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MTECC NEWS 21.07 ||| High Court approves “contracting out” and “confirms” approach to interpretation of commercial contracts

by admin admin

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The recent High Court decision of Price v Spoor [2021] HCA 20, although not a construction case, is worth consideration for two reasons. First, because of its nod to the principle of freedom of contract and second, because of the “direction” it provides on the continually vexed question of how to approach the interpretation of commercial contracts.

The decision is a timely reminder to those of us whose work involves drafting, negotiating and interpreting agreements, be they bespoke construction contracts or related financial security documents, that the freedom of parties to negotiate contractual outcomes will, if appropriate circumstances exist, be upheld.

In Price the parties had included a clause in a 1998 mortgage by which they agreed to oust the operation of the relevant Queensland Limitation of Actions Act 1974. In three separate judgments the High Court upheld the rights of parties to contract out of such legislation in circumstances where there is an intention to do so and it is permissible to exclude the operation of the Act. While the clause in question was extremely broad in its terms, the Court found that it operated to defeat the limitation period that would otherwise have applied in the circumstances of the case.

The second matter of interest from Price is found in the variable approaches taken by the Court to the general interpretation of a commercial contract, which it goes without saying includes construction contracts.

Citing the decisions of Woodside, Simic and Ecosse Kiefel CJ and Edelman J said at [27]:

“An objective approach is required to determine the rights and liabilities of a party to a commercial contract, by reference to its text, context and purpose. The meaning to be given to its terms is determined by reference to what a reasonable business person would have understood those terms to mean.”

Gageler and Gordon JJ, citing Pacific Carriers, Woodside, Mount Bruce Mining and Codelfa and cases referred to in those decisions, said at [42]:

“The construction of cl 24 of each mortgage is to be determined objectively by what reasonable persons in the position of the parties can be taken by adopting the words to have meant. That requires consideration, not only of the text of the mortgage, but also of the surrounding circumstances known to the Mortgagee and the Mortgagor, and the purpose and object of the transaction.”

Citing Woodside, Maggbury, and a number of other High Court and English authorities, Steward J said at [60]:

“…notwithstanding arguable deficiencies in a contract, a court must strive to give meaning and effect to all of its clauses. … because the Mortgage is a commercial contract, the meaning of its terms is to be determined objectively by what a reasonable business person would have understood them to mean. This requires the court to consider the language used by the parties, the circumstances known to them and the commercial purpose or objects which the contract was intended to secure.”

While each of the three judgments approaches the task of interpreting commercial contracts in a similar manner, subtle differences are apparent. The importance of those subtleties will likely be seen in the approach to this important and topical issue taken by intermediate appellate courts, and of course for many of us, arbitrators over the next few years.

Geraldine Gray*

*Liability limited by a Scheme approved under professional standards legislation.

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