a director signed a loan in his personal capacity was approached as a matter of intention). 232 Pacific Carriers [2004] HCA 35, (2004) 218 CLR 451.

230  Role of Interpretation in Contract Law 5. The liability of each and every person under this indemnity shall be joint and several and shall not be conditional upon your proceeding first against any person, whether or not such person is party to or liable under this indemnity. 6. The liability of each and every person under this indemnity shall in no circumstances exceed 200% of the CIF value of the above cargo. 7. This indemnity shall be construed in accordance with English law and each and every person liable under this indemnity shall at your request submit to the jurisdiction of the High Court of Justice of England. Yours Faithfully, [Signature on behalf of consignor] For and on Behalf of: [The consignor] For and on behalf of: [The bank] Banker’s signature [Signature by bank representative].

The High Court of Australia held that the bank had signed as indemnifier. The bank relied primarily on textual or linguistic features suggesting that the consignor was the sole indemnifier. For example, the indemnifying clause stated ‘we hereby agree … to indemnify you’, and the preceding clause stated ‘we, [the consignor], hereby request you to give delivery’.233 The difficulty for the bank was that clauses 5, 6 and 7 indicated that more than one party had undertaken to indemnify the carrier: each clause referred to the liability of ‘each and every person … under this indemnity’.234 Hence, the text being equivocal, the High Court was ultimately guided by the clear commercial object of each indemnity, insofar as the carrier was concerned, which was to obtain indemnification from a financial institution.235 Bearing in mind this objective, the Court concluded that the bank must have signed as indemnifier. It was a party to each indemnity in that capacity. Hence, the capacity in which the bank had signed the letters of indemnity and, in turn, the identity of the bank as a contracting party were established by inference from the contract text. However, the enquiry was essentially factual. It involved identifying the party to the contract – the commercial object of the transaction being a factor in determining the answer to that question. The identification of the parties to a contract is a foundational question in contract law that naturally precedes the definition of what was agreed (or necessarily implied) in a contract. 233 See [2001] NSWSC 900, [283]; [2002] NSWCA 379, [70]. The letter was also stated to be ‘from [the consignor]’: [2001] NSWSC 900, [283]; [2002] NSWCA 379, [70]. 234 See [2001] NSWSC 900, [284]. 235 [2004] HCA 35, (2004) 218 CLR 451, 462–63 [25] (the Court). See also [2002] NSWCA 379, [72] (Sheller JA) (‘The contest is between, on the one hand, language which might be read so as to limit to one party, the requestor alone, an agreement to indemnify, and on the other hand, the clear purpose of the 1998 standard form to be used as a joint indemnity by the requestor and a bank’).

Characterisation  231 Once the parties are identified and the rules in a contract are defined, such rules must be applied through the process of characterisation.

7.5. Characterisation Principle 10: Factual characterisation is a process through which it is determined whether the factual components in a rule are triggered. To the extent that factual characterisation is employed to apply a rule in a contract, it is distinct from, and logically follows, the definition of the rule through interpretation (or some other means). Principle 11: Legal characterisation is a process through which it is determined whether a legal component in a doctrinal (or statutory) rule is triggered. It involves a combination of factual, interpretive and policy-based reasoning. [7-44]  The contractual relationship is regulated by a combination of rules: doctrinal rules, a few statutory rules, and the rules that make up the contract.236 Each rule consists of conditions that, if met, legally affect the relations between the parties.237 The process of determining whether the conditions in a rule are met is often described as a process of ‘application’: a rule is applied by determining whether or not a given case falls within the rule.238 If the conditions in a rule are met, the rule is ‘triggered’.239 Contract law uses a number of processes to determine whether its rules are triggered. Two such processes are factual and legal characterisation. ‘Factual characterisation’ involves the determination whether a factual description in a rule is met, for example, whether a buyer of goods has in fact paid the purchase price. It is employed to apply doctrinal and statutory rules, as well as the rules in a contract. Insofar as it is employed to apply the rules in a contract, it logically follows the definition of such rules (including, by interpretation) and it involves a different cognitive process (namely, a factual enquiry). Factual characterisation is all that is required to determine whether a rule in a contract applies. ‘Legal characterisation’, on the other hand, is often needed to establish whether a doctrinal (or statutory) rule is triggered. In essence, it involves the determination whether a legal component in such a rule is met. For example, it is a matter of legal characterisation whether parties have agreed a lease (rather than a licence), thereby triggering application of doctrinal and statutory rules governing lease 236 See [7-06]. 237 Unless a rule in a contract is denied effect by a doctrinal or statutory rule, or vice versa: see further [7-06]. 238 Hart (n 12) 126; N MacCormick, Legal Reasoning and Legal Theory (Oxford University Press, 1994) 45,  65–68, 231; B Bix, Law, Language and Legal Determinacy (Oxford University Press, 1995) 7–8, 19–25. 239 Ali [2017] UKPC 2, [2017] ICR 531, 534 [6], 537 [14] (Lord Hughes) (an implied rule).

232  Role of Interpretation in Contract Law arrangements. However, it is not clear how such a determination is made; that is to say the cognition of legal characterisation is complex. Occasionally, it depends on interpretive and non-interpretive inferences of intention. In other instances, the process is driven by policy and precedent. Factual characterisation, on the other hand, is not driven by such considerations; it is a purely factual enquiry.

Factual Characterisation [7-45]  Factual characterisation is a process through which it is determined whether a fact or circumstance meets a factual description in a rule.240 It is a process engaged to establish whether the ‘operative facts’ or ‘factual predicate[s]’ in a rule – ‘the factual conditions triggering the application of the rule’ – are met.241 The process is closely related to interpretation because it depends on the meanings of words. Hence, it is regarded by some as part of ‘construction’ or ‘­interpretation’.242 However, factual characterisation can be distinguished from interpretation on two bases. First, it does not involve the inference of objective intention from the choice of words in a contract. Instead, it involves determining whether a factual condition in a rule is satisfied.243 Second, factual characterisation necessarily follows the definition of a rule; a rule can only be applied once it is defined.244 As was noted by Farnsworth: [I]f the seller sells wood as ‘braziletto’, a court may be called upon to decide whether it is in fact braziletto or peachum. But such questions of fact, which concern truth, arise only after questions of law, which concern the expectations of the parties, have been answered: Was the seller bound to deliver braziletto rather than peachum?245

In terms of a real example, in Reardon Smith Line Ltd v Yngvar Hansen-Tangen,246 a sub-charter described the demised vessel as ‘Newbuilding motor tank vessel called Yard No 354 at Osaka’. As a matter of interpretation, it was established that the vessel did not have to be built in yard number 354 at Osaka – it merely needed to be ‘identifiable’ as ‘Yard No 354 at Osaka’.247 As a matter of factual characterisation, the House of Lords determined that the vessel delivered was so identifiable; that is, it satisfied the contractual description.248 240 See, eg, Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 995 (Lord ­Wilberforce) (HL) (‘whether a factual situation comes within particular words’) (The Diana Prosperity). cf Hart (n 12) 125 (‘“subsum[ing]” particular facts under general classificatory heads’); A Scalia and BA Garner, Reading Law (Thomson West, 2012) 53–55. 241 F Schauer, Playing by the Rules (Clarendon Press, 1991) 23. See also MacCormick (n 238) 45. 242 See [2-15] (the two-stage approach). 243 See, eg, Ali [2017] UKPC 2, [2017] ICR 531, 534 [6], 537 [14] (Lord Hughes) (once the implication of a rule had been established, it had to be determined whether the rule had been ‘triggered’). 244 cf Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8, (1968) 118 CLR 429, 436–37 (Barwick CJ). 245 EA Farnsworth, ‘“Meaning” in the Law of Contracts’ (1967) 76 Yale Law Journal 939, 942. 246 The Diana Prosperity [1976] 1 WLR 989 (HL). 247 See [6-10]–[6-11]. 248 The Diana Prosperity [1976] 1 WLR 989, 999G–H (Lord Wilberforce) (HL).

Characterisation  233 [7-46]   Ordinarily, by defining a rule through interpretation (or another means), it is clear whether the rule is triggered by the facts of the dispute.249 This is because the dispute guides the enquiry regarding definition of the relevant rule. For example, in Prenn v Simmonds,250 a condition precedent to a share sale was defined through interpretation such that group profits could count towards the relevant profit threshold. As such, no factual dispute remained; it was clear on the facts that sufficient group profits had been generated.251 [7-47]   By contrast, in some cases, even after a rule in a contract is defined (such as through interpretation), it is not clear whether the facts of the dispute trigger the rule. This is usually because the rule can only be defined in general terms. For example, if the parties have agreed a broad description, it is often the case that the rule cannot be further refined through interpretation.252 An exclusion of liability for ‘consequential’ or ‘indirect’ loss is a common example. No matter how the rule is defined,253 work remains in its application.254 Similarly, if parties reference a broad normative standard, the focus of the enquiry is usually characterisation rather than interpretation. This can be seen in McCann v Switzerland Insurance Australia Ltd.255 A law firm’s insurance policy excluded ‘liability … brought about by a dishonest or fraudulent act of a partner’. The relevant partner had lost a client’s funds by failing to obtain security on a transaction. However, he had also earned a secret commission on the deal. The case involved a question of interpretation directed to causation: did the loss or the liability need to flow from the act?256 It also involved a question of factual characterisation: did the partner’s conduct as a whole amount to ‘a dishonest or fraudulent act’ or was it only his actions

249 cf Bix (n 238) 7 (‘The decision whether a rule applies to a particular situation often turns on the meaning – on delimiting the range of meanings – of a general term’). 250 Prenn v Simmonds [1971] 1 WLR 1381 (HL). 251 See further [5-05]–[5-10]. 252 On one view, the function of using such words is to delegate resolution of the matter to a thirdparty arbiter: see [4-44] (n 187). But note Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7, (2014) 251 CLR 640 (interpretation was employed to define the nature of a ‘reasonable endeavours’ obligation) (discussed at [6-121]–[6-126]). 253 A different approach to the definition of consequential or indirect loss applies in England compared with Australia: see, eg, Watford Electronics Ltd v Sanderson Cfl Ltd [2001] EWCA Civ 317, [36] (Megaw LJ) (loss falling within the second limb of the test from Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145 (Ex)); Environmental Systems Pty Ltd v Peerless Holdings Ltd [2008] VSCA 26, (2008) 19 VR 358, 386–87 [87] (Nettle JA) (any loss beyond the ‘normal measure’ of damages); Regional Power Corp v Pacific Hydro Group Two Pty Ltd [No 2] [2013] WASC 356, (2013) 46 WAR 281 (a contextual approach). See also McMeel (2017) 640–43 [21.57]–[21.70]. The Court of Appeal of England and Wales recently queried the English approach: Transocean Drilling UK Ltd v Providence Resources plc [2016] EWCA Civ 372, [2016] 2 Lloyd’s Rep 51, 54 [15] (Moore-Bick LJ) (The GSF Arctic III). 254 See, eg, Regional Power Corp v Pacific Hydro Group Two Pty Ltd [No 2] [2013] WASC 356, (2013) 46 WAR 281, 298–300 [108]–[114] (Kenneth Martin J); Patersons Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321, (2015) 108 ACSR 483, 508 [131] (Mitchell J) (‘What is direct or indirect loss will depend on the circumstances of the particular case’). 255 McCann v Switzerland Insurance Australia Ltd [2000] HCA 65, (2000) 203 CLR 579 (McCann). 256 See [6-75]–[6-79].

234  Role of Interpretation in Contract Law in obtaining the secret commission and making related misrepresentations that satisfied the contractual description?257 [7-48]   A rule in a contract is also occasionally defined in general terms not because vague language is used per se, but because the contract has to be construed to deal with circumstances not foreseen at the time of contracting. In such cases, the rule inferred from the choice of words in the contract may be imprecise.258 For example, Victoria v Tatts Group Ltd259 involved a 20-year gaming machine licence agreed as part of establishing a duopoly in the industry. Clause 7.1 provided for compensation in the event of non-renewal of the licence at the end of the term. However, under clause 7.2, no such compensation was payable if no ‘new gaming operator’s licence’ was issued ‘to any person’. Near the end of the term, the Victorian government decided to disband the duopoly and to issue licences direct to venue operators (some 27,500 in total). As a matter of interpretation, the original licensee argued that compensation was payable upon issue of a statutory authority entitling the holder to substantially the same rights as under the duopolistic licence. The High Court rejected the licensee’s interpretation.260 However, it was accepted at first instance261 and in the Court of Appeal of the Supreme Court of Victoria.262 This left much work to be done in characterising the form of licence in fact issued to determine whether it conveyed substantially the same rights as the duopolistic licence.263 This was a process of factual characterisation. Such a process is conceptually distinct from that involved in legal characterisation.

Legal Characterisation [7-49]   Legal characterisation is an amorphous concept; it is a complex cognitive process. Like factual characterisation, it is often seen as part of ‘construction’.264 But legal characterisation and interpretation are distinct techniques.265 In essence, 257 See McCann [2000] HCA 65, (2000) 203 CLR 579, 588 [17] (Gleeson CJ), 597 [61]–[62] (Gaudron J), 608 [88] (fn 88) (Kirby J), 618 [121], 623 [138] (Hayne J), 642 [198] (Callinan J) (dissenting). 258 Similarly, a rule implied in fact may be in broad terms such that the dispute also focuses on whether the term is triggered: see, eg, Ali [2017] UKPC 2, [2017] ICR 531, 539 [19] (Lord Hughes) (an implied term in an employment contract provided for waiver of repayment of a study loan if the employer prevented the employee from completing 5 years of service – the employer’s offer of voluntary redundancy (accepted by the employee) did not trigger the implied term). 259 Victoria v Tatts Group Ltd [2016] HCA 5, (2016) 90 ALJR 392. 260 See [6-74]. 261 [2014] VSC 302, [95] (Hargrave J). 262 [2014] VSCA 311, [147] (the Court). 263 See [2014] VSC 302, [150]–[172] (Hargrave J); [2014] VSCA 311, [165]–[209] (the Court). 264 See, eg, Wong Mee Wan v Kwan Kin Travel Services Ltd [1996] 1 WLR 38, 42–43 (Lord Slynn) (PC) (‘a matter of construction’). cf F Dawson, ‘Determining Penalties as a Matter of Construction’ [2016] LMCLQ 207, 214 (an ‘unusual meaning’ for the term ‘construction’). 265 See McMeel (2017) 19 [1.30] (‘related but distinct’); Calnan (2017) 97–99 [5.83]–[5.90]; J Allsop, ‘Characterisation: Its Place in Contractual Analysis and Related Enquiries’ in S Degeling, J Edelman and J Goudkamp (eds), Contract in Commercial Law (Thomson Reuters, 2016) 120 (‘separate existence as a conceptual process’).

Characterisation  235 legal characterisation involves the determination whether a legal component in a doctrinal (or statutory) rule is satisfied. Usually, the process requires the characterisation of a contract, a rule in a contract, or some other document, so as to determine whether it meets legal criteria.266 For example, a rule imposing a detriment for breach must be characterised to determine whether it is void as a penalty;267 a rule providing for the creation of a charge over property may need to be characterised to determine whether it is fixed or floating;268 a retention of title clause may need to be characterised to determine whether it creates a new security interest;269 an offer needs to be characterised to determine whether it is an offer to enter into a unilateral or synallagmatic contract;270 and a contract may need to be characterised to determine whether it falls within a particular category,271 for example, lease or licence,272 contract of service or contract for service,273 domestic or commercial,274 and so on.275 [7-50]   It is not entirely clear how legal characterisation works or how it relates to interpretation. On one view, the characterisation process must follow interpretation; the rules that make up a contract must be defined before either a rule, or the contract as a whole, is characterised.276 The difficulty with this demarcation is that the process of characterisation often turns on the resolution of a particular question of intention277 and such questions are sometimes resolved through interpretation.278 Hence, the characterisation process occasionally employs interpretation, rather than simply follows it. For example, the doctrinal rules that determine common law termination rights require a process of legal 266 cf McMeel (2017) 19–22 [1.30]–[1.32]; Carter (2013) 65–66 [2-30]; Allsop (n 265) 120 (‘the evaluation of circumstances to draw a conclusion, often a taxonomical conclusion’). 267 Paciocco v Australia & New Zealand Banking Group Ltd [2016] HCA 28, (2016) 258 CLR 525, 558 [73], 574–75 [146] (Gageler J), 602 [243] (Keane J) (Paciocco); Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50, (2015) 236 FCR 199, 233 [95] (Allsop CJ). cf McMeel (2017) 715 [24.16]. 268 Agnew v Inland Revenue Commissioner [2001] UKPC 28, [2001] 2 AC 710, 725 [32] (Lord Millett) (a process of ‘categorisation’). 269 Re Bond Worth Ltd [1980] Ch 228, 245–68 (Slade J) (Ch); McMeel (2017) 700–03 [23.44]–[23.51]. 270 cf Blue v Ashley [2017] EWHC 1928 (Comm), [51] (Leggatt J). 271 For example, a contract needs to be characterised to determine whether terms are implied in law: see, eg, Wong Mee Wan v Kwan Kin Travel Services Ltd [1996] 1 WLR 38, 42–43 (Lord Slynn) (PC); McMeel (2017) 340 [9.39]. 272 See [7-52]. 273 See, eg, Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385, 389–90 (Lord Fraser) (PC). 274 See [7-57]. 275 For example, a contract must be characterised to determine whether it is one of guarantee or indemnity for the purpose of the Statute of Frauds 1677 (UK): see Carter (2013) 65 [2-30]. Similarly, a contract must be characterised to determine whether it is one of insurance for the purpose of statutory and common law rules: see Allsop (n 265) 114–15. 276 See Agnew v Inland Revenue Commissioner [2001] UKPC 28, [2001] 2 AC 710, 725 [32] (Lord Millett) (‘a two-stage process’); Radaich v Smith [1959] HCA 45, (1959) 101 CLR 209, 222 (Windeyer J); Calnan (2017) 98 [5.84]. 277 See [7-55]–[7-72]. 278 For example, interpretation often plays a role in determining whether a contract is a lease or licence: see [7-52].

