'Legal principles of contract construction

108. It was common ground that the purpose of the exercise of construction is to ascertain the objective meaning which would be conveyed to a reasonable business person …

109. The Claimants' Pre-Hearing Submissions as to the applicable principles of construction were a product of the way in which it then put its case, which appeared to be on the basis that the language of the Disputed Restraint created an ambiguity.

110. It was submitted that the starting point for construing the Disputed Restraint was its terms in the context of both the Shareholders Agreement as a whole and the related Transaction Documents. If there were two or more possible constructions available then a construction which would lead to unreasonable results should be avoided and, separately, that the construction which promotes the lawfulness of the contract should be preferred.

111. Much emphasis was placed on the context or factual matrix, which constituted the background in which the contract was drafted, the surrounding circumstances known to the Parties and the commercial purpose and object of the transaction. It was submitted that the relevance of surrounding circumstances did not depend upon a finding of ambiguity. Further, evidence of pre-contractual negotiations was admissible to the extent to which it had a tendency to establish objective background facts which were known to both Parties and the subject matter of the contract. The Claimant emphasised the need for flexibility in identifying relevant surrounding circumstances by reference to two decisions of the New South Wales Court of Appeal.1

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113. In their Post-Hearing Submissions, the Claimants drew the Tribunal's attention to Franklins Pty Limited v. Metcash Trading Ltd,2 a decision of the New South Wales Court of Appeal delivered following the hearing in which the principles of contract construction were fully considered. In that case, the Claimants submitted, the Court of Appeal held:

(a) There is no requirement for textual or other ambiguity in the words of a contract before any resort can be made to evidence of surrounding circumstances.

(b) The question is the scope of material to which regard may be had in ascertaining the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(c) A commercial contract should be given a businesslike interpretation. Thus the nature and extent of the commercial aims and purposes of the agreement or parts thereof are part of the essential background circumstances. The words of a contract should be given a construction so as to avoid making commercial nonsense or as is shown to be commercially inconvenient. The words in a business contract should not be approached pedantically or in a manner prone to defeat the evident commercial purpose.

(d) The evidence, to be admissible, must be relevant to a fact in issue, probative of the surrounding circumstances known to the parties or of the purpose or object of the transaction, including its genesis, background, context and market in which the parties are operating. What is impermissible is evidence, whether of negotiations, drafts or otherwise, which is probative of, or led so as to understand, the actual intentions of the parties. Such evidence might be legitimate, however, if directed to one of the legitimate aspects of surrounding circumstances. The distinction can be subtle in any particular case.

(e) A practical example of the sort of contextual matters that can be taken into account in construing a contract can be found in Royal Botanic Gardens and Domain Trust v. South Sydney City Council,3 namely the concern of the parties not for the obtaining by one of commercial profit at the expense of the other, but to protect the lessor from financial disadvantage suffered from the transaction.

(f) Recitals can be used as an aid to construction of a contract.

(g) Conduct subsequent to the entering into of a contract is not relevant to construction save to the extent that it reveals probative evidence of antecedent surrounding circumstances. It may, however, be relevant as to estoppel.

114. The Claimants submitted that the principles of construction outlined by the Court of Appeal in Franklins v. Metcash were materially indistinct from that set out in the speech of Lord Hoffman in Chartbrook.

115. In their Post-Hearing Submissions, the [first three] Respondents acknowledged that there was little substantial difference between themselves and the Claimants as to the applicable principles of contractual construction. …

116. However, in general terms, the [first three] Respondents submitted that the Claimants had overstated the willingness of Australian courts to rewrite contracts in commercial disputes. They submitted that to the extent that the Claimants' sought to invoke Chartbrook as an authority permitting the Tribunal to ignore paragraph (a) of the definition of Restrained Businesses or the natural meaning of "elsewhere in the world" in clause 3.6, they misstated the effect of that case. By reference to Lord Hoffman's speech in Chartbrook, the [first three] Respondents submitted that it must be clear (a) that "something has gone wrong with the language" and (b) "what a reasonable person would have understood the parties to have meant" before one can ignore that language.

117. The [fourth and fifth] Respondents generally accepted the correctness of the principles of construction outlined in the Claimants' pre-hearing submissions and their summary of the principles set out in Franklins v. Metcash. Separately, the [fourth and fifth] Respondents mirrored the [first three] Respondents' submission that to the extent that the Claimant sought to invoke Chartbrook as an authority that would permit the Tribunal to ignore paragraph (a) of the definition of Restrained Businesses, it misstated the effect of that case. In closing [their counsel] submitted that it was "beyond the realm of construction" to add words in the manner suggested by the Claimants ... It was submitted that this was rectification and not construction and would lead to internal inconsistencies within the Shareholders Agreement.

