Construction of Contracts

The "construction of contracts" is basically the process used to determine and give meaning to the intention of the parties. There are a number of rules used, which have been derived from the leading cases, including that the rights and liabilities are determined objectively by reference to the text and the context (the entire text of the contract, documents and legislation referred to) and commercial purpose /objects of the contract. Much of this is known as the objective theory of contract law as this area of the law is less concerned with the subjective intentions of the parties.

Another rule that is often encountered in this context is the parol evidence rule. This rule can, unless an exception applies, prevent extrinsic evidence from being looked at to determine the meaning of a contract where the parties have taken the trouble to try and document it all. In some situations where there is an entire agreement clause a party might wish to place reliance on this rule.

Potential Scenarios - Construction of Contracts

  • Complex contracts often contain clauses that are hard to understand;
  • The contract means one thing to you, and another to the other party;
  • You cannot resolve the meaning of a contract by agreeing its meaning and need help from the Court.

Important Quotes in Cases on Construction of Contracts

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. That approach is not unfamiliar. As reaffirmed, 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. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience - Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35]

Let Us Help You

  • Work out what is certain and uncertain in a contract;
  • Apply the rules about the construction of contracts to try and determine the obligations of the parties;
  • Understand the objective theory of contract law;
  • Place reliance on the parol evidence rule or seek to exclude it where appropriate;
  • Know the types of evidence looked at in the construction of contracts;
  • Get greater clarity on what your contract means for you, and the other party to it;
  • Approach the Court where there is a dispute about its meaning that cannot be resolved between you and the other party.

* This content does not purport to give legal advice. Readers must obtain their own legal advice, that applies to the particular circumstances of their case, before taking any action at all.