236  Role of Interpretation in Contract Law characterisation (ie, the relevant term must be categorised as essential, intermediate or a mere warranty), and the correct categorisation is usually determined as a matter of intention, occasionally on an interpretive basis.279 [7-51]   Legal characterisation does not, however, necessarily involve an intentional enquiry. In fact, such a focus is often denied.280 Instead, in many instances, the enquiry is largely factual.281 Hence, the ‘parties own nomenclature or “labelling”’ are often ignored and the courts are ‘willing to have recourse to the widest possible evidence, including prior dealings and subsequent actings in order to determine the reality of the transaction’.282 In addition, the process is commonly guided by precedent283 or matters of policy.284 For example, as Allsop J remarked, extra-curially: [Characterisation] is the evaluation of circumstances to draw a conclusion, often a taxonomical conclusion, and often one that is contestable, about broadly expressed principles anchored in the honest and fair undertaking of business. That process always calls upon a body of values, private and public, that inform the logical and intuitive reasoning process involved.285

To similar effect, McMeel emphasises the policy element in the process: [Q]uestions of characterization, whilst related to pure questions of construction, are different. They should be approached by looking at substance, not form and labels, and informed by the public policy underlying the need to carry out the exercise.286

[7-52]   The nature of legal characterisation, and the extent to which intention and interpretation play a role in it, depends on the particular legal criteria to be satisfied. For example, one of the most common uses of legal characterisation is to determine whether a contract is a lease or a licence for the purpose of applying statutory and doctrinal rules.287 To amount to a lease, the contract must grant a legal right of exclusive possession for a term.288 Whether the contract contains such a grant is usually approached as a matter of intention. Ordinarily, such intention is

279 See [7-63]–[7-65]. 280 See, eg, Paciocco [2016] HCA 28, (2016) 258 CLR 525, 602 [243] (Keane J) (penalties); Agnew v Inland Revenue Commissioner [2001] UKPC 28, [2001] 2 AC 710, 725 [32] (Lord Millett) (characterising a charge as fixed or floating). 281 cf Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 333. 282 McMeel (2017) 20 [1.30]. cf Lewison (2015) 513–19 [9.07]; Lewison and Hughes (2012) 426–30 [9.07]. 283 See [7-63] (n 367). 284 For example, the determination whether an allegedly penal clause is proportionate or extravagant appears to involve a policy judgement: see [7-53]. 285 Allsop (n 265) 120. 286 McMeel (2017) 22 [1.32]. See also McMeel (2017) 20 [1.30] (questions of characterisation ‘are not pure questions of construction because policy questions are more prominent’). 287 See McMeel (2017) 20 [1.30]; Carter (2013) 66 [2-30], 386 [11-31]. 288 Street v Mountford [1985] AC 809, 826–27 (Lord Templeman) (HL). See also Radaich v Smith [1959] HCA 45, (1959) 101 CLR 209, 214 (McTiernan J), 217 (Taylor J), 220 (Menzies J), 222 (Windeyer J).

Characterisation  237 ascertained through interpretation.289 The mere fact that the contract is labelled a ‘licence’ is not determinative.290 The contract is construed as a whole to determine whether a grant of exclusive possession was intended. For example, in Radaich v Smith,291 a ‘licence’ to use a premises for a milk bar was characterised as a lease. It was clear that a right to exclusive possession was objectively intended in agreeing the deed; that is, such an intention was established as a matter of interpretation. In particular, the deed provided that the shop operator: (i) was obliged to open at all times permitted by law; (ii) was responsible for stock and plant on site; and (iii) had to give up possession at the end of the term.292 [7-53]   By comparison, the role of interpretation in characterising a clause to determine whether it is penal appears to be quite limited. The rule must be defined through interpretation to establish whether it imposes a detriment on breach and to determine the quantum or nature of the agreed detriment. But the remainder of the process seems to be factual or value-laden. Under the modern test, the court must assess whether the detriment is out of proportion to,293 or extravagant, exorbitant or unconscionable with regard to,294 any legitimate interest of the innocent party.295 It is hard to see how the articulation of the relevant legitimate interest and the determination of proportionality or extravagance are matters of intention.296 The former seems more accurately a question of fact; the latter, a ‘value judg[e]ment’.297 [7-54]  The nature of legal characterisation and the role that it plays in contract law is an issue that warrants further scholarly investigation. In particular, it is not clear when a rule contains a legal component or legal criteria that must be satisfied through legal characterisation. Nor is it clear what is involved 289 Street v Mountford [1985] AC 809, 825–26 (Lord Templeman); Radaich v Smith [1959] HCA 45, (1959) 101 CLR 209, 222 (Windeyer J). Query whether the intention is also often implied or ascertained as a question of fact: see, eg, Street v Mountford [1985] AC 809, 821 (Lord Templeman). 290 Radaich v Smith [1959] HCA 45, (1959) 101 CLR 209, 214 (McTiernan J); Street v Mountford [1985] AC 809, 821 (Lord Templeman). 291 Radaich v Smith [1959] HCA 45, (1959) 101 CLR 209. 292 ibid 215 (McTiernan J), 217 (Taylor J), 221 (Menies J), 224–25 (Windeyer J). 293 Cavendish Square Holdings BV v Makdessi [2015] UKSC 67, [2016] AC 1172, 1204 [32] (Lord Neuberger and Lord Sumption) (Lord Carnwath agreeing) (Cavendish); Paciocco [2016] HCA 28, (2016) 258 CLR 525, 557 [69] (Kiefel J) (French CJ agreeing). 294 Cavendish [2015] UKSC 67, [2016] AC 1172, 1247 [152] (Lord Mance), 1278 [255] (Lord Hodge), 1285–86 [293] (Lord Toulson); Paciocco [2016] HCA 28, (2016) 258 CLR 525, 612 [270] (Keane J) (quoting Lord Hodge in Cavendish). See further Lord Hope, ‘The Law on Penalties – A Wasted Opportunity?’ (2016) 33 Journal of Contract Law 93, 104. 295 See further McMeel (2017) 709–10 [24.02], 713–17 [24.07]–[24.23]. 296 Intention would play a more prominent role if the test was simply whether the clause had a punitive purpose: see Paciocco [2016] HCA 28, (2016) 258 CLR 525, 578 [158] (Gageler J). cf Cavendish [2015] UKSC 67, [2016] AC 1172, 1202–03 [28] (Lord Neuberger and Lord Sumption) (‘the penal character of a clause depends on its purpose’). 297 Cavendish [2015] UKSC 67, [2016] AC 1172, 1284 [287] (Lord Hodge). See also Allsop (n 265) 114. cf McMeel (2017) 715 [24.16] (the fact that the determination is a matter of substance not form ‘may mean it is more properly described as an exercise in characterization or categorization, rather than pure construction’).

238  Role of Interpretation in Contract Law in the characterisation process. Depending on the circumstances, it may involve interpretation, it may be a purely factual enquiry, or it may be driven by considerations of policy or precedent. Despite these uncertainties, what is clear is that legal characterisation is a recognised feature of contract law – it is often essential in the application of contract doctrine.

7.6.  Contract Doctrine and Non-Interpretive Inferences of Intention Principle 12: Contract doctrine occasionally requires a conclusion regarding the objective intention of the parties, usually as part of the process of legal characterisation. If the contract text addresses the relevant issue, intention can be inferred as a matter of interpretation. If the contract text does not address the issue, intention is established on a non-interpretive basis, that is, as a question of fact or by presumption. [7-55]   Contract doctrine consists of the numerous rules established by precedent that regulate matters ranging from formation and performance to termination and the scope of secondary obligations.298 Factual and legal characterisation usually determine whether such rules apply in a given case.299 Legal characterisation involves the determination whether legal criteria in a rule are satisfied.300 Often as part of the process of legal characterisation, contract doctrine requires the resolution of a specific question of intention as ‘a matter of construction’. For example, the doctrinal rules that govern contract performance require constructional conclusions as to the dependence301 and divisibility302 of contractual obligations. To similar effect, a contract term must be classified as ‘a matter of construction’ to determine whether a breach of the term gives rise to a common law termination right.303 Likewise, the frustration doctrine needs a constructional determination as to whether the risk of an unforeseen event has been assumed.304 These are but a few examples. Doctrine requires the resolution of many other questions of intention apparently as ‘a matter of construction’, including whether a contractual right

298 See [7-04]. 299 See [7-44]–[7-54]. 300 See [7-49]–[7-54]. 301 See, eg, Kingston v Preston (1773) 2 Doug 689; 99 ER 437 (KB); Burton v Palmer [1980] 2 NSWLR 878, 895 [76] (Mahoney JA) (NSWCA); Carter, Contract Law in Australia (n 5) 631 [28-05]; Peel (n 5) 908–10 [17-020]–[17-023]. 302 See, eg, Purcell v Bacon [1914] HCA 86, (1914) 19 CLR 241, 265 (Isaacs, Gavan Duffy and Rich JJ) (overturned on other grounds: (1916) 22 CLR 307 (PC)). 303 See [7-63]–[7-65]. 304 See [7-66]–[7-71].

Contract Doctrine and Non-Interpretive Inferences of Intention  239 is personal such that it cannot be assigned,305 whether an uncertain clause can be severed,306 whether a deposit is forfeited,307 whether a clause is penal,308 whether a document was executed as a deed or simple contract,309 whether a preliminary agreement was intended to be binding,310 and whether the aim of a contract was to provide enjoyment (for the purpose of awarding damages for distress).311 Even remoteness of loss was controversially labelled an interpretive issue in Transfield Shipping Inc v Mercator Shipping Inc.312 Further, in Australia, leading authorities on interpretation are often cited in cases dealing with issues regarding contract formation, such as intention to create legal relations313 and inferred agreement.314 [7-56]  The relationship between interpretation and contract doctrine is complex.315 It may well be too difficult to explain with precision. However, it is clear that most questions of intention required by contract doctrine are not resolved through interpretation; that is, the intention is not inferred from the choice of words in the contract. This is because the contract text rarely provides an answer. Hence, in such cases, the question is resolved through a different cognitive process. That is to say, the relevant intention is established on a non-interpretive basis:316 it is determined as a matter of presumption or it is proved by evidence as a matter of fact. If intention is established as a matter of fact, evidence of subjective intention (and other evidence excluded in interpretation) is usually inadmissible.317 Instead, the relevant intention is proved by analysing the same limited material 305 See, eg, Leveraged Equities Ltd v Goodridge [2011] FCAFC 3, (2011) 191 FCR 71, 115 [363] ­(Jacobson J) (‘the question is essentially one of construction of the contract’). 306 See, eg, Purcell v Bacon [1914] HCA 86, (1914) 19 CLR 241, 249–50 (Griffiths J) (overturned on other grounds: (1916) 22 CLR 307) (PC)). 307 Howe v Smith (1884) 27 Ch D 89, 97–98 (Bowen LJ) (CA). 308 Cavendish [2015] UKSC 67, [2016] AC 1172, 1194 [9], 1202 [28] (Lord Neuberger and Lord Sumption), 1274 [243] (Lord Hodge). See further [7-53]. 309 400 George Street (Qld) Pty Ltd v BG International Ltd [2010] QCA 245, [2012] 2 Qd R 302, 316 [30]–[32] (Muir JA). But see N Seddon, Seddon on Deeds (Federation Press, 2015) 42–47 [2.5]. 310 Godecke v Kirwan [1973] HCA 38, (1973) 129 CLR 629, 638 (Walsh J); Lucke v Cleary [2011] SASCFC 118, (2011) 111 SASR 134, 149–50 [56]–[59] (Stanley J). See further [7-62]. 311 Baltic Shipping Co v Dillon [1993] HCA 4, (1993) 176 CLR 344, 371 (Brennan J). 312 Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48, [2009] 1 AC 61, 71 [25] (Lord Hoffmann). See further Burrows, ‘Lord Hoffmann and Remoteness in Contract’ (n 24). 313 See, eg, Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8, (2002) 209 CLR 95, 105–06 [24]–[26] (Gaudron, McHugh, Hayne and Callinan JJ) (Ermogenous) (‘Although the word “intention” is used in this context, it is used in the same sense as it is used in other contractual contexts’). But see Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27, (2000) 22 WAR 101, 111 [26] (Ipp J). 314 Kriketos v Livschitz [2009] NSWCA 96, (2009) 14 BPR 26,717, 26,735 [106]–[108] (McColl JA). 315 For recent discussions of the topic, see, eg, S Waddams, ‘Contract Interpretation in Relation to Other Aspects of Contract Law’ (2017) 34 Journal of Contract Law 70; Mitchell (2019) ch 4; Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32). See also JW Carter, ‘Commercial Construction and Contract Doctrine’ (2009) 25 Journal of Contract Law 83. 316 cf Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 328–29 (issues of ‘unexpressed intention’ are resolved through contract doctrine, presumptions of intention and ‘other’ bases, including through ‘factual conclusions’ and ‘construction in its orthodox interpretative role’). 317 As to the nature of such evidence, see [3-30]. But note [7-61] (text at nn 351–52) and [7-62] (text at n 360).

240  Role of Interpretation in Contract Law available in interpretation.318 The fundamental difference is that the focus is not the same. Intention is established as a matter of fact – it is not inferred from the choice of words in the contract. The following questions of intention are usually resolved on this basis: (i) intention to contract (for the purpose of determining whether a contract is formed); (ii) intention as to whether a term is essential (for the purpose of establishing common law termination rights); and (iii) intention to assume a risk (for the purpose of determining whether a contract is frustrated). A non-interpretive conclusion regarding intention is usually required in such cases because the contract text does not contain sufficient evidence of intention. Each of these examples is addressed below. The analysis begins with intention to contract.

Intention to Contract [7-57]   To form a contract, parties must intend to contract: the parties must intend to create legal relations319 and the parties must intend to be immediately bound.320 Traditionally, intention to create legal relations has been established as a matter of rebuttable presumption.321 The presumptions depend on the legal characterisation of the contract:322 is it a social or domestic agreement or a commercial agreement?323 In the case of a domestic arrangement, it is presumed that legal relations were not intended.324 Conversely, if the agreement is commercial in nature, intention is presumed.325 The presumptions can be rebutted by interpretive and non-interpretive conclusions regarding intention. An interpretive inference is only possible if the contract text addresses the issue of intention to create legal relations.326 To rebut the presumption regarding commercial dealings, an interpretive inference negating intention is necessary; that is, the presumption is only rebutted by inference from clear words agreed in the contract.327 By comparison, the presumption that a domestic agreement 318 cf Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 328. As to the scope of interpretive materials, see [3-05]–[3-32]. 319 Carter, Contract Law in Australia (n 5) 175 [8-01]; Chitty (n 5) 309 [2-168]. 320 See McMeel (2017) 431–32 [14.14]–[14-16], 433–35 [14.19]–[14.20]; Seddon and Bigwood (n 5) 250–55 [5.19]; Carter, Contract Law in Australia (n 5) 101–05 [5-02]–[5-06]. 321 See M Furmston and GJ Tolhurst, Contract Formation: Law and Practice, 2nd edn (Oxford University Press, 2016) 254–63 [10.02]–[10.17]; Burrows, A Restatement of the English Law of Contract (n 5) 71 §10. 322 See further [7-49]–[7-54]. 323 cf Furmston and Tolhurst (n 321) 261 [10.13] (‘a problem of categorisation’). 324 See, eg, Balfour v Balfour [1919] 2 KB 571 (CA); Cohen v Cohen [1929] HCA 15, (1929) 42 CLR 91; Jones v Padavatton [1969] 1 WLR 328 (CA); Carter, Contract Law in Australia (n 5) 177–79 [8-03]–[8-04]; Furmston and Tolhurst (n 321) 264–71 [10.20]–[10.33]. 325 See, eg, Edwards v Skyways [1964] 1 All ER 494 (QB); Carter, Contract Law in Australia (n 5) 179–81 [8-05]–[8-07]; Furmston and Tolhurst (n 321) 271–81 [10.34]–[10.58]. 326 cf R v Lord Chancellor’s Department, Ex parte Nangle [1991] ICR 743, 751–52 (insufficient textual foothold) (DC); Chitty (n 5) 313 [2-171]. 327 See [7-59].

Contract Doctrine and Non-Interpretive Inferences of Intention  241 is not intended to be binding can be rebutted by a non-interpretive conclusion regarding intention; that is, it can be rebutted by establishing intention to create legal relations as a matter of fact.328 [7-58]   Under Australian law, it is unclear whether the presumptive approach applies. Following Ermogenous,329 it may be that intention to create legal relations is simply determined on an objective basis by reference to the admissible materials.330 For example, in Ashton v Pratt,331 a lack of contractual intention was established taking into account: the relationship between the parties, the language used, and the lack of certainty regarding key terms.332 [7-59]  Whether or not the presumptive approach is applied, interpretation plays a limited role in determining intention to create legal relations. This is because the contract text rarely addresses the issue.333 Hence, intention to create legal relations is rarely determined as a matter of interpretation; it is rarely determined by inference from the choice of words in the contract. The few exceptions involve negative inferences of intention in the commercial context.334 In broad terms, two types of case arise. The first is that in which the contract clearly disavows contractual intention through a so-called honour clause.335 For example, in Rose & Frank Co v JR Crompton & Bros Ltd,336 an agency agreement stated: This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned, to which they each honourably pledge themselves.

