High Court confirms the objective approach for the construction of contracts

by Andrew Lind on 3 July, 19

In Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 the construction of contracts was one of the issues in dispute.  The High Court  reaffirmed that parties to commercial contracts should adopt an objective approach in determining their contractual rights and obligations.

Objective Approach

The objective approach seeks to determine the meaning of a commercial contract by asking the question “What would a reasonable business person have understood those terms to mean?”.

Interpretation in context

To arrive at the correct interpretation of a contract it is necessary to consider the language used by the parties in a specific contract, the surrounding circumstances known to the parties at the time of entering into the contract and the commercial purpose or objects to be achieved by the contract.  An understanding of the commercial purpose of the contract may be gleaned from an appreciation of the type of transaction, the background to the transaction, context and the market place both parties are finding themselves in.

Businesslike interpretation

The High Court also referred with approval to the Arden LJ’s comments in Re Golden Key Ltd [2009] EWCA Civ 636 that unless a contrary intention is shown, 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.”.  Parties must avoid a construction that would result in “making commercial nonsense” or would result in a “commercial inconvenience”.

Conclusion

By following an objective approach specific terms in a contract are interpreted not only in the context of the contract as a whole, but also taking into account the commercial purpose of the contract.  This approach seeks to avoid the interpretation of specific clauses in isolation without having regard to where the specific clause fits into the “big picture”.

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