In brief: Three High Court judges have stated, in a special leave
decision, that extrinsic evidence of surrounding circumstances cannot be
used to interpret a contract where the contract is not ambiguous on its
face. Partner Malcolm Stephens and Lawyer Tom Prince discuss an unusual, but very important, High Court decision handed down last week.
In litigation of this type, the party advocating a 'commercial' interpretation of the contract will seek to support its argument by putting forward evidence of surrounding circumstances known to the parties at the time the contract was entered into. A common issue is whether these surrounding circumstances can be used to interpret words in a manner different from their ordinary (or 'plain') meaning.
In recent years, many Australian courts have held that it is permissible to look at the surrounding circumstances, known to the parties, before deciding whether a word may have a meaning other than its 'plain' meaning. Three High Court judges have now expressed a strong view that these decisions are inconsistent with High Court authority and are therefore wrong.
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How does it affect you?
- The decision of the High Court will be of immediate interest to those involved in disputes concerning the correct interpretation of contracts as it limits the circumstances in which a court may depart from the literal interpretation of a contract.
- The decision is also important for those involved in drafting and negotiating contracts. It is an important reminder that, in the event of a dispute, the actual words used in a contract will often be more important than the apparent intention of the parties.
The legal context
Contract litigation frequently involves a contest between two interpretations of a contract: one of which is better suited to the literal meaning of the words used in the contract; the other which (arguably) better reflects the intention of the parties and the commercial purpose of the contract.In litigation of this type, the party advocating a 'commercial' interpretation of the contract will seek to support its argument by putting forward evidence of surrounding circumstances known to the parties at the time the contract was entered into. A common issue is whether these surrounding circumstances can be used to interpret words in a manner different from their ordinary (or 'plain') meaning.
In recent years, many Australian courts have held that it is permissible to look at the surrounding circumstances, known to the parties, before deciding whether a word may have a meaning other than its 'plain' meaning. Three High Court judges have now expressed a strong view that these decisions are inconsistent with High Court authority and are therefore wrong.
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