On an interpretive basis, it could be inferred that the parties did not intend to create legal relations. By contrast, in Edwards v Skyways,337 a redundancy agreement between an employer company and a pilot stated that [the employee] would be given an ex gratia payment equivalent to the company’s contribution to the pension fund.

328 See [7-61]. 329 Ermogenous [2002] HCA 8, (2002) 209 CLR 95. 330 ibid 105–06 [24]–[26] (Gaudron, McHugh, Hayne and Callinan JJ). Contrast Sion v NSW Trustee Guardian [2013] NSWCA 337, [40] (Emmett JA); Shahid v Australasian College of Dermatologists [2008] FCAFC 72, (2008) 168 FCR 46, 109 [211] (Jessup J). 331 Ashton v Pratt [2015] NSWCA 12, (2015) 88 NSWLR 281. 332 ibid 295–98 [69]–[93] (Bathurst CJ). 333 cf HK Lücke, ‘The Intention to Create Legal Relations’ (1970) 3 Adelaide Law Review 419, 421 (‘not very frequent’). 334 See Chitty (n 5) 314–15 [2-172]. 335 See Lücke, ‘The Intention to Create Legal Relations’ (n 333) 420–22; Peel (n 5) 191 [4-008]; Carter, Contract Law in Australia (n 5) 180 [8-06]; Furmston and Tolhurst (n 321) 272–81 [10.35]–[10.58]. 336 Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445 (HL). 337 Edwards v Skyways [1964] 1 All ER 494 (QB).

242  Role of Interpretation in Contract Law The mere description of the payment as ‘ex gratia’ did not rebut the presumption that a commercial settlement was intended to create legal relations.338 [7-60]   The second type of case in which intention to create legal relations is established through interpretation involves agreements expressed as ‘letters of comfort’ or ‘letters of commitment’. In such cases, the language is often insufficient to establish a contractual promise.339 For example, in Kleinwort Benson Ltd v Malaysia Mining Corpn Berhad,340 a parent company did not evince an intention to create legal relations by issuing a ‘letter of comfort’ stating: [I]t is our policy to ensure that the business of [the subsidiary] is at all times in a position to meet its liabilities to [its financier].

The letter merely contained a statement of policy – there was no promise that ‘such policy would be continued in future’.341 By comparison, in Norman v FEA Plantation Ltd,342 a parent company was bound by a ‘letter of commitment’, which relevantly stated: We understand that in order to comply with its cash needs requirements as set out in ASIC Regulatory Guide 166 (RG 166), [the subsidiary company] requires an ‘eligible provider’ to provide a commitment to provide cash to [the subsidiary company] to enable it to satisfy its financial obligations. [The parent company] qualifies as an ‘eligible provider’. [The parent company] hereby agrees to provide this commitment to [the subsidiary company] and in doing so, agrees to provide [the subsidiary company] with sufficient cash to meet its ongoing financial obligations and to satisfy its cash needs requirements from time to time.

The agreement to ‘provide this commitment’, in the third paragraph, ‘manifested an intention to provide a legally binding commitment’,343 taking into account the introductory paragraphs in the letter and its evident commercial object.344 [7-61]   As the limited scope of the preceding examples suggests, intention to create legal relations is usually established on a non-interpretive basis, either as a matter of presumption or as a matter of fact. Typically, intention to create legal relations is established as a matter of fact in the domestic setting, that is, to rebut the domestic presumption. The enquiry is largely ‘objective’345 in that, in most 338 See also R v Lord Chancellor’s Department, Ex parte Nangle [1991] ICR 743, 751–52 (Stuart-Smith LJ) (DC) (contractual intention with respect to the employment of a civil servant was not negatived by a provision describing the relationship as ‘regulated under the prerogative and based on personal appointment’ and not ‘a contract of employment enforceable in the courts’). 339 Peel (n 5) 198–99 [4-021]; McMeel (2017) 432–33 [14.17]–[14.18]; Furmston and Tolhurst (n 321) 189–91 [7.60]–[7.67]. 340 Kleinwort Benson Ltd v Malaysia Mining Corpn Berhad [1989] 1 WLR 379 (CA). 341 ibid 388 (Ralph Gibson LJ). 342 Norman v FEA Plantation Ltd [2011] FCAFC 99, (2011) 195 FCR 97. 343 ibid 109 [99] (the Court). 344 ibid 108–11 [88]–[121] (the Court). 345 See [7-61] (n 353).

Contract Doctrine and Non-Interpretive Inferences of Intention  243 cases, intention is inferred from the nature of the agreement or background.346 For example, the agreement may have ‘very significant commercial characteristics’ that ‘strongly support an inference that [legal relations were intended]’.347 Alternatively, the agreement may lack a clear consensus on key terms, thereby suggesting that a binding contract was not intended.348 Or it may be established as a matter of background that a family or spousal relationship had broken down349 or that an apparently domestic agreement served commercial objects,350 such that intention to create legal relations was probable. In some cases, evidence of subsequent conduct is taken in account.351 For example, severe detriment following breach of an agreement suggests that the agreement was meant to be binding.352 However, evidence of subjective intention is excluded;353 it is a matter for the law of mistake if a party claims to be mistaken as to contractual intention.354 [7-62]   Even if parties intended to create legal relations, in some instances, there is a question whether the parties intended to be immediately bound.355 These are cases involving preliminary agreements: ‘Heads of Agreement’, ‘Letters of Intent’ and so on. Under Australian law, the leading authority, Masters v Cameron,356 provides that the question is resolved as a matter of categorisation or characterisation. If the case falls within particular categories, the parties intend to be immediately bound.357 However, more recent judgments at intermediate level 346 But see Ermogenous [2002] HCA 8, (2002) 209 CLR 95, 105 [25] (Gaudron, McHugh, Hayne and Callinan JJ) (the relevant materials are ‘so varied as to preclude the formation of any prescriptive rules’). 347 Ailakis v Olivero (No 2) [2014] WASCA 127, (2014) 100 ACSR 524, 541 [91] (Martin CJ) (an agreement to assign shares). 348 cf Popiw v Popiw [1959] VR 197 (VSC); Ashton v Pratt [2015] NSWCA 12, (2015) 88 NSWLR 281. See also Seddon and Bigwood (n 5) 229–30 [5.2]. 349 See, eg, Popiw v Popiw [1959] VR 197 (VSC); Merritt v Merritt [1970] 1 WLR 1211 (CA); Roufos v Brewster (1971) 2 SASR 218; Snelling v John G Snelling Ltd [1973] QB 87, 93 (Ormrod J) (QB). 350 See, eg, Roufos v Brewster (1971) 2 SASR 218 (an agreement between a couple and their son-in-law for the latter to transport the former’s truck from Adelaide to Cooper Pedy in South Australia benefited each party’s respective business interests). 351 Furmston and Tolhurst (n 321) 270 [10.31]. 352 See, eg, Riches v Hogben [1986] 1 Qd R 315, 329 (Williams J) (QSC). 353 Ermogenous [2002] HCA 8, (2002) 209 CLR 95, 105–06 [25] (Gaudron, McHugh, Hayne and Callinan JJ); RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [2010] UKSC 14, [2010] 1 WLR 753, 771 [45] (Lord Clarke) (for the Court); Merritt v Merritt [1970] 1 WLR 1211, 1213 (Lord Denning MR) (CA); Chitty (n 5) 312–13 [2-171]. Contrast Parker v Clark [1960] 1 WLR 286, 293–94 (Devlin J) (Assizes); Furmston and Tolhurst (n 321) 271 [10.34]. 354 See Seddon and Bigwood (n 5) 230 [5.3]. cf Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, 330–31 (Mahoney JA) (CA). 355 See [7-57] (n 320). 356 Masters v Cameron [1954] HCA 72, (1954) 91 CLR 353. 357 ibid 360 (Dixon CJ, McTiernan and Kitto JJ). Under the Masters v Cameron test, parties intend to be bound immediately if: (i) ‘the parties have reached finality in arranging all the terms of their bargain … but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect’; or (ii) ‘the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document’. An additional category was recognised in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622, 628 (McLelland J) (NSWSC).

244  Role of Interpretation in Contract Law align with the English approach. The question is essentially a matter of objective intention.358 The question is resolved through interpretation if the contract text addresses the issue. For example, a negative inference is usually drawn from the words ‘subject to contract’.359 However, in the absence of an adequate textual reference, intention to be immediately bound is established on a non-interpretive basis, that is, as a matter of fact taking into account evidence of negotiations and subsequent conduct.360 In most cases, the focus is the extent to which an apparent intention to be immediately bound is qualified by words or conduct.361 Hence, in Vantage Systems Pty Ltd v Priolo Corp Pty Ltd,362 parties who agreed a ‘proposal’ for re-lease of a commercial building were held to have an intention to be bound immediately. The ‘proposal’ contained a complete set of terms and the only qualification was that the landlord’s agent had stated: ‘we will arrange for [the landlord’s] solicitors to prepare the draft documentation’.363 Like with respect to the question whether parties intend to create legal relations, the question of intention to be immediately bound is often, if not usually, resolved on a non-interpretive basis. But the focus remains objective in that evidence of subjective intention cannot be considered.364 A similar objective, but non-interpretive approach to establishing intention is employed in the context of common law termination rights.

Termination for Breach at Common Law [7-63]  Whether a party can terminate for breach at common law depends on the classification of the term that is breached. The relevant term can be either: 358 See, eg, Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601, 619 (Lloyd LJ) (CA); GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, 634 (McHugh JA) (NSWCA) (‘the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances’); Pavlovic v Universal Music Australia Pty Ltd [2015] NSWCA 313, (2015) 90 NSWLR 605, 617 [69] (Beazley JA) (‘the Masters v Cameron classifications are no longer, if ever they were, applied as strict categories into which such cases must fall’). See also Furmston and Tolhurst (n 321) 206 [9.21]. 359 See, eg, Masters v Cameron [1954] HCA 72, (1954) 91 CLR 353. cf Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601, 619 (Lloyd LJ) (CA); Furmston and Tolhurst (n 321) 206–07 [9.22]. 360 See, eg, RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [2010] UKSC 14, [2010] 1 WLR 753, 772 [47] (Lord Clarke) (for the Court) (‘All will depend upon the circumstances’); Australian Broadcasting Corp v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 551 (Gleeson CJ) (NSWCA); Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149, [66]–[69] (a ‘fact-specific objective finding of the parties’ intention’) (Giles JA); Furmston and Tolhurst (n 321) 200–02 [9.08]–[9.11]. 361 Cf Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601, 611 (Bingham J) (QB) (‘[I]t is open to parties by their words and conduct to make clear that they do not intend to be bound until certain terms are agreed … The parties may [also] by their words and conduct make it clear that they do intend to be bound, even though there are other terms yet to be agreed’). 362 Vantage Systems Pty Ltd v Priolo Corp Pty Ltd [2015] WASCA 21, (2015) 47 WAR 547. 363 ibid 572 [117] (Buss JA). See also Stirnemann v Kaza Investments Pty Ltd [2011] SASCFC 77. 364 See, eg, RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [2010] UKSC 14, [2010] 1 WLR 753, 771 [45] (Lord Clarke) (for the Court); Vantage Systems Pty Ltd v Priolo Corp Pty Ltd [2015] WASCA 21, (2015) 47 WAR 547, 568–71 [97]–[107] (Buss JA).

Contract Doctrine and Non-Interpretive Inferences of Intention  245 (i) essential or a ‘condition’ (meaning any breach gives rise to a right to terminate); (ii) intermediate (meaning a fundamental breach gives rise to a right to terminate); or (iii) a warranty (meaning no right to terminate arises for breach).365 This is a process of legal characterisation.366 The correct classification may be governed by precedent.367 However, it is usually designated a matter of ‘construction’,368 and it is resolved, at least in part, as a matter of intention.369 The determinative ­question is whether any breach of the relevant term was meant to give rise to a right to terminate.370 If so, the term is essential. If not, it is an intermediate term or a warranty. The question of intention is resolved on either an interpretive or non-interpretive basis. [7-64]   An interpretive inference of essentiality can be drawn if there is a sufficient textual foothold to ground the inference of intention.371 If a term is described as ‘essential’, this is usually sufficient.372 Likewise, if time is stated to be ‘of the essence’, a time stipulation is an essential term.373 In some cases, the essentiality of a term is made quite clear. For example, in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd,374 ‘many clauses point[ed] overwhelmingly to the conclusion’ that a covenant to pay rent punctually was essential:375 the covenant was described as a ‘fundamental obligation’ (clause 1.13) and an ‘essential term’ (clause 7.1); the lessor was entitled to recover loss of bargain damages for breach (clauses 7.5 and 7.7); and the acceptance of late rent was not to amount to a waiver of essentiality (clause 7.4).376 By comparison, stating that 365 See Carter, Contract Law in Australia (n 5) 279 [13-02]; Chitty (n 5) 1023 [13-019]–[13-020]. 366 See Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711, 723 (Lord Roskill) (HL) (the correct classification depends on the ‘character’ of the obligations created). As to legal characterisation, see further [7-49]–[7-54]. 367 See, eg, Bowes v Chaleyer [1923] HCA 15, (1923) 32 CLR 159, 174 (Isaacs and Rich JJ); Carter, Contract Law in Australia (n 5) 677 [30-14]; Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 330-31. See also [7-65] (nn 393–96). 368 See, eg, Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15, (1987) 162 CLR 549, 556–57 (Mason ACJ, Wilson, Brennan and Dawson JJ) (Ankar); Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711, 714 (Lord Wilberforce), 727 (Lord Roskill) (HL); Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274, 281 (Bowen LJ) (CA); Carter, Contract Law in Australia (n 5) 675 [30-11]; Peel (n 5) 981 [18-044]; Heydon (n 5) 914 [24.200]. cf Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61, (2007) 233 CLR 115, 138 [48] (Gleeson CJ, Gummow, Heydon and Crennan JJ) (Koompahtoo). 369 See, eg, Bettini v Gye (1876) 1 QBD 183, 186–87 (Blackburn J) (QB); Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274, 281 (Bowen LJ) (CA); Koompahtoo [2007] HCA 61, (2007) 233 CLR 115, 140 [56] (Gleeson CJ, Gummow, Heydon and Crennan JJ). 370 See, eg, L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (HL) (Schuler) (discussed at [6-91]–[6-97]). See further Carter and Courtney, ‘Belize Telecom: A Reply to Professor McLauchlan’ (n 89) 256; Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 335. 371 See Peel (n 5) 983 [18-046]. 372 But note Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10, (2008) 234 CLR 237, 255 [47] (the Court) (a question not decided). 373 See, eg, Lombard North Central Plc v Butterworth [1987] QB 527, 535 (Mustill LJ) (CA); Carter, Contract Law in Australia (n 5) 676 [30-12]. 374 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10, (2008) 234 CLR 237. 375 ibid 255 [48] (the Court). 376 ibid 254–55 [47] (the Court).

246  Role of Interpretation in Contract Law an obligation must be performed ‘with all due dispatch’ does not necessarily mean that punctual performance is essential.377 Similarly, merely designating a term to be a ‘condition’ does not automatically render it an essential term.378 In Schuler,379 a clause in a distributorship agreement required a minimum number of customer visits per week and it was labelled a ‘condition’. The manufacturer argued that essentiality could be inferred, as a matter of interpretation, from the label. The manufacturer’s predominantly linguistic interpretation was defeated by consequentialist considerations. The parties could not have intended a termination right to arise for a failure to make any one of 1,400 visits. Describing the clause as a ‘condition’ merely emphasised the significance of the clause for the purpose of an express termination regime.380 Schuler illustrates the usual tension that arises in interpretive disputes regarding essentiality: linguistic verse consequentialist justification. The latter also play a part in non-interpretive conclusions regarding essentiality. [7-65]  Often the essentiality of a term cannot be determined through ­interpretation – it is ‘not discoverable from the words used’.381 Nonetheless, in such cases, essentiality can still be established on a non-interpretive basis, usually as a matter of ‘necessary implication’.382 The broad-brush test looks to whether performance of the stipulation goes to the root of the contract383 or whether the innocent party would not have entered into the contract without being assured of strict or substantial performance of the promise.384 The approach is objective in that evidence of subjective intention is usually inadmissible.385 However, a number of ‘factors’386 come to bear in the exercise, including the likely consequences of breach,387 whether the term can be breached in trivial ways,388 the availability 377 DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12, (1978) 138 CLR 423, 430 (Stephen, Mason and Jacobs JJ) (DTR Nominees). 378 See Carter, Contract Law in Australia (n 5) 676 [30-12]; Seddon and Bigwood (n 5) 1114–15 [21.17]; Chitty (n 5) 1025 [13-025]. 379 Schuler [1974] AC 235 (HL). 380 See [6-91]–[6-97]. 381 Peel (n 5) 981 [18-044]. See also Ankar [1987] HCA 15, (1987) 162 CLR 549, 557 (Mason ACJ, Wilson, Brennan and Dawson JJ) (the language ‘does not provide a clear indication’); Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711, 717 (Lord Scarman) (HL) (‘as commonly happens, the parties do not identify a stipulation as a condition’). 382 Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711, 717 (Lord Scarman) (HL). See also Carter, Contract Law in Australia (n 5) 677–81 [30-13]–[30-19]. 383 Glaholm v Hays (1841) 2 Man & G 257, 268; 133 ER 743, 747 (Tindal CJ) (CP); Associated Newspapers Ltd v Bancks [1951] HCA 24, (1951) 83 CLR 322, 336 (the Court); Peel (n 5) 981 [18-044]. 384 Koompahtoo [2007] HCA 61, (2007) 233 CLR 115, 138 [48] (Gleeson CJ, Gummow, Heydon and Crennan JJ) quoting Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, 641 (Jordan CJ) (NSWSC). 385 Bowes v Chaleyer [1923] HCA 15, (1923) 32 CLR 159, 189 (Higgins J). 386 Ankar [1987] HCA 15, (1987) 162 CLR 549, 557 (Mason ACJ, Wilson, Brennan and Dawson JJ). 387 See, eg, Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274, 281 (Bowen LJ); Carter, Contract Law in Australia (n 5) 679–80 [30-17]. 388 See, eg, Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA) (seaworthiness clause in a time charter); Koompahtoo [2007] HCA 61, (2007) 233 CLR 115, 146 [69] (Gleeson CJ, Gummow, Heydon and Crennan JJ) (an obligation to keep books and records).

