Observations on Construing a Commercial Contract as a Whole

On the Occasion of the commencement of the Civil Litigation Skills Course

Presented to the Western Australian Bar Association and Francis Burt Chambers Civil Litigation Skills Course

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Can I begin by commending each of you for making the substantial commitment to all that this course of teaching offers. It will reward you greatly, I am sure. Its focus will afford a much deeper understanding of the nature of the work of a commercial barrister. It even has the prospect, may I suggest, of delivering greater personal satisfaction in your future travails as you gain further insight into how best to be a barrister.

The work of a barrister requires unswerving commitment to identifying the real issues in dispute and confining the case to those issues. Finding the real issues requires analysis; that is, the application of a deep understanding of legal principle and forensic insight to the task at hand. It does not involve presenting the client's position. Or even starting your analysis with what the client thinks and seeking to support that position. Or worse still, the client's arguments.

The law mediates between clients, it is not an instrument for one party to overwhelm or subjugate the other to its interests. Instead, the law stands between the parties to bring about a fair and just outcome. It does so by being principled, certain and consistent. It is able to respond to a wide range of circumstances. It seeks to be stable and predictable in its response. Your job is to stand in that space and explain its working to the client, not to do the client's bidding.

If you understand what the law is doing and keep it at the forefront of all that you do, then you can become its instrument. You can assist in its working by developing a theory of the way the case should be resolved according to legal principle and making submissions to support that theory. You can leave behind the agonies of simply trying to say and do what the client wants.

You will become a far more effective barrister if you think about every instruction you receive as one which requires you to focus on the way that the law would resolve the problem. You will stop searching for arguments to support a particular presupposed position, for sentences from cases, for words out of context or for propositions outside the support of fundamental principle that are in favour of your client. That is because the law does not operate in such a fickle and flimsy way.

Instead, you will seek to understand the way the law should mediate or resolve the outcome. You will seek to articulate what will resonate as the appropriate outcome to be delivered by a system that administers justice between parties.

It is sometimes said that you need to look at a case from the judge's perspective not from the perspective of your client. That conjures the idea that you should look at the case from a kind of independent stance. While that is true, it is a notion that captures only part of what is required. What you really need to think about is what guides the judge's perspective. What does the judge look for in administering justice? It is a search for the essential features that determine the law's answer to the case at hand. As a barrister you need to be in there with the judge trying to do that too.^[1] If you are not, most of what you say will likely be seen as being of little assistance. The judge will likely assess you as being of little or no help and proceed unaided and unguided by any case concept or focussed submissions that you might have presented.

The adversarial system is not properly conceived as a battle between matching champions engaged in a trial by battle. Nor is it a debate between great orators trying to sway opinions or convict others to moral positions. It is the presentation of alternative pathways by which legal principle will deliver an outcome, in circumstances where each alternative pathway is advanced in the interests of a particular party. In the end, the choice is not between the two pathways. Rather, it is an assessment by the judge as to what the law requires as the outcome, supported by principled reasons. That is why a barrister best serves the client's interests by engaging with this territory.

Turning then to the particular matters at hand. When it comes to giving meaning to the language of statutes or contracts, the law is concerned with giving legal power to the words used. Once spoken by Parliament or the parties, words are given breath as utterances that the law will act upon. It is a serious process that must be able to be explained and repeated. If it is perceived as random or unprincipled then the law itself will be perceived as having that character and those affected will lose trust and confidence in the institutions that administer the law. They will tend to resist submitting to its terms. They will move away from accepting that they should be governed by the terms of statutes or bound by the formal promises they have given.

I say all of that by way of introduction because I propose to say something of the way these matters are carried out when it comes to the interpretation of commercial instruments.

The objective theory of contract means that the parties have enlivened and animated their words to produce binding obligations that they cannot alter or take back except by further agreement between them. The formality of their dealings and the promises they have exchanged mean that they will be held to what they have agreed, as manifested by the words they have chosen to use. It does not matter what they thought they were doing or what they wish they had said after the event. It does not matter that they regret what they agreed to or that it is now less commercially palatable than it was seen to be at the time. These aspects inform in a fundamental way how the meaning of a commercial contract is to be interpreted.^[2]

You have been provided with an outstanding paper by those responsible for the course, as you might expect given the quality of its authors. My only minor criticism is its title, 'Aspects of the Construction of Commercial Contracts'. I suggest that a more apt title may have been 'The Essence of Construction of Commercial Contracts'. That is because every indispensable part of what you must understand when it comes to construing commercial contracts is captured by the paper. It is a rare gift that would otherwise take you years to grasp so succinctly. You need to have all of that in your head when you read a contract for the purpose of understanding what the rights of your client might be. It will repay reading a number of times and being kept close at hand or, better still, committing its insights to your professional memory.

