Construction and interpretation of contracts

HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342


Applicable principles of construction

127 It is idle to pretend that the questions of construction raised on this appeal are anything other than contestable. I should acknowledge at the outset that although I have reached a different conclusion, my task has been made easier by the illuminating analyses of Black and Darke JJ.
Basic principles of construction

128 First, it is axiomatic that a contract can have but one legal meaning. As it was put by Sir Montague Smith, “[A]fter all, there must be one true construction”. His advice on behalf of the Judicial Committee of the Privy Council was applied in Life Insurance Company of Australia Ltd v Phillips (1925) 36 CLR 60 at 78-79. That is not to say that the application of that legal meaning to the facts may not be uncertain in a particular case, which is the point made by Branson and Lindgren JJ in Universal Music Australia Pty Ltd v Sharman Networks Ltd (2006) 150 FCR 110; [2006] FCAFC 41 at [29]-[30] and [55]-[56]. However, the way in which the question arises in this litigation, on agreed facts, means that any difficulties of application fall away.

129 Secondly, it is axiomatic that (a) the words in a sentence are not building blocks whose meaning is unaffected by the rest of the sentence, (b) the sentence is the unit of communication by which language works, and (c) the significance of individual words is affected by other words and the syntax of the whole sentence: see Lord Hoffmann’s speech in R v Brown [1996] AC 543 at 561 and its endorsement in Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 at 397. The task is not to find the legal meaning of particular words within the clause, but the clause as a whole. This principle bears upon some of the submissions which focussed on the particular words “made available” and “by the Grower”.

130 Thirdly, the words in cl 5.2(c) are readily capable of sustaining more than one literal or grammatical meaning. No party contends that the competing legal meanings are not open as a matter of the literal or grammatical meaning of the contractual language. One available grammatical meaning of “the Grower’s income from his interest in the Project” is the monies required to be paid to the grower pursuant to cl 17.8 of the Investment Deed. Another available grammatical meaning of the same words is the proportion of the Gross Sale Proceeds attributable to the particular Grower. The “income” of most Australian employees is, after all, considerably more than the amounts credited to their bank accounts by their employers, and the income declared by investors in the Coonabarabran Orchard Project would exceed the amounts received by them pursuant to cl 17.8.

131 Fourthly, the task of identifying the single legal meaning of the clause is the task of identifying the imputed intention of the parties, by reference to the contractual text construed in light of its context and purpose: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[51] and [108]-[109]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]-[75]; Simic v New South Wales Land and Housing Corporation [2016] HCA 47 at [18] and [78].

132 Fifthly, as the High Court said in Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530; [2004] HCA 56 at [82]:

“It was necessary to construe the [contract] so as to avoid it making commercial nonsense or working commercial inconvenience. Its commercial purpose – the purpose of reasonable persons in the position of TOC and the plaintiff – was relevant. That, in turn, required attention to ‘the genesis of the transaction, the background, the context, the market’ in which the parties were operating, as known to both parties.” [Citations omitted.]

133 Sixthly, it is open to the parties to confine the material available to the Court for the purpose of identifying the legal meaning. For example, the parties may choose not to adduce evidence of surrounding circumstances or commercial purpose which would otherwise be admissible on the question of construction. In the present case, the question arises on a very narrow background (given by the Statement of Agreed Facts), and it will be seen below that, even then, there remains a dispute as to whether material not contained in the contractual documents may be used for the purposes of construction. I am not implying any criticism of the way the issue has been presented; to the contrary, where as here a large number of parties have become bound by the same contractual terms, it is unlikely that there will be much scope for evidence of surrounding circumstances.
134 Seventhly, it is trite that the contract must be construed as a whole, with a view to the legal meaning reflecting a measure of internal coherence: thus “preference is given to a construction supplying a congruent operation to the various components of the whole”: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 at [16]. In a case such as the present, where the difficulties are real, that involves what Lords Neuberger and Mance have described as an “iterative process” – “checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences”: see Re Sigma Finance Corp (in administrative receivership) [2009] UKSC 2; [2010] 1 All ER 571 at [12], and see Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 at [28] and Richmond v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147 at [98]. Lord Grabiner has, in my view rightly, regarded this as “fundamental”: “The iterative process of contractual interpretation” (2012) 128 Law Quarterly Review 41 at 45-49 and 61. The process of working through the consequences of the competing literal or grammatical meanings enables a court to assess whether either party’s preferred legal meaning gives rise to a result that is more or less internally consistent and avoids commercial absurdity.

135 What is more, in complex cases such as the present, it is likely that there will be internal inconsistencies or infelicities on any construction. It is important therefore not to conclude the evaluation too soon. Just because one party’s preferred construction leads to a result which is internally inconsistent does not mean that the other party’s competing construction is the legal meaning. The other construction may, on analysis, involve a more serious internal inconsistency.

136 Eighthly, all four contractual documents are to be read together. Not only does cl 5.2 refer in terms to cl 17.8 of the Investment Deed, but also the entire purpose of the loan, entered into simultaneously with the other three contracts, was to fund costs of the Coonabarabran Orchard Project, which was governed by those other three contracts. The position resembles that stated in Zhu v Treasurer of the State of New South Wales at [82]:
“The execution of the Deed Poll pursuant to an obligation in, and at the same time as, the Agency Agreement meant that it had to be given a construction conformable with the Agency Agreement.”