Contract Doctrine and Non-Interpretive Inferences of Intention  247 and adequacy of damages,389 the presence of an express termination right,390 the nature of the contract,391 and, perhaps most significantly, the particular features of the breached obligation.392 Some guidelines apply: stipulations as to time receive unique treatment;393 conditions precedent394 and time stipulations395 in commercial contracts are often essential; and terms descriptive of subject matter are ordinarily conditions.396 That said, the analysis is usually bespoke, depending on the unique circumstances of the case.397 For example, in Ankar,398 a guarantor had guaranteed a lessee’s obligations under a lease of machinery. Under the guarantee, the lessor was obliged to notify the guarantor of any breach of the lease by the lessee and any assignment of the leased machinery by the lessee. Clauses 8 and 9 relevantly stated: 8. [The lessor] agrees with [the guarantor] that it will use its best endeavours to ensure that the machinery referred to in the Schedule to the Lease Agreement shall remain in the possession of the Lessee and will notify [the guarantor] should the Lessee propose to sell or assign its interest in any of the said machinery. 9. Upon the Lessee being in default under the Lease Agreement [the lessor] shall agree to notify the [the guarantor] whereupon [the lessor] and [the guarantor] shall consult with a view to determine [sic] what course of action will be taken by [the lessor] following such default.

The lessee defaulted in payment of rent and it assigned the leased machinery. However, the lessor failed to notify the guarantor, in breach of clause 8 and clause 9. The guarantee was silent on the question of essentiality. However, the lessor’s obligations to notify the guarantor were held to be essential because: neither clause was ‘readily enforceable by way of an action for damages’; the purpose of each obligation was ‘to enable the surety to take such action as it [could] to safeguard its position and its interest’; and ‘it was clearly disadvantageous to the surety to be faced with a situation in which it would be liable as surety for a lessee of equipment who no longer enjoyed possession of that equipment, notwithstanding that it remained liable to pay the rent’.399 Hence, Ankar is a 389 See, eg, Carter, Contract Law in Australia (n 5) 680 [30-18]. 390 See, eg, DTR Nominees [1978] HCA 12, (1978) 138 CLR 423, 430 (Stephen, Mason and Jacobs JJ). 391 See, eg, Ankar [1987] HCA 15, (1987) 162 CLR 549 (guarantee); Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711, 715 (Lord Wilberforce) (HL) (time stipulations in mercantile contracts); Carter (n 151) 680–81 [30-19]. 392 See, eg, Carter, Contract Law in Australia (n 5) 680–81 [30-19]; Seddon and Bigwood (n 5) 1118–24 [21.19]. 393 See, eg, Carter, Contract Law in Australia (n 5) 705–08 [30-50]–[30-53]. 394 Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711, 729 (Lord Roskill) (HL); Seddon and Bigwood (n 5) 1114–15 [21.17]. 395 Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711, 716 (Lord Wilberforce) (HL); Carter, Contract Law in Australia (n 5) 706–07 [30-52]. Contrast United Scientific Holdings Ltd v Burnley BC [1978] AC 904, 924 (Lord Diplock) (HL). 396 See, eg, Bowes v Chaleyer [1923] HCA 15, (1923) 32 CLR 159; Carter, Contract Law in Australia (n 5) 681 [30-19]. 397 See, eg, Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274, 281 (Bowen LJ) (CA). 398 Ankar [1987] HCA 15, (1987) 162 CLR 549. 399 ibid 557 (Mason ACJ, Wilson, Brennan and Dawson JJ).

248  Role of Interpretation in Contract Law good example of how contextual, purposive and consequentialist considerations inform a non-interpretive conclusion regarding the essentiality of a contractual provision (for the purpose of establishing a common law termination right). Non-interpretive conclusions regarding the objective intention of the parties also feature in the doctrine of frustration.

Discharge by Frustration [7-66]   The question of frustration of a contract arises if a supervening event either: (i) renders performance impossible or illegal;400 or (ii) frustrates the object of the contract.401 In general terms, to frustrate a contract, the changed circumstances must make performance ‘radically different from that which was undertaken by the contract’.402 In such a case, the contract is frustrated so long as the event was not induced by either party403 and the risk of the event occurring was not allocated to one party or the other.404 Events that usually frustrate a contract include changes in law,405 physical destruction of subject matter,406 and the death or incapacity of a party.407 Prolonged delay may also amount to frustration.408 [7-67]   The theoretical basis of the frustration doctrine has been the subject of debate.409 Occasionally, the doctrine is postulated as a purely interpretive enquiry, with the ultimate question being whether the contract, properly construed, applies in the changed circumstances.410 However, the predominant and more appropriate 400 G Treitel, Frustration and Force Majeure, 2nd edn (Thomson Sweet & Maxwell, 2004) chs 3–6 and 8; Chitty (n 5) 1669 [23-001]; Carter, Contract Law in Australia (n 5) 747–51 [33-11]–[33-17], 752–54 [33-21]–[33-24]. 401 Krell v Henry [1903] 2 KB 740 (CA); Treitel (n 400) ch 7; Peel (n 5) 1055–57 [19-041]–[19-043]; Carter, Contract Law in Australia (n 5) 751–52 [33-18]–[33-20]. 402 Davis Contractors Ltd v Fareham Urban DC [1956] AC 696, 729 (Lord Radcliffe) (HL). 403 Chitty (n 5) 1706 [23-061]. 404 See Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd [2007] EWCA Civ 547, [111] (Rix LJ) (The Sea Angel); Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd [2011] VSCA 116, (2011) 32 VR 255, 273 [70] (Nettle JA); Regional Development Australia Murraylands and Riverland Inc v Smith [2015] SASCFC 160, (2015) 251 IR 317, 345–46 [102], 351–52 [128] (Nicholson J); Chitty (n 5) 1703–04 [23-058]. 405 See, eg, Chitty (n 5) 1682 [23-022], 1682–83 [23-024]. 406 See, eg, Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 (KB); Carter, Contract Law in Australia (n 5) 748 [33-12]. 407 Chitty (n 5) 1689–91 [23-037]–[23-038]. 408 See, eg, Jackson v Union Marine Shipping Co Ltd (1874) LR 10 CP 125 (Ex); The Nema [1982] AC 724, 752 (Lord Roskill) (HL); The Sea Angel [2007] EWCA Civ 547; Carter, Contract Law in Australia (n 5) 767–69 [33-25]; Chitty (n 5) 1688–89 [23-035]. 409 See National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, 687–88 (Lord Hailsham), 693 (Lord Wilberforce), 702 (Lord Simon), 717 (Lord Roskill) (HL); Treitel (n 400) ch 16. 410 See, eg, FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397, 404 (Earl Loreburn) (HL); British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166, 185 (Viscount Simon) (HL); Davis Contractors Ltd v Fareham Urban DC [1956] AC 696, 721 (Lord Reid) (HL); Empresa Exportadora De Azucar v Industria Azucarera Nacional SA [1983] 2 Lloyd’s Rep 171, 187 (Ackner LJ) (CA) (The Playa Larga).

Contract Doctrine and Non-Interpretive Inferences of Intention  249 view is that the doctrine operates as a default ‘rule of law’.411 The aim is ‘to achieve a just and reasonable result’.412 This involves a ‘commercial judg[e]ment’413 and a ‘multi-factorial’ approach.414 Hence, the doctrine involves mixed questions of fact and law.415 It follows that interpretation plays only an auxiliary role.416 First, in a general sense, interpretation establishes the nature of the obligations originally agreed (for the purpose of determining whether performance is rendered impossible or radically different due to a supervening event).417 Second, interpretation is often employed to resolve the question of assumption of risk, that is, to determine whether one party has assumed the risk of the relevant event occurring.418 However, this is not simply an interpretive enquiry; an intended assumption of risk is commonly established by other means.419 [7-68]   In order to infer an assumption of risk as a matter of interpretation, a sufficient textual foothold is required. The paradigm case is ‘where the contract makes [full and complete] provision … for a contingency’;420 that is, the contract specifically allocates the risk of the relevant event to one party. For example, in Budgett & Co v Binnington & Co,421 a bill of lading provided that unloading was at consignee’s risk, fixed the number of lay-days for unloading, and required the payment of demurrage thereafter. Hence, it could be inferred from the choice of words in the contract that the consignee bore the risk of strike causing delay in unloading.422 Similarly, in Achille Lauro Fu Gioacchino & C v Total Societa Italiana per Azioni,423 a voyage charterparty that specified a freight rate for an alternative route to the Suez Canal thereby allocated the risk of closure of the canal to the charterer.424 Likewise, in FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd,425 a ‘restraint of princes’ exclusion in a time charter 411 McMeel (2017) 665 [22.09]–[22.11]. cf Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 330 (‘a default rule expressed as a negative presumption’). 412 J Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep 1, 8 (Bingham LJ) (CA) (The Super Servant Two). 413 Carter (2013) 124 [4-18]. 414 The Sea Angel [2007] EWCA Civ 547, [111] (Rix LJ); Peel (n 5) 1036 [19-008]. 415 Peel (n 5) 1069 [19-067]; The Nema [1982] AC 724, 738 (Lord Diplock) (HL) (‘never a pure question of fact’). 416 cf Carter and Courtney, ‘Unexpressed Intention and Contract Construction’ (n 32) 330 (‘[the] test for frustration is applied by construing the contract’). 417 See Davis Contractors Ltd v Fareham Urban DC [1956] AC 696, 730 (Lord Radcliffe) (HL); Chitty (n 5) 1677 [23-014]. 418 cf Atiyah and Smith (n 7) 188; Heydon (n 5) 890–91 [23.370]. A similar question must be resolved in determining whether a contract is void for common mistake: see, eg, Associated Japanese Bank (International) Ltd v Crédit du Nord SA [1989] 1 WLR 255, 268 (Steyn J) (QB); Chitty (n 5) 632 [6-037]. 419 cf Taylor v Caldwell (1863) 3 B & S 826, 833; 122 ER 309, 312 (Blackburn J) (KB) (‘express or implied warranty’); Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119, 137 (Lord Parmoor) (HL); Seddon and Bigwood (n 5) 1063–66 [19.21]–[19.22] (express or implied assumption of risk). 420 The Playa Larga [1983] 2 Lloyd’s Rep 171, 188 (Ackner LJ) (CA). 421 Budgett & Co v Binnington & Co [1891] 1 QB 35 (CA). 422 See further Peel (n 5) 1070 [19-070]. 423 Achille Lauro Fu Gioacchino & C v Total Societa Italiana per Azioni [1969] 2 Lloyd’s Rep 65. 424 See further Peel (n 5) 1035 [19-007]. 425 FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397 (HL).

250  Role of Interpretation in Contract Law had the effect of allocating to the charterer the risk of government intervention in performance.426 [7-69]   Beyond such obvious cases of allocation, an assumption of risk can be inferred through interpretation from more tenuous textual foundations. For example, from an express allocation of certain risks to one party, it can be inferred that the remaining risks were to be borne by the other party.427 Alternatively, without explicitly allocating a particular risk to either party, a contract may simply make it clear that the parties are to be bound ‘notwithstanding that the supervening event may occur’.428 In such a case, the risk lies where it falls.429 Hence, in Bangladesh Export Import Co Ltd v Sucden Kerry SA,430 a sale of goods was not frustrated by the revocation of government licences (necessary for the sale) because the contract contemplated such an event. In particular, the contract provided that any inability to obtain the licences ‘shall not be justification for declaration of force majeure’.431 [7-70]   Despite the preceding analysis, mere foresight of an event by the parties does not necessarily indicate that risk of the event is assumed by either or both parties; that is, it does not preclude a finding of frustration. If the supervening event is particularly catastrophic, clear words are required to establish an assumption of risk.432 Further, a conclusion that risk has been assumed is often avoided through ‘a process of narrow construction’.433 For example, in Bank Line Ltd v Arthur Capel and Co,434 a time charter was held to be frustrated by the requisition of the vessel prior to commencement of the charter. The charter entitled the charterer to cancel the hire if the vessel was not delivered on time or if the vessel was requisitioned during the charter. The charter relevantly stated: 26. That the steamer shall be delivered under this charter not before April 1, 1915, and should the steamer not have been delivered latest on the 30th day of April, 1915, charterers to have the option of cancelling this charter … 31. Charterers to have option of cancelling this charterparty should steamer be commandeered by Government during this charter. 426 ibid 426–27 (Lord Parker). But see Treitel (n 400) 467 [12-013]; Geipel v Smith (1872) LR 7 QB 404, 412 (Blackburn J) (QB); Jackson v Union Marine Shipping Co Ltd (1874) LR 10 CP 125, 139 (Cleasby B) (Ex). 427 See, eg, Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd [1976] HCA 30, (1976) 133 CLR 671, 677–78 (the Court). But note Intertradex SA v Lesieur-Tourteaux SARL [1978] 2 Lloyd’s Rep 509, 515 (Goff LJ) (CA); Treitel (n 400) 460 [12-007]. 428 Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154, 163 (Viscount Simon). 429 See Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095, [17] (Hamilton J). 430 Bangladesh Export Import Co Ltd v Sucden Kerry SA [1995] 2 Lloyd’s Rep 1 (CA). 431 ibid 5 (Neill LJ). 432 Jackson v Union Marine Shipping Co Ltd (1874) LR 10 CP 125 (Ex) (an exception for delay for perils of the sea in a charter was insufficient to establish an assumption of risk for prolonged delay); Kuwait Supply Co v Oyster Marine Management Inc [1994] 1 Lloyd’s Rep 637, 643 (Rix J) (QB) (The Safeer); Chitty (n 5) 1703–04 [23-058]. 433 Treitel (n 400) 460 [12-005]. But see The Safeer [1994] 1 Lloyd’s Rep 637, 642–43 (Rix J) (QB). 434 Bank Line Ltd v Arthur Capel and Co [1919] AC 435 (HL).

Contract Doctrine and Non-Interpretive Inferences of Intention  251 Adopting a narrow approach to interpretation, the provisions were construed such that the owner had not assumed the risk of requisition prior to commencement of the charter.435 To similar effect, in Metropolitan Water Board v Dick, Kerr & Co Ltd,436 a contract for construction of a reservoir was frustrated by delay due to wartime interruption. A clause provided for an extension of time for delay ‘whatsoever or howsoever occasioned’. The clause stated, in fuller form: The contractor shall complete and deliver up to the Board the whole of the works [within six years] … Provided always that if by reason of any additional works or enlargements of the works (which additions or enlargements the engineer is hereby authorised to make), or for any other just cause arising with the Board or with the engineer, or in consequence of any unusual inclemency of the weather, or general or local strikes, or combination of workmen, or for want or deficiency of any orders, drawings or directions, or by reason of any difficulties, impediments, obstructions, oppositions, doubts, disputes, or differences, whatsoever and howsoever occasioned, the contractor shall, in the opinion of the engineer (whose decision shall be final), have been unduly delayed or impeded in the completion of this contract, it shall be lawful for the engineer, if he shall so think fit, to grant from time to time, and at any time or times by writing under his hand, such extension of time either prospectively or retrospectively.437

The extension of time clause was insufficient to allocate the risk of wartime interruption because it only contemplated ‘temporary difficulties’438 or ‘difficulties arising in the execution of the works’.439 Likewise, in Codelfa440 (not a case involving a catastrophic supervening event, such as war), a provision in a contract to construct a railway tunnel precluded a contractor from recovering additional payment if it was required to undertake ‘measures … to reduce noise and pollution’. Clause S.8(2)(c) stated: The operation of all plant and construction equipment shall be such that it does not cause undue noise, pollution or nuisance. This may require the use of sound insulated compressors and air tools, silencers on ventilating fans and restrictions on the working hours of plant or such other measures as approved by the Engineer. The Contractor shall not be entitled to additional payment if the Engineer requires that measures be taken to reduce noise and pollution.

The High Court of Australia, by majority, held that the clause did not allocate the risk of an injunction for noise disruption restraining working hours – it did not detract from the common assumption that the works would be performed in three eight-hour shifts per day, six days per week, without restriction on Sundays.441

435 See ibid 441–43 (Lord Finlay). 436 Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119 (HL). 437 Emphasis added. 438 [1918] AC 119, 130 (Lord Dunedin). 439 ibid 135 (Lord Atkinson). 440 Codelfa [1982] HCA 24, (1982) 149 CLR 337. 441 ibid 362 (Mason J) (Stephen and Wilson JJ agreeing). See also The Playa Larga [1983] 2 Lloyd’s Rep 171, 187–89 (CA) (frustration not excluded by a force majeure clause).

