Kate Green - Know When to Hold Em

Know When to Hold ‘Em, Know When to Fold ‘Em

How to play your best hand through understanding contractual interpretation principles and the importance of limitations on liability Kate Green Senior Associate 22 March 2019

Today’s agenda Part 1: Interpretation of contracts Part 2: Controlling liability through contract

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Part 1: Contractual Interpretation

Part 1: Contractual interpretation

1: Determining the meaning of the words.

2: Resolving competing interpretations.

3: Using extrinsic evidence to assist interpretation.

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1: Determining the meaning of the words

The current approach to interpretation Electricity Generation The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean.

It will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract.

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Mount Bruce Mining The rights and liabilities of parties under a provision of a contract are determined objectively by reference to its text, context and purpose.

In determining the meaning of terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry 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.

Toll v Alphapharm

It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe.

Zhang v ROC Services Step 1 Determine the literal or grammatical meaning as a matter of English, then the legal meaning and then apply the legal meaning to the facts

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Step 2

Step 3

Construe the contract as a whole, having regard to how the meaning of the contractual provision fits with the other provisions of the contract.

Where there are two available legal meanings, the court will prefer the meaning that will avoid consequences that appear irrational and unjust.

2: Resolving competing interpretations

ABC v Australian Performing Rights Assoc If the language is open to two constructions, [the construction that will be preferred is the one] which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust...

If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different.

Gibbs J

Quirke v FCL Interstate Transport Services Facts: • FCL provided transportation services to Dayrise.

• FCL required a guarantee from Mr Quirke, a director of Dayrise, to secure amounts owing to FCL in the following terms: “In consideration of FCL agreeing from time to time to sell to [Dayrise] such goods in the way of its business as [Dayrise] may require… [Mr Quirke] hereby irrevocably and unconditionally guarantees to FCL, both jointly with Dayrise and severally, the due payment for all such goods as may be sold to Dayrise.”

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FCL provided services to Dayrise and Dayrise subsequently went into liquidation.

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FCL sued Mr Quirke on the guarantee to recover outstanding payments.

Held: • The guarantee did not apply to the amounts outstanding.

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Ecosse Property Holdings v Gee Dee Nominees Clause 4 The Lessee will pay all rates taxes assessments and outgoings whatsoever excepting land tax which during the said term shall be payable by the Landlord or tenant.

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Clause 13 The parties acknowledge that it was the intention of the Lessor to sell and the Lessee to purchase the land and improvements hereby leased for the consideration of $70,000.00 and as a result thereof the parties have agreed to enter into this Lease for a term of ninety-nine years in respect of which the total rental thereof is the sum of $70,000.00 which sum is hereby acknowledged to have been paid in full.

Ecosse Property Holdings v Gee Dee Nominees

Unless the Anglo-Australian objective theory of contract is now to be cast aside, the commercial approach to construction is not a licence to alter the meaning of a term that is ‘clear and fairly susceptible of one meaning only’ to achieve a result that the court may think to be reasonable.

Nettle J at [98]

3: Using extrinsic evidence to assist interpretation

Terminology

• Surrounding circumstances: – – – –

Context Background Setting Factual Matrix

• Extrinsic evidence:

– Surrounding circumstances – Evidence of prior negotiations – Subjective intentions

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Context and purpose • Examples of context: – – – – –

the genesis of the transaction the market in which the parties operate professional experience and legal representation the regulatory framework the usual practices of the parties

• Examples of purpose:

– the need to obtain an indemnity from a financial institution – the pursuit of profit from the sale of goods – avoiding a change in the law by amending the contract

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Codelfa: the ‘true rule’

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.

Is ambiguity required?

Toll v Alphapharm The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean.

That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

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Electricity Generation The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. It will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract.

Critical questions 1. Can evidence be admitted to assist in the interpretation of the contract even if the language is not ambiguous or susceptible of more than one meaning?

2. Can evidence of surrounding circumstances be admitted to determine whether a contract has a “plain meaning”? In other words, can evidence of surrounding circumstances be admitted to create ambiguity?