137 There was no dispute at all, at least so far as I was aware, between the parties as to the operation of these principles of construction. Yet there was a tendency in some of the submissions to enumerate as large a number of textual and contextual submissions as could be, with the seeming intent that that party’s construction should be favoured merely as a matter of numerical abundance of supporting arguments. But ascertaining the legal meaning of a commercial contract is not determined by counting the number of arguments put on each side, still less by the creative ingenuity of the parties’ lawyers.

The weight to be given to competing considerations

138 The various textual and contextual submissions advanced by the parties do not all carry the same weight. Indeed, the weight they carry varies depending upon the particular contract, and there are principles for determining which submissions are of greatest weight in any particular case. The following matters bear directly on this point.

139 First, the agreements appear to have been hastily and somewhat casually drafted. This may be a consequence of the commercial imperative for the prospectus (which was lodged on 4 June 1993) to be registered in time for its being marketed to potential investors before 30 June of that year. Irrespective of the cause, there are superficial drafting errors and obscurities throughout the documents. For example (the following are taken only from clauses which are of central relevance to the appeals),

(1) In cl 17.6 of the Investment Deed, the first reference to “accordance” is misspelt.
(2) The erroneous reference to cl 17.7 (as opposed to cl 17.8) in item 4 of Schedule 1 of the Loan Agreement has been noted above.
(3) Clause 5.2 of the Loan Agreement shifts from “Borrower” in cl 5.2(a) to references to “Grower” in cl 5.2(b) and (c), although plainly at all times is referring to the same person.
(4) The application form for the loan asks for a cheque payable to “permanent [sic] Trustee Company Ltd”.
140 Secondly, there is a recurring verbosity and lack of precision in the drafting. Why is the qualified limited recourse provision found in cl 5.2(c) under the heading “Security” rather than as a qualification upon the obligation to repay? How does a deemed irrevocable authorisation and direction differ from the irrevocable authorisation and direction which cl 5.2(a) would otherwise effect? Why is the future tense used? And why the authorisation of repayment to the Lender under cl 3.3 as well as cl 5.2(a)? I am not implying that there is any great difficulty identifying the legal meaning of cl 5.2(a); as Mr Walker observed of the future deeming in it, “the language may not be elegant but it is unmistakably clear”. My point is that the loose use of language here and elsewhere throughout the contracts tends to diminish the weight that is to be given to some of the more nuanced submissions advanced by the parties.
141 Thirdly, there are also some quite serious infelicities in the drafting. There is, for example, a large difficulty with the formula in cl 17.6 (which determines a proportion of Gross Sale Proceeds), contrary to the introductory words of the same clause, which refer to “a share of the Net Income”. What is meant by including the Investor Loan Agreement as part of the Security is also highly unclear.
142 The weight to be given to various considerations based on text, context and purpose leading to the determination of a contract’s legal meaning depends on the particular contract. For example, greater weight should be given to a change in language in a contract which uses language carefully and consistently. Conversely, as I said in Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184 at [98]:
“Legal meaning should not turn on arguments based on semantic exactitude where it is plain that the parties have recorded their bargain in loose, ungrammatical language.”

143 Diplock LJ was making much the same point when he said in Lindsay (WN) & Co Ltd v European Grain & Shipping Agency Ltd [1963] 1 Lloyd’s Rep 437 at 443:

“… the drafting is not self-consistent, and the nomenclature employed is not uniform. The usual presumption that the same word is used throughout the contract in the same meaning is less strong than in the case of a contract drafted at one time by a single draftsman.”

144 Those considerations tend to diminish the force of some of the parties’ finer textual submissions. For example, where as here there is every indication that no close detail has been paid to much of the language, I find it difficult to give much significance to what flows from the words “for the purpose”, or the use of the passive in the words “by the Grower”.
145 The nature of litigation is such that the particular issue presented to a court is often one which may never have come to the parties’ attention. As Mr Sumption QC pithily put the position in submissions in Wasa International Insurance Co Ltd v Lexington Insurance Co [2010] AC 180 at 186:

“Any judicial interpretation of a contract involves retrospectively attaching to it a meaning which hypothetical persons in the position of the parties are assumed to have intended at the time when it was made, but which may have been unclear or unknown to those particular parties.”

146 In the present case, the possibility that TROM would have assigned the Borrowers’ debts and failed to remit all of the Gross Sale Proceeds to the Representative is scarcely a circumstance which could have been at the forefront of the drafter’s mind. Ordinarily in such cases, I am inclined to think that context and purpose are apt to have less weight. For example, the numerous contests between the lessors and lessees concerning the ownership at the end of the lease of poker machine entitlements (a form of valuable statutory property which came into existence after many leases had been entered into) all took place in essentially the same context and purpose and were resolved on the basis of quite fine textual differences in each lease (see for example Yarraburn Nominees v Alliance Engineering Pty Ltd [2010] NSWSC 1081 at [30]-[35]).

147 Finally, and especially where the contract is characterised by looseness of expression and unnecessary words, it makes sense for the legal meaning of identical words in related agreements to be the same. “[W]here parties have used language which means one thing in a contract to which they were parties, and they use the same language in another, it is likely that it will have the same meaning”: Shell UK Ltd v Total UK Ltd [2010] 3 All ER 793; [2010] EWCA Civ 180 at [16]. In the present case, this is an aspect of reading the four agreements which the Representative was authorised to enter into on the Grower’s/Borrower’s behalf together and as a whole.