252  Role of Interpretation in Contract Law Hence, the contract was frustrated. By comparison, in The Safeer,442 a voyage charter was not frustrated when the vessel was detained by the Iraqi army during the Kuwait war causing delay in discharge of cargo. The charter relevantly provided: The Vessel shall have liberty to comply with any directions … as to … discharge, delivery or any other wise whatsoever [sic] … given by any Government or by any belligerent or by any organized body engaged in civil war, hostilities or warlike operations … If by reason of or in compliance with any such direction … anything is done … such shall not be deemed a deviation.

This provision was sufficient to allocate to the charterer the risk of delay caused by detention of the vessel. The language of the clause was determinative; it granted ‘liberty to comply’ with the exact sort of direction that had given rise to the dispute.443 Hence, the contract was not frustrated.444 [7-71]   If an assumption of risk cannot be inferred through interpretation, it may be established on a non-interpretive basis as a matter of fact, by implication or by inference.445 However, the approach remains objective in that subjective intention is not relevant.446 A non-interpretive approach is often necessary because no inference can be drawn from the text – the parties have left insufficient clues regarding who should assume the relevant risk.447 In such a case, the extent to which the parties foresaw the risk is a key indicator of assumption of risk,448 but it is not determinative.449 Ultimately, the correct conclusion depends on the facts of the case. An assumption of risk can be inferred from background,450 the nature of the contract,451 or the characteristics of the transaction.452 For example, in Regional Development Australia Murraylands and Riverland Inc v Smith,453

442 The Safeer [1994] 1 Lloyd’s Rep 637 (QB). 443 ibid 642 (Rix J) (‘The intention of the parties was to provide an alternative mode of performance in precisely the situation in which the vessel found itself ’). 444 ibid 642–43 (Rix J). 445 See, eg, Seddon and Bigwood (n 5) 1063–66 [19.21]–[19.22]; Peel (n 5) 1070 [19-071]. 446 cf Davis Contractors Ltd v Fareham Urban DC [1956] AC 696, 728 (Lord Radcliffe) (HL); The Sea Angel [2007] EWCA Civ 547, [111] (Rix LJ); Chitty (n 5) 1678 [23-016]. 447 See, eg, Taylor v Caldwell (1863) 3 B & S 826, 833; 122 ER 309, 312 (Blackburn J) (KB) (‘The parties … evidently had not present to their minds the possibility of such a disaster’). 448 Regional Development Australia Murraylands and Riverland Inc v Smith [2015] SASCFC 160, (2015) 251 IR 317, 352 [129] (Nicholson J); Chitty (n 5) 1704–05 [23-059]. 449 See, eg, The Sea Angel [2007] EWCA Civ 547, [111], [127] (Rix LJ); The Safeer [1994] 1 Lloyd’s Rep 637, 643 (Rix J) (QB). 450 See, eg, Intertradex SA v Lesieur-Tourteaux SARL [1978] 2 Lloyd’s Rep 509, 514 (Lord Denning MR) (CA) (the breakdown of factory machinery was ‘commonplace in the world of affairs’). 451 See, eg, Larrinaga and Co Ltd v Société Franco-Américaine des Phosphates de Medulla, Paris [1923] 14 Lloyd’s Rep 457 (in entering a long-term carriage contract, a carrier had assumed the risk of the radical change in shipping conditions following the First World War); Treitel (n 400) 457 [12-003]. 452 See, eg, Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd [2011] VSCA 116, (2011) 32 VR 255, 282-83 [107]–[109] (obstruction of a billboard due to commercial or residential development was clearly a risk to be borne by the licensee of the billboard); Treitel (n 400) 457 [12-003]. 453 Regional Development Australia Murraylands and Riverland Inc v Smith [2015] SASCFC 160, (2015) 251 IR 317.

Conclusion  253 a regional development body alleged that the contract through which it employed its Chief Executive Officer had been frustrated because the body’s funding had been withdrawn. The contract did not address the issue of a withdrawal of funding. However, the body had clearly assumed this risk because neither party believed that such funding would remain in place and the body had failed to secure for itself an express right to terminate in the event that such funding was withdrawn.454 Hence, the body failed in arguing that the contract was frustrated; a non-interpretive conclusion regarding assumption of risk excluded the operation of the frustration doctrine.

Comment [7-72]   The distinction between interpretive and non-interpretive approaches to establishing intention is a fine one. It depends on the extent to which the choice of words in the contract is driving the process of inference. As can be seen in the leading interpretation cases, the interpretive process of inference usually involves a complex system for formulating and evaluating a range of arguments.455 However, in a base sense, the same process applies, for example, in inferring a lack of intention to contract from the use of the words, ‘subject to contract’. That said, it seems a stretch to conclude that a process is interpretive merely because it depends on the commercial object of a contract, even if the relevant purpose is ascertained by analysing the contract as a whole.456 Similarly, conclusions regarding intention drawn from ‘the nature of the contract’ do not have the same character as those inferred from a particular choice of words.457 In any event, the aim of this chapter was not to propose a bright-line distinction between interpretive and non-interpretive processes in contract law. The chapter merely demonstrates that contract law involves a range of techniques, with each technique involving a different cognitive process and serving its own purpose in the law of contract.

7.7. Conclusion [7-73]   The role of interpretation in contract law is complex. The process is employed to infer objective intention from the choice of words in a contract. It is the primary tool for determining what the parties agreed. The orthodox use of interpretation is to define a rule in a contract – a rule that is subsequently applied to determine rights and obligations. However, as this chapter has shown,



454 ibid

351–52 [124]–[128] (Nicholson J) (Sulan J agreeing). generally ch 6. 456 As is often the case in modern cases on the implication of terms in fact, see [7-22]–[7-24]. 457 The nature of a contract is a factor in inferring essentiality: see [7-65] (text at n 391). 455 See

254  Role of Interpretation in Contract Law interpretation is also occasionally employed to establish auxiliary matters, such as the capacity in which a party entered into a contract, intention to contract, the essentiality of a contract term (for the purpose of establishing common law termination rights), and the question of assumption of risk (for the purpose of applying the frustration doctrine). It even plays a role in the process of legal characterisation. In simple terms, if the parties agree words dealing with an issue, the intention that can be inferred from the choice of those words is a matter of interpretation. [7-74]   A major cause for confusion in contract law is the fact that interpretation is often conflated with other contract law techniques, usually under the moniker of ‘construction’. However, this chapter demonstrates that the different techniques that feature in contract law involve different cognitive processes. Interpretation, implication in fact, and common mistake rectification are distinct processes because each technique has its own sphere of application and it involves its own approach to establishing intention. Likewise, the identification of the parties to a contract is not an interpretive exercise: it is a factual enquiry, even though it often involves a similar textual process of inference. Factual characterisation also, unsurprisingly, involves a fact-intensive investigation. It is a process through which it is determined whether a factual component in a rule is satisfied, such as whether money was in fact paid under a sale of goods. It does not involve a question of intention, and the focus is not textual analysis, but rather factual classification. Interpretation does, however, play a role in legal characterisation. The latter is a process through which it is determined whether the legal components in a rule are satisfied, for example, whether a contractual provision amounts to a penalty such that the penalties doctrine is enlivened. While interpretation is often needed in this process, legal characterisation is clearly not solely about the intention of the parties, let alone intention as established through interpretation. Legal characterisation is often driven by factual investigation, precedent and policy. Likewise, to the extent that contract doctrine requires the resolution of specific questions of intention, those questions are only resolved on an interpretive basis if the contract text addresses the issue. Otherwise, intention is established by presumption or as a matter of fact. [7-75]   The product of the analysis in this chapter is a particular vision regarding cognition in contract law. The common law of contract consists of doctrinal rules and a number of underlying techniques. Contract interpretation is the most important technique because it is how the court infers what was agreed from the choice of words in the contract. It is needed to facilitate the application of the most fundamental doctrinal rule in contract law: the principle of freedom of contract. Other contract law techniques also fulfil this function, namely, implication, rectification, and the unique approach applied to determine the content of an oral or partly oral agreement. But contract law involves more than simply defining the content of a contract. The rules in a contract must also be applied through a process of factual characterisation. Likewise, the orthodox rules that make up the common law of contract (ie, those regarding formation, discharge,

Conclusion  255 and so on) must be applied. This involves factual characterisation. But it also often requires legal characterisation: a technique that involves a range of underlying processes, including interpretation, factual investigation, reliance on precedent, and policy-based reasoning. As can be seen, understanding the cognition of contract interpretation – sitting, as it does, at the heart of contract law – paves the way for a deeper understanding of the cognition of contract law. It allows one to distinguish between related techniques and to think about how each technique serves contract doctrine. Hence, the approach to interpretation outlined in this book not only explains how interpretive disputes are determined – it also makes sense of the role of interpretation in contract law and the nature of cognition in the common law of contract.

8 Conclusion 8.1.  A Brief Synopsis [8-01]  Contract interpretation is a fundamental technique in contract law. This book has explained interpretation as a matter of cognition. It claims that interpretation is a process through which objective intention is inferred from the choice of words in a contract. It involves four steps: define the question; formulate competing answers; identify supporting arguments; and choose the correct construction. An interpretive dispute is determined, in the final stage, by weighing and balancing the competing arguments. The correct interpretation is the one that is established to the highest degree of probability. But the balancing exercise is a principled one: disputes involving a similar argument composition are resolved in a similar way. Through interpretation, the court defines what was agreed by analysing the choice of words in the contract. Hence, interpretation is the primary tool through which the principle of freedom of contract is implemented. And it can be distinguished from related techniques that serve different functions and involve distinct cognitive processes. [8-02]   The approach to interpretation advanced in this book is justified both as a matter of theory and through empirical investigation. On a theoretical level, the proposed approach makes sense because it represents an amalgamation of the different theories of interpretation recognised in the cases and commentary. More fundamentally, the four-stage approach follows from an analysis of the key features of interpretation, namely, the materials that must be considered in the process, the bespoke principles that have traditionally guided it, and the problems that it is employed to resolve. That said, theoretical justification was not the primary focus of this book. The proposed approach to interpretation was proved through empirical analysis. That is to say, the four-stage interpretive theory was verified through a close analysis of the reasoning evident in leading cases on interpretation. The empirical research, in an exploratory sense, also revealed a great deal about the cognition of interpretation. In particular, it showed that the balancing exercise in interpretation is consistent and principled. A similar empirical investigation of related techniques in contract law demonstrated that interpretation can be distinguished from analogous processes. Each technique involves its own cognition and serves its own purpose. Turning back to theory, the findings of the empirical analysis led to a unique vision of contract law – one that explains the relationship between contract doctrine, contract law techniques, and the contract itself.

Potential Limitations and Criticisms  257 [8-03]   It is hoped that this book will assist judges, lawyers and scholars who struggle with contract interpretation and its role in contract law. The book provides practical guidance about the resolution of interpretive disputes and the distinction between interpretation and related techniques. That guidance is distilled down to simple principles.1 But it is also justified through an analysis of reasoning evident in seminal cases, which analysis builds on a solid theoretical foundation. In summary, the aim of this book has been ‘to bridge the gap between legal theory and legal practice [so as to] make a difference in practice’.2

8.2.  Potential Limitations and Criticisms [8-04]   The proposed approach to interpretation is not perfect; some cases are simply hard to explain.3 As McLauchlan notes, interpretive disputes often ‘seem to border on the unjusticiable’.4 But this does not undermine the value of the fourstage interpretive approach.5 ‘No theory … can be expected to solve every problem raised.’6 Further, it is widely accepted that contract interpretation is notoriously difficult to explain. As Rix LJ spoke of the process: Lord Mansfield is supposed to have said, in effect, that it is easier for a judge to get the answer right than it is for him to give sound reasons for his correct answer. In a sense, this is one of those areas of the law which puts me in mind of that dictum.7

Sedley LJ took it one step further, suggesting that ‘right’ answers may be out of reach in cases of construction: [C]ourts … do their best … to arrive (if they are Dworkinians) at the right answer or (if they take the less ambitious approach that most of us take) at the least problematical one.8

This book therefore seeks to explain a difficult area of law, and it does so with a level of sophistication not previously advanced. The proposed approach has its limitations in that the correct construction is not always clear; reasonable minds 1 The principles are set out collectively at [1-28] and [1-32]. See also chs 6–7. 2 Borrowed from EW Thomas, The Judicial Process: Realism, Pragmatism, Practical Reasoning and Principles (Cambridge University Press, 2005) 349. 3 See [6-08]. 4 D McLauchlan, ‘The Lingering Confusion and Uncertainty in the Law of Contract Interpretation’ [2015] LMCLQ 406, 406. See also D McLauchlan, ‘A Construction Conundrum’ [2011] LMCLQ 428, 448 (in many cases, there is ‘no indisputable “right” answer’). 5 cf N MacCormick, ‘Reconstruction after Deconstruction: A Response to CLS’ (1990) 10 OJLS 539, 556 (legal doctrine ‘purport[ing] to reconcile and work in every single case’ ‘degenerates into mere casuistry’). 6 RE Barnett, ‘A Consent Theory of Contract’ (1986) 86 Columbia Law Review 269, 269. 7 Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc [2009] EWCA Civ 531, [2009] 1 CLC 909, 927 [47] (Rix LJ) (The Reborn). 8 Wasa International Insurance Co Ltd v Lexington [2008] EWCA Civ 150, [2008] Bus LR 1029, 1046 [46] (Sedley LJ) (overturned on other grounds: see [2009] UKHL 40, [2010] 1 AC 180).

258  Conclusion may differ as to the outcome that was probably intended. But such debates rage within the confines of the proposed four-stage approach. In particular, disputes as to which construction was objectively intended focus on the final stage in which the competing arguments are weighed and balanced. [8-05]   Critics may also take aim at the logic and inference that underpins the proposed approach to interpretation. For example, it could be argued that such a ‘scientific’ approach is inappropriate. Contract interpretation is an ‘art’, not a science.9 Its attraction ‘lie[s] principally in its extreme flexibility’.10 Admittedly, scientific attempts to explain law are ‘frequently unsuccessful’11 because law involves ‘practical reasoning’.12 However, interpretation is ‘a complicated ­exercise’.13 It is inextricably mixed with the philosophy of logic and linguistics. Simple descriptions in terms of linguistic meaning are deficient. The process can only be explained in terms of its cognition, as revealed in leading decisions. If contract interpretation is understood as a matter of cognition, this may go some way to addressing the concern that ‘the outcome of interpretation litigation is notoriously difficult to predict’;14 that is to say, it can lead to greater ‘contractual certainty’. In particular, it can address concerns regarding the role of some factors in the process, including business common sense.15 Further, to borrow from Mitchell, a more robust understanding of interpretation can forge ‘a clearer link between contract law and commercial expectation’.16 To this end, there is no doubt that understanding interpretation on a deeper level requires time and effort. But, as Lord Bingham noted, extra-curially: Certainty of interpretation, however hard to achieve, is of course a highly desirable goal in commercial transactions.17

One way, at least, to secure such certainty is through a detailed analysis of the reasoning evident in seminal interpretation cases. One must understand the cognition of interpretation to facilitate a consistent and unified approach.

9 J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) 126; Calnan (2017) 1 [Pr.02]–[Pr.03]. 10 PS Atiyah, Essays on Contract (Clarendon, 1990) 269. 11 R Feldman, The Role of Science in Law (Oxford University Press, 2009) 3. 12 VR Walker, ‘Discovering the Logic of Legal Reasoning’ (2007) 35 Hofstra Law Review 1687, 1690. 13 PS Davies, ‘Finding the Limits of Contract Interpretation’ [2009] LMCLQ 421, 426. 14 McLauchlan, ‘A Construction Conundrum’ (n 4) 448. See also Calnan (2017) vii (‘if you ask … three lawyers to interpret some words in a contract, you will be lucky to get away with fewer than three answers’). 15 See, eg, L Macgregor, ‘Crossing the Line between Business Common Sense and Perceived Fairness in Contract Interpretation’ (2015) 19 Edinburgh Law Review 378, 383 (‘cross[ing] the line between (acceptable) business common-sense and (unacceptable) fairness … could impact negatively on contractual certainty’). 16 C Mitchell, Contract Law and Contract Practice: Bridging the Gap between Legal Reasoning and Commercial Expectation (Hart Publishing, 2013) 239. 17 Lord Bingham, ‘A New Thing Under the Sun? The Interpretation of Contract and the ICS Decision’ (2008) 12 Edinburgh Law Review 374, 388.

