Principles by which the Courts interpret a Commercial Contract

In business, one of the most common legal disputes is that of breach of a commercial agreement.  Often, opposing parties have a different interpretation of what a party was obligated to do or how they were supposed to do it.

When faced with such a dispute, prior to determining whether a breach occurred, a court must first determine what the contract actually says, and then how the relevant obligation was supposed to be performed. This is referred to as “contract construction”.

Over time, Australian courts have developed a number of general principles in assist in the construction of commercial contracts.  These principles were recently summarised by the Victorian Supreme Court of Appeal as follows:[1]

• It is necessary to construe the relevant provisions of a commercial agreement in accordance with the general principles to be applied in giving commercial contracts a businesslike interpretation.
• The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
• In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
• Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
• However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice.
• Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
• Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result.  Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.
• The Court should have regard to all of the words used in the agreement ‘so as to render them all harmonious one with another’ and to ensure the ‘congruent operation of the various components as a whole.

Courts in Australia are bound to the above principles, and it is only after the court has constructed the relevant terms of a contract that it can then proceed to apply the terms to determine what the effect of its operation is in respect of the breach in dispute.

At Boss Lawyers, we have experience in assisting clients with commercial contract disputes.  For practical legal advice, support and assistance regarding your particular circumstances, contact Boss Lawyers.  We are ready to step in and assist you.

[1] Reliance Franchise Partners Pty Ltd v Ford Kinter & Associates Pty Ltd [2018] VSCA 106, citing heavily from McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579.