The legal interpretation of contract can be a minefield for the unwary. HAYLEY KELLOWAY of RMB Lawyers explains the approach that Australian Courts take in interpreting contracts when disputes arise:
Contractual obligations are found within so many aspects of our day to day life.
Have you ever wondered what approach the Courts take when having to interpret contracts?
For example, to what extent can one party to a contract aim to rely on conversations, promises or a subjective intention/understanding about a matter concerning a contract – if it is not specifically mentioned within the wording of the contract itself?
Australian Courts have adopted an object approach to contractual interpretation. In doing so, the Courts aim to give effect to the presumed intentions of the parties – as opposed to any subjective intentions. The Court considers what a reasonable person would understand the words of the contract to mean.
It is only when there is ambiguity within the terms of the contract that the Court will then consider pre-contractual statements to assist in establishing the objective background facts. This will aid in rectifying the said ambiguity, by providing context to the terms of the contract.
Being able to consider extrinsic factors only in limited circumstances, ensures that the binding nature of a contract is not undermined.
Without it, there potentially would be numerous loopholes for parties to rely on subjective intentions and/or understandings, outside of the wording of the contract itself.
The benefit of the objective approach is that it saves the Court the time of having to try and determine the subjective intentions of the parties to a contract – on a case by case basis.
Taking into consideration the terms within the contract itself, provides uniformity and certainty - not only to the parties at hand, but also for public policy purposes.
The objective contractual interpretation approach helps establish and maintain commercial predictability. It provides a greater emphasis for the enforceability of terms and/or obligations created under a contract, so that parties appreciate the binding nature of entering into a contractual agreement.
It is obvious that a poorly constructed contract can lead to all kinds of problems. RMB Lawyers can assist you to draw up binding contracts that meet all the requirements of our Courts to help you avoid potential difficulties in the future. Contact our office to arrange a free consultation by phone or our 'Ask a Question' tool on our website.