The same is true of its companion concerning statutory construction, but this evening I will focus upon just one aspect covered by the paper on the construction of commercial contracts.

I want to begin with the proposition, often stated, that in order to properly construe the language of a commercial contract it is necessary to have regard to the contract as a whole. It is a phrase that appears throughout the paper. It is a phrase that conjures a number of different ideas that I wish to try and unpack. It is worth focussing upon because the notion of the contract as a whole lies at the heart of the construction task. What is being determined is the meaning of words that only have legal effect as part of the whole contract.

So, it is better to start with the contract as a whole than with the particular contested words or the bits of the contract that your client seeks to rely upon.

Speaking broadly, the idea of regard to the contract as a whole captures the notion that all language must be understood in context.^[3] Every expression in a contract is intended to speak as part of the whole contract.

It has been said that the sentence is the unit by which communication occurs. It is true that we do not convey meaning by uttering individual words.^[4] The semantic range of meaning for most words usually requires context to understand the precise sense in which the word is being used. That is why arguments conjured by reference to dictionary definitions of individual words are usually of little to no assistance in discerning the meaning of a document.^[5] But it is also the case that every sentence that forms part of a document takes its meaning from its place within the whole document in which it appears.

Regard to the whole of the contractual instrument has a number of distinct aspects.

The first aspect is the notion that a contract has a commercial object or purpose that may be discerned from regard to the whole of its terms.^[6] The nature of a contract is that its various provisions are intended to operate together in order to effect a dealing or to govern an ongoing relationship. Much is to be gained from a careful formulation of what the contract is actually about. In this respect, a description given by the parties may be relevant but is never decisive. A careful examination of the collection of promises is more instructive. What is the transaction they record or the relationship they regulate? You should always try and describe that purpose or object. It may be a familiar dealing, or it may be a bespoke one. In either case it is necessary to articulate what it is so you can place its language within a broad understanding, derived from all the words used, of what the document is doing.

The second aspect flows from the first. It concerns whether the contract is one which is intended to speak separately from its surrounding circumstances.^[7] Some contracts record terms which are to apply to third parties.^[8] Consider, for example, a bill of lading, an assignable joint venture interest or a contract of insurance that is to cover all the participants in a project. An understanding of the object or purpose may be a reason why the instrument should be construed according to its terms without regard to surrounding circumstances. Otherwise, relevant external context (or surrounding circumstances) should be identified and brought to bear. It should be used to revisit (and reformulate, if necessary) the overall purpose or object of the commercial instrument.

The third aspect is that regard to the whole of the contract enables a view to be formed as to the degree of formality with which the instrument has been prepared.^[9] Is it detailed? Is it informal? Is it a model of consistency? Is it comprehensive? Is it in a standard form? Is it grammatically coherent? Does it strive for plain English or draw upon phrases with established legal or contextual meaning? These matters bear upon the way in which its terms would be understood when viewed objectively through the perspective of a reasonable businessperson.^[10] Significantly, they are matters that bear upon the extent to which a number of other presumptions or rules, that draw upon the contract as a whole, may be used. It is to those other aspects of regard to the contract as whole to which I now turn. They comprise the fourth aspect of construing the document as a whole.

Regard to a contract as a whole to discern (a) its object or purpose; (b) the extent to which it speaks independently of surrounding circumstances; and (c) the formality with which it has been prepared, inform whether various approaches should be adopted as to its construction, sometimes called presumptions or rules - but really just aspects of reading the whole of the instrument.

This process was described in Fitzgerald v Masters^[11] in the following way:^[12]

It is trite law that an instrument must be construed as a whole. Indeed it is the only method by which inconsistencies of expression may be reconciled and it is in this natural and common sense approach to problems of construction that justification is to be found for the rejection of repugnant words, the transposition of words and the supplying of omitted words. … Many illustrations may be given of the circumstances in which these processes have been followed but to do so would add nothing to the rule that the intention of the parties is to be ascertained from the instrument as a whole and that this intention when ascertained will govern its construction …

(citations omitted)

Let me try and enumerate some of these principles.

First, the manner of operation of each clause of an agreement must be construed as being intended to work in harmony with every other clause.^[13] The provisions do not operate in isolation. They operate together. So, each clause of the contract must be interpreted in a way that will enable the provisions to work with and interact with other provisions of the contract.