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Awaiting High Court confirmation 1. Victoria v Tatts Group – without expressly saying so, the reasoning of the High Court suggests surrounding circumstances can be used to interpret meaning without ambiguity.

2. NSW Court of Appeal has adopted Victoria v Tatts Group.

Victorian Court of Appeal still says ambiguity is first required.

3. In Cherry v Steele Park it was found that there is no need for ambiguity to look at surrounding circumstances. However, primacy is given to the text of the contract.

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Key takeaways from part 1

The plain meaning of words of the contract take primacy.

Carefully review every term in the boilerplate agreements.

Include an express purpose in the contract and ensure that all relevant facts are within the walls of the contract to avoid ambiguity over meaning.

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Part 2: Controlling liability through contract

Types of clauses that limit liability

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Release

Accord and satisfaction

Exclusion clauses

Indemnities

Releases What is a release?

• discharges a party from an obligation under another agreement, or relieves them of certain liabilities; • often executed by parties if the matter is settled, discharging a party from a particular claim A release in general terms will be given a narrower construction - Grant v John Grant • A release phrased in broad and general terms will be read down to matters contemplated by the parties at the time of the release • Equity will consider whether it would be unconscientious for a party to rely on the generality of the release in the circumstances

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Releases: Example clause A releases and discharges B from any Claim it has or may have in the future against B to the extent that it relates to: (1)

the Circumstances; and

(2)

the Dispute,

wherever and whenever arising, whether: (3)

known or unknown at the time of execution of this agreement;

(4)

presently in contemplation of the parties; or

arising under common law, equity, statute, restitution or otherwise.

Accord and satisfaction What is accord and satisfaction?

• The acceptance by the plaintiff of something in place of his cause of action; • Accord is the agreement or consent to accept the satisfaction; • The purpose of an accord is to replace the former contract with a new one.

Accord and satisfaction in the context of a dispute • Where there is an agreement to accept a promise in satisfaction of the cause of action, the original cause of action is discharged from the date when the promise is made - McDermott v Black; Osborn & Bernotti v McDermott 26

Exclusion and limitation of liability clauses Exclusion clause • exclude the rights of a party to a contract for breach of a duty. It is only for the benefit of one party.

Limitation of liability clause • restricts a party’s liability arising from a breach of contract. It operates only in certain circumstances and can limit damages to a specified sum or to a maximum amount.

Agreed damages clause • which fixes the sum payable as damage in the event of breach without the requirement that the plaintiff prove loss or damage.

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Interpretation of exclusion clauses Case law • Operation of an exclusionary clause depends on the intention of the parties - Darlington Futures Ltd v Delco Australia Statutory intervention (for consumer matters) • Designed for the protection of consumers, some provisions specifically prohibit exclusion clauses – see Australian Consumer Law ss 60 and 64; Contracts Review Act 1980 Liability for negligence • If a clause seeks to limit liability for negligence, a clear manifestation of intention is required.

Misleading and deceptive conduct • Limiting liability for pre-contractual statements prohibited.

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Indemnities

An indemnity is an obligation by one party to make good losses sustained by another party.

Indemnities commonly refer to acts or omissions of the party giving the indemnity.

It is important to draft indemnity obligations with precision as relatively insignificant differences in drafting may affect the interpretation of such clauses, which are construed strictly – see Andar v Brambles

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Practical legal and drafting tips for exclusion or limitation clauses •

Any pre-contractual statements are specifically included or excluded as terms of the contract

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Make sure each party has the opportunity to obtain independent legal advice before signing the contract.

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Consider carefully your limitation or exclusion of liability clauses to ensure they will work the way you want them to

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For each representation, make sure it is complete and correct at the time you make it – or, if it is a representation as to a future matter, you had reasonable grounds to believe it to be true

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Where possible, specifically identify the statutory prohibition that affects the limitation of liability, thereby clearly demonstrating the intention of the parties

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Identify the type of liability you are attempting to limit or exclude and confirm it is capable of being limited and excluded

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