Contract: objective approach

Angas Securities Ltd v Small Business Consortium Lloyds Consortium No. 9056 [2016] NSWCA 182

Leeming JA

  1. All this accords with the “principle of objectivity” which is central to contractual construction. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40], the High Court unanimously said:

“This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. 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. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. 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.” [Citations omitted.]

  1. The distinction between impermissible regard to the parties’ subjective intentions and expectations and permissible recourse to objective matters known to the parties may be seen in a number of recent decisions of the High Court. Without purporting to be exhaustive, in Byrnes v Kendle [2011] HCA 26; 243 CLR 253, Heydon and Crennan JJ said at [98]:

“A contract means what a reasonable person having all the background knowledge of the ‘surrounding circumstances’ available to the parties would have understood them to be using the language in the contract to mean. But evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of ‘surrounding circumstances’. And in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd this Court said:

‘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.’” [Citations omitted.]

  1. Substantially the same distinction was drawn by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 89 ALJR 990 at [50]:

“Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.”

  1. I note that the references in both of those passages to evidence being “inadmissible” are references not to the evidence being tendered, but to its being used in some particular process of reasoning, a point recently emphasised in D Reynolds, “Construction of contracts after Mount Bruce Mining v Wright Prospecting” (2016) 90 Australian Law Journal 190 at 193.
  2. Hence, I am of the view that regard can be had to the 2010 Letter, which was an objective matter known to both of the parties giving rise to the Deed of Release. I think the position is no different from that stated by Gleeson CJ in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; 234 CLR 151 at [8]:

“This is a case in which the Court’s general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes its meaning.” [Citation omitted.]

  1. The construction upheld by the primary judge and for which SBC contends is entirely consistent with para 18 of that letter.
  2. Although in this respect my analysis differs from that adopted by Sackville AJA, I respectfully agree with him that, even if the 2010 Letter be put entirely to one side, the other considerations referred to above and to which he has referred sustain the same result.

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