This article considers a recent decision of the High Court and its restatement of the proper approach to the construction of commercial contracts.
In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37 the High Court referred to the relevant principles of interpreting contracts by reference to a number of preceding statements of law.
Principles of contract construction
First, the rights and liabilities of a party under any provision of contract are to be determined objectively. That is, you must look at the entire text of the contract, the context and the purpose of that contract.
Second, you must ask what a ‘reasonable businessperson” would have understood the terms of the contract to mean. That is, what a reasonable person in the position of a party to the commercial contract would have understood. According to the High Court, a commercial contract should be given a ‘businesslike interpretation’. This requires a consideration of the language used by the parties, the commercial circumstances and the objects of the contract.
There are situations where you may need to go outside the four corners of a contract and refer to surrounding circumstances in order to decipher the meaning of a term. However, the High Court has said that if the meaning of an expression used in a contract is clear and subject to only one meaning then there is no need to refer to surrounding circumstances. Accordingly, there is an assumption that in the overwhelming majority of cases the written words of a contract will have a fixed meaning.
Third, you cannot admit evidence of the parties’ statements and actions reflecting their actual intentions prior to entering the contract. This is because the actual intentions of the parties are contained and expressed in the contract itself.
Finally, the interpretation of a contract that is preferred is the interpretation that makes commercial sense. That is, there is an assumption at law that the parties to a commercial document intended to produce a commercial result.
Overview of the High Court case
The Mount Bruce case arose out of a dispute concerning the interpretation of a clause in a commercial contract. Mount Bruce Mining Pty Limited was required to pay royalties to Wright Prospecting Pty Limited on iron ore won from what the contract termed as the “MBM area”. The High Court was asked to consider what the meaning of the terms “MBM area” meant in the contract. It held that the starting point was the language used by the parties in the contract and determined that the “MBM area” referred to a physical area. The High Court held that this meaning was the natural and ordinary understanding of the language used, and that this was consistent with the commercial circumstances and purpose of the contract.
Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.