Looking to the Future  259

8.3.  Looking to the Future [8-06]   This book opens the door for several interesting areas of research. First, it paves the way for a similar analysis of interpretive processes in other areas of law.18 For example, there is no apparent reason why the four-stage structure could not be used to explain statutory or even constitutional interpretation.19 Admittedly, each process is driven by its own unique considerations. In particular, constitutional interpretation is at the whim of policy. But the four-stage approach may prove useful in giving structure to debates on the correct interpretation of both constitutional documents and legislation. [8-07]   Second, understanding the cognition of contract interpretation could provide insight in terms of contract drafting. As Calnan notes, ‘[w]hen drafting a contract, the draftsman should always have in mind how what he or she has written will be interpreted by a court’.20 Interpretive disputes often arise due to error or because parties deliberately refrain from specifically addressing an issue.21 However, on some occasions, disputes come about because of the ‘give and take’ – the compromise – that underpins contractual negotiations. Parties are willing to accept adverse drafting on an issue in one part of the contract only if an advantageous position on the same issue is advanced elsewhere in the document. In crude terms, contractual provisions are often bastardised by the advancement of competing interests. For example, the reasonable endeavours clause in Electricity Generation Corp v Woodside Energy Ltd22 was expressed as a matter of ability or capacity, but conditioned by consideration of commercial or business interests. This smacked of a negotiation striking too fine a balance.23 Considering the litigation costs that result from drafting that is inconsistent or ambiguous, lawyers may think twice before leading clients down such a path. [8-08]  Third, there is certainly scope for further research into the synergy between the rules in a contract and the doctrinal rules that make up the common law of contract. The book establishes that the rules in a contract can override some doctrinal rules, but not others. It also confirms that the definition of a rule 18 cf McMeel (2017) 23 [1.33] (the ‘private law of construction’). See also P Herzfeld, T Prince and S Tully, Interpretation and Use of Legal Sources: The Laws of Australia (Thomson Reuters, 2013) 483–612 [25.3]. 19 As to the relationship between contract construction and statutory interpretation, see McMeel (2017) 23–26 [1.34]–[1.36]. 20 Calnan (2017) ix. 21 cf TAO Endicott, ‘Objectivity, Subjectivity, and Incomplete Agreements’ in J Horder (ed), Oxford Essays in Jurisprudence (Oxford University Press, 2000) 163; Steyn (n 9) 126; P Atiyah and SA Smith, Atiyah’s Introduction to the Law of Contract, 6th edn (Oxford University Press, 2005) 147 (‘the time and cost of trying to make every part of a contract as self-interpreting as possible will often outweigh the benefits’). 22 Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7, (2014) 251 CLR 640 (discussed at [6-121]–[6-126]). 23 See [6-127].

260  Conclusion in a contract is effectively governed by doctrine in the form of p ­ rinciples. However, it leaves one to wonder why the line is drawn as it is between the enforcement of the contract and the regulation of the contractual relationship through doctrinal rules.24 What unifying explanation is there for the specific limits on the principle of ­freedom of contract?25 [8-09]   Finally, the research method employed in this book is suited to application in a variety of areas in private law. The method consists of a blend of theoretical and empirical investigation. It involves identifying a theoretical hypothesis and testing it against the reasoning that one can observe in leading cases. In short, the approach is apposite in any situation where there is a disjunction between what judges say they are doing and what they appear to be doing.26 It must be the reasoning process actually employed that defines any legal technique and, in turn, any legal rule or principle. It is often the work of the scholar to unearth such truth. To this end, it is hoped that this book is a worthy contribution.

24 See further Endicott (n 21) 163–71; SA Smith, Contract Theory (Oxford University Press, 2004) ch 8. 25 cf Atiyah and Smith (n 21) 6. 26 cf R McDougall, ‘Construction of Contracts: The High Court’s Approach’ (2016) 41 Australian Bar Review 103, 114 (‘what it is [courts] are doing’).

INDEX absurdity  61–2, 79 admissible materials see interpretive materials adversarial process  95 agreement, definition of the  92, 103–4 Agricultural and Rural Finance Pty Ltd v Gardiner  159–61, 175 aims of interpretation  17, 26–37 ambiguity  28, 74–80 ambiguity in application  58, 76 background  58 choice of meaning  87–90 curing ambiguity  76 definition  74–6 gateway  58, 176, 187 identity of parties  227–8 interpretive disputes  176, 187 lexical ambiguity  58, 75 linguistics  46, 89–90 objective intention inferred from choice of words  80, 89–90, 104 omission  76 oral and partly oral contracts  208 purpose  60 syntactical ambiguity  58, 75 textual interpretation  51, 52, 80, 213–15 vagueness  58, 75–6 Antaios Compania Maviera SA v Salen Rederierna AB  177, 180–1 argumentation  94–7, 111, 123–32, 137–8 cogent arguments  13, 146 consequentialist arguments  123, 126–9, 137 contextual arguments  123, 126–7 determinative arguments  13, 80, 81, 141, 146–51, 157, 160, 173, 180, 187, 188, 200 formulation of arguments  123, 126–7 four-stage process  94–5, 105, 110, 117–18 inferences  41–2, 123 interpretive materials  95–6, 123, 137, 199 linguistic arguments  123–4, 128–9 logic  41–2, 93, 95–6 meanings for words  94–6, 105, 110, 123 normative arguments  123, 129–31 precedent  123, 131–2, 137

purposive arguments  96, 123, 127–8, 137 textual arguments  123, 124, 125–6, 137 whole contract  94–5, 125 Arnold v Britton  101, 130, 177, 184–8, 199, 220 Atiyah, PS  5, 9, 102 auxiliary justification  12–13, 142, 157–8, 177 background  2, 11, 41, 51–4, 58–9 ambiguity  58, 76 argumentation  94, 126–7, 128 choice of words  80 contextual arguments  96, 123, 126–7 definition  58–9 factual matrix  43, 58 implication  217–8 industry  58, 63, 126, 165, 168, 234 inferences  126 interpretive materials  1, 11, 89, 94–5, 110 legal background  58–9, 126 legal matrix  43, 58 market  2, 3, 58, 126, 133, 154, 196–7, 228 meanings for words  59, 126–7 nature of transactions  126 objective intention inferred from choice of words  1, 59, 84, 87, 89 party-specific meanings  56 precedential meanings  57 purpose  59 purposive arguments  127 regulatory background  126 strength of arguments  133–4 transaction documents  54 termination for breach at common law  247–8 universal or baseline context  99 balancing exercise  2, 99–103, 132–8, 218, 256 background  102, 134, 136 burden of proof  135 consequentialist interpretation  100, 110, 136, 176–88 correct interpretation  93, 99–100, 102–3, 110, 132–8 determinative arguments  146–7

262  Index empirical research  19 four-stage process  93–5, 105, 110 identification of arguments  103 interpretive disputes  12–14, 139, 143, 199 interpretive materials  42–3, 100, 102, 218 judicial preference  100–2, 136–7, 187–8 linguistic interpretation  100–2, 157–88 literal interpretation  102, 151–7 logic  42, 45 meanings for words  100, 110, 136 nature of exercise  99–103 objective intention inferred from choice of words  135–6 oral and partly oral contracts  208–9 persuasive arguments  2–3, 136 principled approach  12–14, 139 probabilities  100, 103 purpose  100–1 purposive interpretation  100, 102, 110, 136, 157–76 results  100–1 specific types of contract  136 strength of arguments  43, 110, 135, 147 strict literal interpretation  151–7 textual emphasis  43, 137, 147 whole contract  103 Bank Credit and Commerce International SA v Ali  149–51 Bingham, T  258 borderline cases  75–6, 142–3, 198–9 burden of proof  135, 223–4 Burrows, A  100 business common sense  41, 114, 129–31, 258 normative arguments  129–31 normative standards and objectives  51–3, 62–3, 123, 129–31 purpose  61 purposive interpretation  61, 127, 134 Calnan, R  4–5, 29, 101, 259 Canada SS rules  72, 130–1 capacity of parties  3, 225–6, 228–31 factual investigations  15, 225, 229 identity of parties  230–1 inferences  229 interpretation  3, 229 meanings for words  230 non-interpretive techniques  229 purpose  230 signatures  228–30 subjective intention  229 textual emphasis  229–30

Carter, JW  5–6, 29, 33, 35–7, 41, 46, 88 certainty  7–8 commercial certainty  89, 93, 129–30, 161 inferences  100 interpretation, of  258 normative standards and objectives  64 objective intention inferred from choice of words  103 principles and maxims  72–3 text, of  74 characterisation  3, 201, 231–8 see also factual characterisation; legal characterisation application, process of  231, 233, 236 construction, use of term  9 doctrinal rules  231–2, 235–6 interpretation  3, 9–10, 15–16, 19, 201–2, 231–8, 254–5 non-interpretive techniques  232 normative standards  233 objective intention inferred from choice of words  236–7 policy  232, 236 precedent  232, 236, 254 principles  231–8 related techniques  9–10 statutory rules  231–2, 235 Chartbrook Ltd v Persimmon Homes Ltd  5, 101–2, 152–5, 199–200, 220 Charter Reinsurance Co Ltd v Fagan  158, 167–9 choice of words  49–51, 66 background  80 balancing exercise  82 consequentialist interpretation  50, 80 contract, definition of the  207 freedom of contract  203–4, 256 identity of parties  226–7 implication  212–19 interpretation  97, 203–4, 218–19 purpose  50, 80 purposive interpretation  50, 80 question of interpretation  118 results  50, 80 cognition of contract law  202–6 cognition of interpretation  11, 17, 51, 79, 105, 109–38, 256 see also interpretation Collins, H  30, 35, 44 commercial interpretation see also business common sense aims of interpretation  33, 100–1, 230

Index  263 capacity of parties  230 certainty  89, 93, 129–30, 161 frustration  249 intention to contract  241, 243 interpretive disputes  142 linguistic interpretation  100, 175 objective intention inferred from choice of words  66, 92–3 persuasive interpretation  173 principles and maxims  43, 71, 73–4 probabilities  89 purposive interpretation  60–3, 114, 117, 127, 134, 142, 154, 157–62 termination for breach at common law  247 common law termination see termination for breach at common law competing interpretations  11, 37, 41, 43, 81, 121–3 see also balancing exercise; weighing arguments alternative interpretations  121, 122–3 correct interpretation  132, 137 error  80 formulation of  121–2 four-stage process  1, 93, 94–5, 110, 117 inconsistency  80 interpretive disputes  198–9 interpretive materials  1, 11, 82 meanings for words  1, 82, 94, 95, 105, 110 multiple answers  121 normative standards  82 probabilities  137 strength of arguments  134–5 whole contract  82 conditions  245–8 Connal, RC  188 consequentialist interpretation  40, 116–7, 128–9, 137, 176–88, 218 see also results argumentation  123, 126–9, 137 auxiliary considerations  142 background  126–7, 128 balancing exercise  100, 110, 136 choice of words  80 competing interpretations  123, 136, 137, 142 consequentialist arguments  96, 123, 128–9 definition  12, 14, 40, 80, 139, 141–2, 177 implication  218 inconsistency  80, 142–3 interpretive disputes  12, 14, 140–2, 160, 169, 176–88, 198–200

linguistic argument  12, 14, 128–9, 134, 139, 141–2, 157–8, 176–88 negative arguments  128–9 normative standards  129–30, 134 objective intention inferred from choice of words  1, 100 precedent  132 rectification  220, 224 results  96, 123, 128–9 strength of arguments  133–4 termination for breach at common law  129, 245, 248 textual interpretation  125, 128, 137 constitutional interpretation  259 construction, use of term  3, 9–10 see also interpretation context see background contextual interpretation  39–41, 58–9, 97, 123, 126–7 see also background background  96, 123, 126–7 balancing exercise  102, 136, 176 contextual arguments  123, 126–7 interpretive disputes  176 literal interpretation  39–40 meanings for words  26, 126–7 purposive interpretation  39–40, 127 termination for breach at common law  248 textual interpretation  39–40 universal or baseline context  99 contra proferentem rule  63, 70–1, 73, 130–1 contract, definition of the  206–19 contract doctrine and theory see also doctrinal rules agency  228–9 assignment  116, 239 capacity of parties see capacity of parties damages  7, 116–17, 149, 170, 184, 205, 233, 239, 245, 247 freedom of contract see freedom of contract frustration see frustration good faith see good faith identity of parties see identity of parties illegality  205 implication see implication intention  238–9 intention to contract see intention to contract interpretation  3, 14–16, 17, 201–2, 238–53, 254–5 see also interpretation; role of interpretation mistake see mistake, doctrine of objective intention  238–9

264  Index objective theory  97–9, 208, 222–3, 241, 244, 246 penalties  204, 205, 235, 237, 239, 254 public policy  205 rectification see rectification rescission  7, 8, 85, 115–17, 122, 145, 147, 184, 186, 220 restraints of trade  205 sale of goods  144, 203 severance  239 subjective theory  91, 98, 222–3 termination for breach at common law see termination for breach at common law uncertainty  103 will theory  28 contract interpretation see interpretation; objective intention inferred from choice of words contracts, types of agency  207, 209, 241 arbitration  7, 103, 122–3, 126, 131, 132, 145–6, 147, 151 articles of association  71, 136, 215, 217 assignment  7, 85, 111, 114–17, 120, 163–5, 183–4, 189–91, 247 building and construction  57, 60, 75, 131, 136, 205, 207, 251 carriage  208–9, 228, 249, 252 charterparty  78, 122–3, 126, 133, 144–6, 151, 180–1, 228, 232, 246, 249–51, 252 confidentiality  60, 143, 213 constitution  71, 136, 215, 217 contractual notice  111, 120 deed  60, 77, 111, 147, 155–7, 159, 161, 191, 237, 239 deed of company arrangement  191 deed poll  111 distribution  134, 181–3, 246 employment  103, 143, 209, 214, 217, 234, 235, 242, 252–3 guarantee  71, 75, 147–9, 200, 227, 235, 247–8 lease  15, 56, 57, 60, 62, 76, 78, 90, 117, 120, 130, 131, 134, 136, 143, 158, 161–3, 163–5, 170–1, 176, 177–9, 184–7, 188, 189, 207, 210, 214, 215, 218, 220, 231, 235, 236, 237, 244, 245–6, 247 letter of comfort  242 letter of commitment  242 loan  58, 78, 159–61, 217, 229, 234

licence  36, 137, 152–5, 171–3, 221–2, 223–4, 227, 228, 231, 234, 235, 236, 237 indemnity  58, 72, 88, 147, 159–61, 165–7, 227, 229–31, 235 insurance  57, 64, 68–9, 71, 131, 133, 136, 158, 159, 167–9, 173–5, 207, 215, 216, 217, 233–4, 235 option  8, 62, 71, 77, 78, 85, 87, 90, 103, 120, 143, 171, 177 mining  120, 122, 163–5, 189–91, 228 performance bond  227 redundancy  149–51, 241 release  71, 121, 130, 133, 149–51 sale of business  221 sale of gas  195–8 sale of goods  2–3, 15, 76, 203, 204, 224–5, 250, 254 sale of land  69–70, 103, 134, 170–1, 188, 208–9, 215, 227 sale of shares  60, 97, 104, 111–14, 119, 121, 124, 147, 165–7, 233 security trust deed  77, 155–7 services  8, 76, 90, 213–4, 235 settlement deed  60, 147 shipbuilding  60, 75, 144, 147–9 simple contract  239 standard form  57, 62, 65, 69, 115, 125, 131, 136, 207 synallagmatic  235 trust deed  77, 111, 159 unilateral  235 unit trust  159 contractual clauses or provisions, types of  70–1, 130–1 arbitration  7, 103, 122–3, 126, 131, 132, 145–6, 147, 151 best endeavours  181, 247 break  120, 214, 218 cancellation  250 compensation  172–3, 234 condition  60, 69, 71, 97, 104, 112–14, 119, 124, 125, 134, 181–3, 199–200, 233, 246, 246 covenant  69–70, 130, 184–7, 188, 220, 245 description  119, 144, 224–5, 232 distribution  155–7 exclusion of claims  7, 114–17, 147, 183–4, 200, 220 exclusion of liability  70, 72, 131, 173–5, 209, 233 extension of time  251 force majeure  250

Index  265 grant  70 guarantee  71, 75, 147–9, 200, 227, 235, 247–8 honour  241 indemnity  72, 88, 147, 159–61, 165–7, 227, 229–31, 235 insuring  68–9, 152 limitation of liability  70 notice requirements  120 payment  120, 122, 130, 152–5, 155–7, 163–5, 170–1, 172–3, 177–8, 184–7, 188, 189–95, 199–200, 214, 215, 220, 221, 223, 224, 228, 234, 241, 245, 251 penal  239 price  152–5, 170–1, 200, 221, 223, 224, 249 option  62, 77, 78, 87, 90, 143 reasonable endeavours  104, 119, 181, 195–8, 233, 259 release  71, 121, 130, 133, 149–51 rent  245 rent review  62, 161–3 restraint of princes  249, 252 retention of title  235 right of re-entry  78 royalties  120, 122, 163–5, 189–91 termination  119, 143, 180–1, 211, 247, 250 time  247, 251 ultimate net loss  128, 167–9 correct interpretation  110, 111, 132–7 balancing exercise  99–100, 102–3, 132, 135–7, 138 competing interpretations  111–14, 132, 137 consequentialist arguments  136, 137 four-stage process  93, 94–5, 118 interpretive disputes  199 objective intention inferred from choice of words  132 persuasive arguments  133–8 probabilities  93, 110, 132, 136–8 strength of argument  133–5 textual analysis  133–4, 137 Courtney, W  5 criticisms and limitations  91–3, 95, 257–8 customary or trade meaning  55–6 deadlock, breaking the  146–51 deductive reasoning  42, 95–6, 104, 203 determinative arguments  146–51, 160, 188 dictionaries  56, 97 dispute resolution see interpretive disputes doctrinal rules  9, 238–56 assumption of risk  240

characterisation  15, 231–2, 235–6 see also characterisation; factual characterisation; legal characterisation choice of words  240 evidence of intention  240 freedom of contract  14–15, 17, 201, 203–4, 205, 254, 260 see also freedom of contract frustration  248–53, 254 see also frustration implication  210–11 see also implication intention to contract  240–4 see also intention to contract interpretation  14, 202–6, 239 see also interpretation non-interpretive inferences of intention  3, 238–53 objective intention inferred from choice of words  103 principles and maxims  260 rules in a contract  204–6, 259–60 termination for breach at common law  235–6, 240, 244–8 see also termination for breach at common law triggering rules  231–2 drafting contracts  259 ejusdem generis maxim  68–9, 126 Electricity Generation Corp v Woodside Energy Ltd  195–9 empirical research  16–21, 201, 256 cognition of interpretation  17–19, 109–10, 138 doctrinal rules  256 interpretive disputes  140 theoretical research  260 Endicott, TAO  35, 83 error  78–9 see also rectification ambiguity, giving rise to  78–9 correction of  74, 78–9, 114–17, 224 falsa demonstratio non nocet maxim  79 inconsistency  78–9 interpretation, through  79 literal interpretation  80 meanings for words  79 objective intention inferred from choice of words  80, 87, 89–90 textual interpretation  51, 52, 80, 215

