Interpreting Terms of a Contract

Interpreting Terms of a Contract


It may not always be easy to interpret terms within a contract. Sometimes contractual terms can be ambiguous or specific words within those terms can have more than one meaning or a different meaning within a certain context. When this happens, matters can end up in Court in order to have the interpretation decided. It may also be the case that a Court finds the term to be uncertain and may strip it out of the contract or render the entire contract void.

How the contract is interpreted

Terms of contracts and indeed contracts themselves are firstly interpreted based on the ordinary meaning of the words forming the terms of the contract. This is why great care needs to be taken when drafting contracts to ensure litigation does not arise later as a result of a dispute with a contractual term and its interpretation.

If there is difficulty in interpreting terms of a contract based on the ordinary meaning of the words forming it then other methods must be employed. One of those methods is looking at pre and post contractual negotiations (although the use of pre-contractual negotiations may be also affected by clauses in contracts limiting their use for the purposes of interpreting the contract in question).

Currently there is debate in Australia as to whether there needs to be ambiguity on the face of the contract before a Court will look at the surrounding circumstances to interpret a contract. The High Court case of Electricity Generation Corporation t/a Verve Energy v Woodside Energy Ltd [2014] HCA 7 at [35], [53] did offer comments that the surrounding circumstances and the commercial purpose of a contract should be considered when construing terms of a contract.

The “parole evidence rule” means pre-contractual negotiations cannot be used to interpret contractual terms unless there is evidence concerned with the surrounding circumstances. These pre and post contractual negotiations must be assessed objectively. When assessing this evidence objectively, the Courts place particular emphasis on how a reasonable business person would interpret the terms based on the commercial reality of the situation.

Terms can also be implied in contracts in certain circumstances:

  • To give business efficacy;
  • If they are so obvious the contract would not make sense without it;
  • Be reasonable and equitable;
  • Can be easily expressed; and
  • Cannot contradict express terms.

Negotiations can provide an insight into the intention of the parties when construing a contract. In addition, information like what industry the parties are in, what they would likely be trying to achieve when contracting can also assist when coupled with the background knowledge of what negotiations have taken place.

Interpretation of contracts is a highly litigated area of the law and requires broad and extensive experience from legal practitioners.  Should you require assistance with your litigation matter, please give us a call for a free assessment. Our contact details are:

Berrigan Doube Lawyers

Melbourne:        (03) 9600 2577

Sydney:             (02) 9251 6699

Brisbane:           (07) 3229 0707

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