Tribunal's determinations as to applicable legal principles

118. It is well established that the task of construction is one of ascertaining the objective meaning by an examination of the text of the document in the context of the surrounding circumstances that would have reasonably been available to the parties at the time they were contracting, including the purpose and object of the transaction, and by assessing how a reasonable person would have understood the language in that context.4

119. The Tribunal further accepts that if it concludes from the context and background that something must have gone wrong with the language of the Disputed Restraint, the law does not require it to attribute to the Parties an intention which they plainly could not have had: see Chartbrook.5 That case makes it clear that before the Tribunal can correct a mistake by construction not only must it be clear that something has gone wrong with the language but it must also be clear what a reasonable person would have understood the parties to have meant. Contrary to the Respondents' submission, provided those requirements are satisfied there is no limit to the amount of correction which the Tribunal is allowed. That is clear from Lord Hoffman's speech in Chartbrook at paragraphs [21] and [25]:

....I do not think that it is necessary to undertake the exercise of comparing this language with that of the definition in order to see how much use of red ink is involved. When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties...is no reason for not giving effect to what they appear to have meant.

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What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.

120. The Tribunal is satisfied that this represents the law of New South Wales: see Noon v. Bondi Beach Retirement Village Pty Ltd where the New South Wales Court of Appeal referred to Chartbrook and recognized that "the process of construction may bring a marked diversion from the text".6

121. Separately, the Tribunal notes Lord Hoffman's observation in Chartbrook that the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says.7

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158. Having regard to the language of the Disputed Restraint, it is the Tribunal's view that in order to succeed as a matter of interpretation the Claimants must rely on establishing from the context and background that something has gone wrong with the language such that the Tribunal can correct a mistake by construction.

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The Tribunal's findings as to commercial context

260. It is first necessary for the Tribunal to determine the relevant context in which the Disputed Restraint must be construed, accepting that it is still the words of the Disputed Restraint whose meaning must be decided in the context of the Shareholders Agreement, the Transaction Documents and the surrounding circumstances.

261. A threshold issue arises as to whether it is necessary for the claimed context to have been known to the … Shareholders at the time of the merger as claimed by the Respondents. The law is clear on this issue. The background circumstances that can be taken into account for the purposes of construction must be reasonably available to the parties at the time of the contract: see Franklins v. Metcash.8 That is an objectively judged requirement and actual knowledge or ignorance of facts which form part of the circumstances in which the parties contract is irrelevant. However, it flows from that that statements by the Parties about their subjective intentions in entering the agreement do not assist the Tribunal in ascertaining the meaning of the Disputed Restraint.

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The Tribunal's findings on commercial consequences

293. The Tribunal notes that there are well-established limits to the use of so-called commercial common sense to construe a contract: see Kooee Communications Pty Ltd v. Primus Telecommunications Pty Ltd.9 Those limits were properly acknowledged by [counsel] for the Claimants in the course of closing submissions. They stipulate that it is not the role of the Tribunal to rewrite a commercial contract simply because one party contends that its preferred construction would effect what appears to be a sensible commercial purpose. As a separate but related matter, the Tribunal adopts Lord Hoffman's observation in Chartbrook that the fact that a contract may appear to be unduly favourable to one of the Parties is not a sufficient reason for supposing that it does not mean what it says.10

294. Ultimately, the relevance of business common sense to the task of interpretation is an aspect of the objective approach to contractual construction. In the context of ambiguity, it may mean no more than preferring the construction which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust because such an approach is likely to best give effect to the intention of the parties: see Australian Broadcasting Commission v. Australian Performing Right Association Limited.11 However, in the context of construction for error correction it will be necessary to demonstrate that "something has gone wrong with the language" such [that] giving the words of the contract their ordinary meaning "flouts business sense" or leads to results which are "arbitrary and irrational". Chartbrook is an example of this as Lord Hoffman said that it made "no commercial sense" to interpret the relevant definition "in accordance with the ordinary rules of syntax". 12'

1
Boreland v. Docker [2007] NSWCA 94 and Challenger Group Holdings v. Concept Equity Pty Limited [2009] NSWCA 190.

2
[2009] NSWCA 407.

3
(2002) ALJR 436 at [30].

4
See, for example, Franklins Pty Ltd v. Metcash Trading Limited [2009] NSWCA 407 at [14] per Allsop P.

5
At [14].

6
[2010] NSWCA 202 at [46].

7
At [20].

8
[2009] NSWCA 407 at [49] et seq.

9
[2008] NSWCA 5 at [27].

10
At [20].

11
(1973) 129 CLR 99, 109.

12
At [16].