266  Index definition  78–9 description, in  78–9 identity of parties  228 inconsistency, giving rise to  78–9 essential terms  245–8 evidence  91–3, 97 doctrinal rules  240 excluded material see excluded material expert evidence  61 extrinsic evidence  64–6 see also excluded material identity of parties  337 inferences  85 meanings for words  56 negotiations  53, 57–8, 59, 64–6, 208, 222, 224, 244 objective intention inferred from choice of words  91–3 oral and partly oral contracts  209 prior dealings  236 purpose  61 rectification  222–4 subjective intention see subjective intention, evidence of subsequent conduct  53, 64–6, 160, 208, 209, 222, 224, 236, 243, 244 excluded materials  64–6 negotiations  53, 57–8, 59, 64–6, 208, 222, 224, 244 subjective intention see subjective intention, evidence of subsequent conduct  53, 64–6, 160, 208, 209, 222, 224, 236, 243, 244 exclusionary rule  64–6 see also excluded materials extrinsic evidence  64–6 see also excluded materials expressio unius est exclusio alterius maxim  69, 125–6 facts see also background; factual characterisation capacity of parties  15, 225 identity of parties  15, 225–7, 254 implication  210–11 oral and partly oral contracts  207 factual characterisation  3, 202, 232–4, 238, 254–5 see also characterisation application of rules  15, 231–3 aims of interpretation  33–4 definition  231 interpretation  15, 104, 202, 204, 231–4

interpretive materials  105 objective intention inferred from choice of words  232 triggering rules  15, 233 fairness  63–4, 71–4, 89, 130–1, 211 falsa demonstratio non nocet maxim  79 Farnsworth, EA  232 Fiona Trust & Holding Corp v Privalov  145–6, 151–2, 175 Fish, S  98 foreign terms  55 four-stage process  1, 82, 93–5, 110, 201 agreement, definition of the  1, 3 argumentation  51, 94–5, 105, 110, 117–18 balancing exercise  93, 94–5, 105, 110 cognition of interpretation  109–38 competing interpretations  17, 51, 52 constitutional interpretation  259 correct interpretation, choice of  11, 17, 93, 94–5, 118 empirical research  18–19 formulation of arguments  1, 11, 17, 93, 94 identifying competing answers  1, 11, 93, 94–5, 110, 117 interpretive disputes  257 interpretive materials  93, 94–5, 110, 256 question of interpretation  1, 11, 17, 51, 93, 94, 105, 110, 117 unified theory of interpretation  1, 82, 94–5 freedom of contract  3, 14–15, 201, 203–4 aims of interpretation  36 choice of words  256 contract, definition of the  206–7 definition  203–4 doctrinal rules  14–15, 17, 201, 205, 254, 260 interpretation  3, 14–15, 201, 203–5, 260 objective intention inferred from choice of words  103–4 scope of  205–6, 260 frustration  248–53, 254 assumption of risk  249–53, 254 auxiliary role  249 change in law  248 change of circumstances  248–9 death or incapacity of party  248 default rule of law, as  249 delay  248, 251–2 destruction of subject matter  248 force majeure  250 foreseeability  250 illegality  248

Index  267 impossibility  248 inducement  248 inferences  249–50, 252 intention  248–53 multi-factorial approach  249 non-interpretive techniques  253 objective intention  252 supervening events  248–50 textual interpretation  249 future of interpretation  259–60 generalia specialibus non derogant maxim  67–8, 126 good faith  72–3, 210–11, 220 Grabiner, A  35, 41 Havelock, R  102 highest degree of probability see probabilities Ho, HL  86 Holmes, OW  20 identity of parties  3, 202, 225–8 capacity of parties  230–1 characterisation  15, 231 factual enquiry, as  15, 225–7, 254 inferences  227–8, 254 interpretation  3, 15, 16, 225–31, 254 objective intention  226–7 signatures  226 textual interpretation  226, 254 implication  3, 21, 206–7, 210–16, 254 agreement-centred or intention-based rules  204–5, 210 choice of words  212 consequentialist interpretation  218 construction, use of term  9, 10 duty of good faith  211 see also good faith duty to co-operate  210–1 interpretation  3, 9–10, 15, 19, 204–5, 211–18 objective intention  15, 213, 216, 218, 224 purpose  210, 217–18 purposive interpretation  210, 217–18 rectification  207, 224–5 related techniques  9–10 results  218 rules in a contract  204–5, 207, 210–19, 224–5 textual interpretation  213–16 whole contract  54 impression  44–5

inconsistency  7–8, 28, 74, 77–8 competing interpretations  80 consequentialist interpretation  80, 142–3 definition  77 error  78–9 identity of parties  227–8 interpretive disputes  139, 142–3 linguistic interpretation  89–90, 142–3 objective intention inferred from choice of words  78, 80, 89–90, 142 oral and partly oral contracts  208 partial inconsistency  78 principles and maxims  67–8 purposive interpretation  80, 134, 142–3 reading down  78 strength of arguments  142–3 textual interpretation  51, 52, 80, 125 indicators of intention objective intention inferred from choice of words  66, 81, 83 interpretive disputes  161 interpretive materials  83, 93, 94, 102 purposive interpretation  102, 157 inductive reasoning  41, 45, 93, 95–7 see also logic inferences  40–2, 49–50, 258 see also objective intention inferred from choice of words argumentation  41–2 background  126–7 balancing exercise  100 capacity of parties  229 certainty  100 deductive reasoning  95–6 frustration  249–50, 252 identity of parties  227–8, 254 inductive reasoning  95–6 intention to contract  241 linguistic interpretation  48 logical and propositional, argumentation as  95–6 meanings for words  30, 50, 85, 100, 124, 126 non-interpretive inferences  202, 238–53 propositional inferences  123 purposive interpretation  61, 128 question of interpretation  118 rectification  220–1 termination for breach at common law  245 textual interpretation  125–6, 213–16

268  Index intention see also indicators of intention; intention to contract; objective intention inferred from choice of words artificial  28, 91 assumption of risk  248–53 capacity of parties  229 contract doctrine  238–9 definition  83 essential terms  245–8 factual characterisation  232 fiction  28, 30, 91 frustration  248–53 hypothetical  28, 44 identity of parties  226–8 implication  212–9, 225–6 interpretation see objective intention inferred from choice of words legal characterisation  232, 235–8 non-interpretive techniques  3, 238–53 objective  1–2, 6, 9, 11, 13–16, 26, 28–30, 40, 83–93, 103–5, 118, 140–3, 204, 213, 219, 220, 222–5, 226–7, 237, 238–53 see also objective intention inferred from choice of words oral and partly oral contracts  208–9 presumed  44, 212, 216, 218, 240 rectification  219–20, 222–6 see also rectification subjective  28, 53, 57–8, 59, 61, 64–66, 91, 208, 222, 223, 229, 239, 243, 244, 246, 252 see also subjective intention, evidence of termination for breach at common law  244–8 will theory  28 intention to contract  240–4 domestic and social arrangements  240–1, 243 intention to be immediately bound  240, 243 intention to create legal relations  240–4 non-interpretive techniques  240–4 objective intention  241–2, 244 rebuttable presumptions  240–3 International Air Transport Association v Ansett Australia Holdings Ltd  135, 191–5, 198 interpretation see also objective intention inferred from choice of words agreement, definition of the  92, 103–4 agreement-centred or intention-based rules  204–5

aims of  17, 26–37 alternative interpretations  122–3 argumentation see argumentation background see background balancing exercise see balancing exercise capacity of parties  3, 229 certainty of  258 certainty of text  74 characterisation  3, 9–10, 15–16, 19, 201–2, 231–8, 254–5 cognition of  11, 17, 51, 79, 105, 109–38, 256 commercial interpretation see commercial interpretation competing interpretations see competing interpretations consequentialist interpretation see consequentialist interpretation constitutional interpretation  259 construction, use of term  3, 9–10 context see background contract, definition of the  208–25 correct interpretation see correct interpretation doctrinal rules  202–6, 239 see also contract doctrine; doctrinal rules drafting contracts  259 error  78–9, 114–17 factual characterisation  15, 104, 202, 204, 231–4 four-stage process  109–38 freedom of contract  3, 14–15, 201, 203–5, 260 frustration  205–6, 248–52 identity of parties  3, 15, 16, 225–31, 254 implication  3, 9–10, 15, 19, 204–5, 211–18 interpretive arguments see argumentation interpretive disputes see interpretive disputes interpretive materials see interpretive materials legal characterisation  3, 15–16, 202, 204, 231, 234–8 linguistic interpretation see linguistic interpretation literal interpretation see literal interpretation method of  37–50, 82, 93–105 multiple questions  120–1, 137 nature of  4–10 objective intention inferred from choice of words  7, 116–17, 137–8, 206, 218–19

Index  269 oral and partly oral contracts  204, 208 practice of  139–200 principles and maxims  66–74 proposed approach to  10–16 purposive interpretation see purposive interpretation question of see question of interpretation rational choice, as a  7, 37, 49 rectification  3, 15, 16, 19, 204–5, 219–25 related techniques  3, 9–10, 14–16, 19, 109, 204–5 resolution of interpretive disputes see interpretive disputes role of see role of interpretation rules in a contract  1–4, 15, 103–5, 204–5, 218 statutory interpretation  259 statutory rules  202–5 strict literal interpretation see strict literal interpretation structure of  40–2, 110 subjective  98 termination for breach at common law  3, 181–3, 205–6, 244–8 theories of see theories of interpretation uncertainty, doctrine of  103 unified theory of see unified theory of interpretation interpretive arguments see argumentation interpretive disputes  12–14, 17, 139–200, 257 Agricultural and Rural Finance Pty Ltd v Gardiner  159–61, 175 aims of interpretation  36–7 ambiguity  80, 187 Antaios Compania Maviera SA v Salen Rederierna AB  177, 180–1 Arnold v Britton  101, 130, 177, 184–8, 199 auxiliary interpretations  12, 177 balancing exercise  12–14, 139, 143, 146–51, 199 Bank Credit and Commerce International SA v Ali  149–51 Chartbrook Ltd v Persimmon Homes Ltd  5, 101–2, 152–5, 199–200 Charter Reinsurance Co Ltd v Fagan  158, 167–9 clear cases  13, 80, 139, 141, 143–6, 199 consequentialist interpretation  12, 14, 140–2, 157–8, 176–88, 198–200 contextual interpretation  176 correct interpretation  199 deadlock, breaking the  146–51

determinative arguments  13, 80, 81, 141, 146–51, 160, 173, 180, 187, 188, 200 Electricity Generation Corp v Woodside Energy Ltd  17, 101, 119, 195–9 empirical research  140 error  80 Fiona Trust & Holding Corp v Privalov  145–6, 151–2, 175 four-stage process  257 identifying competing answers  199 inconsistency  80, 139, 142–3 International Air Transport Association v Ansett Australia Holdings Ltd  135, 191–5, 198–9 Investors Compensation Scheme Ltd v West Bromwich Building Society  183–4, 187–8, 199–200 L Schuler AG v Wickman Machine Tool Sales Ltd  177, 181–3 linguistic interpretation  12–14, 47, 139, 141–2, 157–88, 200 literal interpretation  12, 151–7, 199 meanings for words  36 McCann v Switzerland Insurance Australia Ltd  159, 173–5 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd  120, 122, 163–5, 189–91 nature of  12–3, 140–3 objective intention inferred from choice of words  12–14, 36, 139–43, 187, 199 one-sided disputes  13, 80, 139, 141, 143–6, 199 persuasive interpretation  12–14, 139, 141–6, 157–9, 199 principled approach  12–14, 139–57 probabilities  12–14 purposive interpretation  12–13, 141–2, 157–77, 187, 200 question of interpretation  199 Rainy Sky SA v Kookmin Bank  147–9, 199–200 Reardon Smith Line Ltd v Yngvar Hansen-Tangen  144–5 reasonable person’s understanding  187 Royal Botanic Gardens and Domain Trust v South Sydney City Council  101, 158, 161–3 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd  158, 169–71, 175

270  Index Sigma Finance Corp, Re  42, 155–7 strength of arguments  12, 13 textual analysis  142, 177, 188–99 Thompson v Goblin Hill Hotels Ltd  101, 177–9, 187 types of dispute  12–13, 19, 139–200 Victoria v Tatts Group Ltd  5, 36, 171–3 Wood v Capita Insurance Services Ltd  5, 27, 43, 49, 158, 165–7, 176 interpretive materials  11, 37, 51–66, 256 ambiguity  89–90 argumentation  95–6, 123, 137, 199 background  1, 11, 51, 52, 53, 58–9, 66, 89, 94–5, 110 see also background balancing exercise  42–3, 74, 100, 102, 218 competing interpretations  1, 11, 51, 66, 82 see also competing interpretations consequentialist interpretation  52 error  90 excluded materials  64–6 factual characterisation  105 four-stage process  93–5, 110, 256 inconsistency  89–90 indicators of intention  66, 83, 93, 94, 102 intention to create legal relations  241 logic  41, 93, 95–7 meanings for words  1, 11, 41, 51–7, 66, 80–2, 89, 94–5, 110 see also meanings for words normative standards and objectives  1, 11, 51–3, 62–4, 81, 89, 95, 110 see also normative standards and objectives objective intention inferred from choice of words  1, 50, 83–5, 89, 99, 103, 105 oral and partly oral contracts  208 precedent  110 principles and maxims  70, 80 probabilities  93 propositional arguments  137 purpose  59–61 see also purpose purposive interpretation  51–3, 59–61, 89 question of interpretation  94 rational choice  49 reasonable person’s understanding  39 results  61–2, 89 see also results textual interpretation  74 whole contract  1, 11, 51–4, 80–1, 89, 94–5 see also whole contract interpretive problems  21, 52, 74–80, 89–90, 140 see also ambiguity; error; inconsistency intuition  7, 37, 44–5, 124

invented terms  55 Investors Compensation Scheme Ltd v West Bromwich Building Society  22, 114–17, 119, 187–8, 199, 220 commercial purpose  116–17 consequentialist interpretation  116–17, 183–4, 200 error  114–17 meanings for words  117, 183–4 meaning of words and meaning of the contract  30–1 objective intention inferred from choice of words  7, 116 ordinary meaning  116 persuasive arguments  184, 200 purposive interpretation  116–17, 184, 200 judicial notice  56, 97, 124 judicial preference  100–1, 136–7 key features of interpretation  51–81 Kramer, A  45, 47, 92 L Schuler AG v Wickman Machine Tool Sales Ltd  177, 181–3 legal characterisation  3, 202, 234–8, 254 see also characterisation definition  231–2, 234–5 doctrinal rules  15–16 implication  210 interpretation  3, 15–16, 202, 204, 231, 234–8 objective intention inferred from choice of words  237 question of interpretation  119–20 statutory rules  15–16 termination for breach at common law  245 legal meanings  55–6 Leggatt, G  49, 85, 88, 91–2 Lewison, K  30, 44, 46 limitations and criticisms  91–3, 95, 257–8 linguistics  45–8 linguistic interpretation  7–8, 37, 40, 45–8, 97 aims of interpretation  26–7 ambiguity  46, 89–90 argumentation  123–4, 128–9 assumptions  47–8 auxiliary justifications  13, 157 balancing exercise  100, 110, 136 capacity of parties  230 categories  124 competing interpretations  142

Index  271 consequentialist interpretation  12, 14, 128–9, 134, 139, 141–2, 157–8, 176–88 contextual arguments  87 conversational implicature  47 definition  141 error  80 inconsistency  89–90, 142–3 indicators of intention  157 inferences  48 interpretive disputes  12–14, 47, 139, 141–2, 157–76, 200 linguistic arguments  96, 97, 123–4 literal interpretation  141 meanings for words  27–8, 96, 97, 123–4 objective intention inferred from choice of words  2, 14, 29, 47, 86–7, 88–90, 100, 105 ordinary meaning  2, 124 persuasive arguments  139, 141 pragmatics  45, 47–8 principles and maxims  51, 52, 67–70, 89, 125–6, 132 purposive interpretation  12–13, 40, 100, 128, 134, 139, 142, 157–76 semantics  45–7, 86 strength of arguments  142 termination for breach at common law  246 textual interpretation  124 vagueness  46, 89 linguistic meaning see meanings for words literal interpretation  39–40, 44–5 see also strict literal interpretation aims of interpretation  26–7, 33 balancing exercise  102 error  80 impression  44–5 interpretive disputes  12, 151–7, 199 persuasive arguments  151–7 whole contract  12 litigation, interpretation as a source of  4, 7 logic  7, 40–2, 45, 258 see also inductive reasoning argumentation  41–2, 93, 95–6 balancing exercise  42, 45 deductive reasoning  42 inductive reasoning  41, 45, 93 interpretive materials  41, 93, 95–7 inferences  95–6 strength of arguments  133 structure  41