Second, where possible effect should be given to every word of a contract.^[14] Obvious boilerplate to one side, key provisions of a contract have been included for a reason. Consequently, there is a presumption against a meaning that would render the words of a particular clause redundant in the sense that it would have no meaningful field of operation. The parties having taken the care to include the language of the clause, it is likely that they thought it would have some possible operation.

Of course, repetition for emphasis or out of an abundance of caution may be an explanation for two clauses with the same effect.^[15] The question then is whether the same concept is addressed to reinforce the existence of the obligation or whether the apparent repetition is actually directed to different aspects.

Third, it is likely that the parties used the same terminology with consistency in meaning; and used different words when they intended to convey a different meaning.^[16] Application of this principle must have regard to the overall characteristics of the drafting. It is a principle that carries less weight where the document does not exhibit consistency in expression or care in use of terminology.^[17] There is also the phenomenon in English of 'elegant variation' whereby there is a tendency to avoid repeated use of the same term because it is considered more attractive and erudite to do so. In a contract recorded by letter, that aspect may be an explanation for different words being used to convey the same idea. But that too would call upon the overall character of the instrument to aid in its construction.

Fourth, more general provisions will usually be read as being qualified by more specific ones.^[18] Having included both, it is unlikely that the general provision was intended to apply to the specific case addressed by another provision with the consequence of overriding the operation of the specific provision.

Fifth, absurdity or illogicality in operation measured against the overall object or purpose may lead to rejection of one available construction.^[19] It is now well established that the Court approaches any contract on the basis that the parties intended its terms to produce a commercial result and to avoid it 'making commercial nonsense or working commercial inconvenience'.^[20]

It is very important to observe that the cases in this area do not entrust to the Court an ex post facto ability to assess the present commercial consequences of a particular interpretation of an agreement.^[21]

It is necessary to found any use of an alleged lack of commerciality upon a properly formulated submission as to the purpose or object of the contract. This too will require regard to the contract as a whole, considered in the context of any relevant surrounding circumstances. Views as to what is 'commercial' may vary. This principle is usually expressed in terms of commercial nonsense, unreasonableness and inconvenience. The lack of commerciality must be so pronounced that it will indicate that some different construction must have been intended.^[22]

The process of using these tools is iterative.^[23] It involves using the object or purpose of the contract and its characteristics to form a view that guides construction of particular clauses. Rival meanings are then checked and may expose possibilities that bear upon the understanding of the agreement as a whole. They then require regard to the individual provisions in the way I have described but guided by the revised view as to the overall purpose or object.

Importantly, these are all outworkings of regard to the whole of the contract. There is no authority that will require one of these presumptions to be applied in a particular case. Rather they are properly seen as tools of analysis that will be deployed in circumstances where they are justified by regard to the nature and characteristics of the contract as a whole. They each have to be reasoned in the particular circumstances of the case. In every case, insight into meaning is delivered through the process I have described.

Importantly, these matters direct attention away from singular focus upon the words in issue. So, do not start with the disputed words. Do not approach the task by reading those words and then simply spouting the meaning that your client contends for. Do not look for random parts of the contract that support your client's case if read in isolation. Give respect to the objective nature of the task as one which requires interpretation of the words within the whole of the contract. Work out what the deal is and how carefully or loosely it has been expressed. Undertake the task of considering the whole. It is fundamental to the way the law works when construing disputed terms of a contract.

We addressed these ideas in LCA Marrickville Pty Limited v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 at [57]-[60],^[24] a case involving the construction of five different insurance policies to business interruption brought about by response to the COVID-19 pandemic.

The reasoning of Chief Justice Quinlan and Appeal Justice Beech in GR Engineering Services Ltd v Investmet Ltd [2021] WASCA 136 is also a very good illustration of the required approach.^[25]

The judgments of the High Court in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd^[26] are also instructive when it comes to use of the overall object of an instrument as a whole.^[27] In that case, Justice Gageler (as the Chief Justice then was) said:^[28]

Clause 4 can only be so construed for what it is: a clumsily tailored variation of an ill-fitting off-the-shelf precedent. To bring linguistic and grammatical precision to its construction would be to burden the clause with more weight than its jumble of words will bear.

The competing constructions of cl 4 being open on its language, and the textual indications in favour of each being at best equivocal and at worst conjectural, the choice between them comes down to deciding which is more reasonable considered as a matter of 'commercial efficacy or common sense'.

(footnotes omitted)

I will finish there. You have been patient. I thank you for your attention. I wish you well with the rest of the course.