McCann v Switzerland Insurance Australia Ltd  159, 173–5 MacCormick, N  20, 104 McKendrick, E  100 McLauchlan, D  4–5, 98, 100–2, 257 McMeel, G  4, 30–2, 43, 200, 218–19, 225, 236 materials see interpretive materials maxims see principles and maxims meaning, definition of  54–5, 86, 96–7 meaning of contract  26, 28, 30–1, 42, 87, 212, 221 meanings for words ambiguity  28, 75, 89 argumentation  94–6, 105, 110, 123 background  59, 124, 126–7 balancing exercise  100, 102 choice of meaning  87–90 competing interpretations  82 contextual arguments  26, 126–7 customary or trade meaning  55–6 definitions  55 dictionaries  56 error  8, 79, 89 factual characterisation  232 foreign terms  55 inconsistency  28, 78 inferences  7, 30, 50, 85, 100, 124, 126 interpretive materials  1, 11, 41, 52–3, 80–1, 82, 89, 94–5, 110 invented terms  55 legal meanings  55–6 linguistic interpretation  27–8, 97 logic  96 objective meaning  6, 9, 27, 47, 49 objective intention inferred from choice of words  6, 26–30, 85, 89, 105 ordinary meaning  26–7, 55–6 party-specific meanings  55, 56–7 precedent  55–6, 57, 124 principles and maxims  68, 83 purposive interpretation  26 reasonable person’s understanding  36–7 scientific or technical meanings  55 semantics  54 statutory meanings  55 subjective meaning  56–7, 98 textual interpretation  26 whole contract  124 method of interpretation  37–50, 82, 93–105 see also four-stage process

272  Index mistake, doctrine of common  16, 206, 219–20, 222, 224–5, 254 unilateral  219–20 mistakes see error; rectification Mitchell, C  9, 35, 37, 99, 101–2, 258 moral problems  92–3 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd  122, 158, 163–5, 189–91 multiple questions  118, 120–1, 137 necessity  212, 217–18 negotiations, evidence of  53, 57–8, 59, 64–6, 208, 222, 224, 244 Nicholls, D  88, 98 non-interpretive techniques  202, 238–53 capacity of parties  229 characterisation  232 common law  244–8 doctrinal rules  3, 238–53 frustration  248–53, 254 inferences  202, 238–53 intention to contract  240–4 termination for breach at common law  244–8 normative standards and objectives  51–3, 62–4 argumentation  123, 129–31 business common sense  1, 11, 51, 52, 53, 62–3, 123, 129–31 certainty  64, 129–30 characterisation  233 competing interpretations  82 consequentialist interpretation  129–30, 134 direct support, as  130 fairness  63–4, 129–31 institution of contract law  63–4 interpretive materials  89, 95, 110 normative arguments  123, 129–31 objective intention inferred from choice of words  1, 53, 64, 84, 89, 92–3, 129 precedent  131–2 presumptions  129–30 principles and maxims  130–1 purposive interpretation  127, 130 reasonable person’s understanding  53, 62–3, 129–30, 134 results  61–2 specific contracts or clauses  130–1 specific questions of construction  130–1 values and beliefs  89 noscitur a sociis maxim  68–9, 126

objective intention inferred from choice of words  2, 10, 43, 93, 79–85, 103–5, 201 see also balancing exercise; four-stage process; intention; interpretation; probabilities abstract definitions  99 actual states of minds, relevance of  91–2 agreement, definition of the  92, 103–4 ambiguity  79–80, 89–90, 104 background  1, 59, 84, 87, 89 certainty of text  74 characterisation  232, 236–7 choice of meaning  87–90 cognition of interpretation  7, 114–17, 137–8, 206, 218–19 collective behaviour  92 commercial objectives  92–3 common intention  28 common law  28–9, 246–7 communication  83–4, 91–2 consequentialist interpretation  1, 12, 14 contextual arguments  41 correct interpretation  132 correction of error  80, 87, 89–90 criticisms  91–3 doctrinal words  103 evidence  91–3 fiction  28, 30, 91 four-stage process  18–19 freedom of contract  15, 103–4 hypothetical intention  28, 44 identity of parties  227 inconsistency  78, 80, 89–90 indicators of intention  66, 81, 83 inferences  11, 14–15, 40–1, 49–50, 80, 100, 253–4 interpretive materials  1, 50, 83–5, 89, 99, 103, 105 interpretive disputes  12–13, 36, 139–43, 187, 199 linguistic meaning  2, 14, 29, 47, 86–7, 88–90, 105, 142 literal interpretation  13 meanings for words  26–30, 85, 89, 105 moral problems  92–3 nature of objective intention  83–5 non-interpretive techniques  3, 16 normative considerations  1, 84, 89, 92–3, 129 omissions  41 oral and partly oral contracts  208 ordinary meaning  30

Index  273 principles and maxims  74, 83, 89 probabilities  12–14, 138–9, 141–6, 199 purpose  1, 2–3, 13, 66, 84, 87, 89, 127, 157–9 question of interpretation  118 reasonable person’s understanding  37, 84–5, 89, 92, 104 rectification  219, 220, 222–3 results  84, 88, 89 subjective intention  91 uncertainty, doctrine of  103 unified theory of interpretation  83–93 vagueness  87 obvious error see error; rectification omissions  32, 41, 76, 125 oral and partly oral contracts  3, 15, 204–5, 206, 207–9 ordinary meaning  2, 45, 153–4 definition of  124 meanings for words  26–7, 55–6 objective intention inferred from choice of words  30 parol evidence rule  64–6 partly oral contracts see oral and partly oral contracts party-specific meanings  55, 56–7 perspective  118, 134 persuasive arguments  2–3, 133–9, 141, 154, 220 philosophy of language  54 potential meaning for words see meanings for words potential results see results practice of interpretation  139–200 pragmatism  25 precedent  123, 131–2 argumentation  131–2, 137 background  57 business common sense  132 characterisation  232, 236, 254 consequentialist interpretation  132 formulation of arguments  131 interpretive materials  110 linguistic arguments  131–2 meanings for words  55–6, 57 normative arguments  131–2 precedential meanings  57 standard form contracts  131 termination for breach at common law  245 textual analysis  132

Prenn v Simmonds  22, 111–14, 117, 119, 124 choice of meaning  87 choice of words  97 collective nature of intention  92 competing interpretations  111–14, 121 factual characterisation  104 objective intention inferred from choice of words  112–14 purposive interpretation  60, 113–14 presumptions  72–3, 118, 129–30, 240–3 principles and maxims  4–5, 15–16, 51, 52, 66–74, 80–1, 202–25 ambiguity  76 argument templates/schemes  67, 73, 81 Canada SS rules  72–3, 130–1 cognition of interpretation  109, 111 commercial interpretation  71, 73–4, 89 conditions precedent  72 contra proferentem rule  70–1, 73 discrete or secondary rules  67 doctrinal rules  260 ejusdem generis maxim  68–9, 126 expressio unius est exclusio alterius maxim  69, 125–6 fairness  89 falsa demonstratio non nocet maxim  79 generalia specialibus non derogant maxim  126 Gricean maxims  47 interpretive disputes  12–14, 139–57 interpretive materials  70, 80 linguistic interpretation  51, 52, 67–70, 89, 125–6 meanings for words  68, 83 noscitur a sociis maxim  68–9, 126 objective intention inferred from choice of words  83, 89 policy  89 preferences or presumptions  72–3 questions of interpretation, specific to  72–3, 80, 111 probabilities  40 redundancy  69–70 surplusage  69–70 textual interpretation  51, 52, 67–70 types of contracts or clauses, specific to  67, 70–1 probabilities balancing exercise  100, 103 competing interpretations  137 correct interpretation  93, 110, 132, 136–8 interpretive disputes  12–14

274  Index objective intention inferred from choice of words  103, 138 principles and maxims  40 problems  3–10, 74–80, 92–3 interpretive problems see interpretive problems nature of interpretive task  4–8 related techniques in contract law  9–10 promises, rights, liabilities or obligations  34–6 proposed approach to interpretation  10–16 propositions  93, 95–6, 123, 137 purpose  59–60 see also purposive interpretation capacity of parties  230 commercial  60 definition  59–60 defensive mechanism, as  128, 188, 191–5, 198 derivation  127 direct support, as  128 expert evidence  61 implication  210, 217–8 intention  1, 2–3, 13, 127, 157–9, 66, 84, 87, 89 legal  60 multiple  60 negative obligations  210 public  60 purposive arguments  96, 123, 127–8 purposive interpretation  127 subjective intention  61 support, as  128 termination for breach at common law  182, 247–8 purposive interpretation  2, 11–12, 40, 51–3, 59–63, 113–17, 123, 127–8, 138, 217–18 auxiliary considerations  13, 142, 157–8 background  59, 127 balancing exercise  100, 102, 110, 136 business common sense  61, 127, 134 choice of words  80 commercial purpose  60–3, 114, 117, 134, 142, 154, 157–62 contextual arguments  127 defensive mechanism, as  128, 188, 191–5, 198 definition  12, 13, 40, 80, 139, 141–2, 157–8 implication  217–8 inconsistency  80, 134, 142–3 indicators of intention  102, 157

inferences  61, 128 interpretive disputes  12–13, 141–2, 153, 157–77, 187, 200 interpretive materials  53, 95, 110 linguistic interpretation  12–13, 100, 128, 134, 139, 142, 157–76 meanings for words  26 normative standards  127, 130 objective intention inferred from choice of words  1, 2–3, 66, 84, 87, 89, 100, 127, 158 persuasive arguments  157–9 principles and maxims  43 probabilities  89 purpose  96, 123, 127–8 purposive arguments  96, 123, 127–8 reasonable person’s understanding  127 rectification  224 strength of arguments  158 subjective intention  61 termination for breach at common law  129, 248 textual interpretation  125, 127, 134, 137, 158, 176, 197 whole contract  41, 103 question of interpretation  111, 112–13, 117, 118–21, 137 contract doctrine  119–20 four-stage process  1, 93, 94, 105, 110, 117 interpretive materials  94 multiple questions  110, 118, 120–1, 137 subject matter  118, 119–20 unified theory of interpretation  82 Rainy Sky SA v Kookmin Bank  147–9, 199–200 rational choice, interpretation as a  7, 37, 49 reading down  78 Reardon Smith Line Ltd v Yngvar Hansen-Tangen  144–5 reasonable person’s understanding  7, 38–9, 53, 62–3, 187 consequentialist interpretation  134 identity of parties  227 interpretive disputes  175 interpretive materials  39 meanings for words  37–8 normative arguments  129–30 objective intention inferred from choice of words  37, 84–5, 89, 92, 104 oral and partly oral contracts  208

Index  275 perspective  38, 134 purposive interpretation  127 rectification  3, 15, 21, 201, 219–25 burden of proof  222–4 business common sense  220 choice of words  224 common mistake  16, 206, 219–20, 222, 224–5, 254 consequentialist interpretation  220, 224 contract, definition of the  206, 219, 224 different cognitive approach  222–4 establishment of intention  220 evidence  222–4 identity of parties  225 implication  207, 224–5 inferences  220–1 interpretation  3, 15, 16, 19, 204–5, 219–25 objective intention  219, 220, 222–4 persuasive interpretation  220 policy  219–20 purposive interpretation  224 related techniques  9–10 rules in a contract  204–5, 219–25 scope to correct error  220–2 subjective intention  223 textual interpretation  220 unconscionability  220 unilateral mistake  219–20 related techniques  9–10, 14–17, 109, 201–55 relevant and admissible materials see interpretive materials research see empirical research; theoretical research resolution of interpretive disputes see interpretive disputes results  61–2 see also consequentialist interpretation absurdity  61–2 actual  61, 128 consequentialist arguments  96, 123, 128–9 consequentialist interpretation  129 definition  61–2 hypothetical  61, 128 interpretive materials  89, 95, 110 negative role  62 objective intention inferred from choice of words  84, 88, 89 termination for breach at common law  182–3, 246–8 rights and obligations, crystallising  90, 93, 99, 130, 253–4

role of interpretation  3, 201–55 characterisation  3, 9–10, 15–16, 19, 201–2, 231–8, 254–5 contract, definition of the  206–19 contract doctrine  3, 14–16, 17, 201–2, 238–53, 254–5 factual characterisation  15, 104, 202, 204, 231–4 freedom of contract  3, 14–15, 201, 203–5, 260 identity of parties  3, 15, 16, 225–31, 254 implication  3, 9–10, 15, 19, 204–5, 211–18 legal characterisation  3, 15–16, 202, 204, 231, 234–8 non-interpretive inferences of intention  202, 238–53, 254 objective intention inferred from choice of words  14–15, 16, 201, 253–4 principles and maxims  15–16, 202–25 rectification  3, 15, 16, 19, 204–5, 219–25 related techniques  14–15, 16, 201–55 termination for breach at common law  3, 181–3, 205–6, 244–8 role of meaning  96–9 Royal Botanic Gardens and Domain Trust v South Sydney City Council  101, 158, 161–3 rules see doctrinal rules; rules in a contract; statutory rules rules in a contract  3, 206–25 implication  204–5, 207, 210–19, 224–5 interpretation  15, 103–5, 204–5, 207 definition of  206–25 doctrinal rules  204–6, 259–60 oral and partly oral contracts  204–5, 207–9 rectification  204–5, 219–25 scientific or technical meanings  55 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd  158, 169–71, 175 semantics  45–7, 54, 86, 97–8 Sigma Finance Corp, Re  42, 155–7 simultaneously executed documents  54 Smith, SA  35, 102 standard form contracts  57, 62, 65, 69, 115, 125, 131, 136, 207 statutory interpretation  259 statutory rules characterisation  231–2, 235

276  Index implication  210 interpretation  202–5 legal characterisation  15 techniques  14–15 Staughton, C  29–30 Steyn, J  5, 82 strict literal interpretation  151–7 see also literal interpretation consequentialist interpretation  154, 156 definition of  141, 151 linguistic arguments  141, 151 linguistic interpretation  141, 156 purposive interpretation  154, 156 strength of arguments background  133 balancing exercise  43, 110, 135 consequentialist interpretation  133–4 correct interpretation  110, 132–5 false premises  133 interpretive disputes  2, 11–12 linguistic interpretation  142 logic  133 principles and maxims  67, 74 probabilities  11–3 structure of interpretation  40–2, 110 subjective intention, evidence of  53, 57–8, 61, 64–6, 208, 222, 244, 246, 252 background  59 capacity of parties  229 doctrinal rules  239–40, 244 exclusionary rule  64–6 intention to create legal relations  243 meanings for words  56–7, 98 objective intention inferred from choice of words  91 party-specific meanings  57 purpose  61 rectification  222–3 subsequent conduct, evidence of  53, 64–6, 160, 208, 209, 222, 224, 236, 243, 244 surrounding circumstances see background syntax  45 technical or scientific meanings  55 termination for breach at common law  182, 240, 244–8 background  247–8 classification of terms  244–5 commercial contracts  247 conditions  245–8

consequentialist interpretation  129, 181–3, 245–6 contextual interpretation  248 doctrinal rules  235–6 essential terms  245–8 interpretation  3, 181–3, 205–6, 244–8 linguistic arguments  246 non-interpretive techniques  245–8 objective intention inferred from choice of words  246–8 purpose  182, 247–8 purposive interpretation  61, 248 question of interpretation  119–20 results  182–3, 246–8 textual interpretation  245–6 textual interpretation  37, 74–80, 125–6, 137, 217–18 ambiguity  51, 52, 80, 213–15 argumentation  123, 124, 125–6 balancing exercise  43, 137 capacity of parties  229–30 certainty of text  74 choice of words  213, 216 competing interpretations  133–4, 137 connection  213–16 consequentialist interpretation  125, 128, 137 contextual arguments  39–40 contract, definition of the  213–16 determinative arguments  149 error  51, 52, 80, 215 frustration  249 identity of parties  226, 254 implication  213–16 inconsistency  51, 52, 80, 125 inferences  125–6, 213–16 interpretive disputes  101–2, 142, 174, 177, 188–99 interpretive materials  74 linguistic argument  124–6, 169 meanings for words  26 omissions  125 precedent  132 principles and maxims  51, 52, 67–70 purposive interpretation  125, 127, 134, 137, 176, 197 rectification  220 strength of arguments  133–4 subject to contract  244 textual arguments  96, 123, 125–6 whole contract  125

Index  277 theoretical research  16–17, 256, 260 cognition of interpretation  16–17, 25, 52, 82 empirical research  260 theories of interpretation  25–50 aim of interpretation  26–37 method of interpretation  37–49 Thompson v Goblin Hill Hotels Ltd  101, 177–9, 187 Tolhurst, G  5 types of contract see contracts, types of types of contractual clause or provision see contractual clauses or provisions, types of uncertainty, doctrine of  103 see also certainty unified theory of interpretation  7, 10, 20, 25, 82–105 aim of interpretation  82, 83–93 freedom of contract  260 method of interpretation  82, 93–105 objective intention inferred from choice of words  1, 83–93 unitary and iterative exercise, interpretation as a  7, 42–3, 94–5 vagueness  5, 32, 46, 58, 75–6, 87, 89 Victoria v Tatts Group Ltd  159, 171–3 weighing arguments  2, 11, 51, 52, 53–4 see also balancing exercise

whole contract annexures  54 appendices  54 argumentation  94–5 attachments  54 balancing exercise  103 cited in contracts, agreements which are  54 competing interpretations  82 counterparts  54 definition  53–4 headings  54 implication  217–8 implied terms  54 incorporated terms  54 interpretive materials  1, 11, 89, 94–5 literal interpretation  12 marginal notes  54 party-specific meanings  56 principles and maxims  68 purposive interpretation  41 recitals  54 schedules  54 simultaneously executed documents  54 subordinate parts  54 textual arguments  96, 123, 125–6 textual interpretation  125 Wigmore, JH  86–7 Wood v Capita Insurance Services Ltd  27, 43, 49, 158, 165–7, 176 words see choice of words; meanings for words

278