No “common view” of “commercial common-sense” in contract

LAURA KEILY | Founder and Barrister  Case Update   No “common view” of “commercial common-sense” in contract

No “common view” of “commercial common-sense” in contract

This case highlights both the inherent mutability and increasing importance of ‘commercial common-sense’ in the construction of contracts, particularly where the contract in question has been poorly drafted as it clearly was in this case. What a reasonable business person considers commercial at the time of entering a contract is never a sure thing and as Nettle J observed in his dissenting judgment, the weight given to different principles of contractual interpretation can lead to opposing applications of commercial common-sense.

To avoid this uncertainty, parties should include in a contract an unequivocal statement of its commercial objects. Also all contracts should be signed in final and unmarked form.

Summary

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd 2017 HCA 12 (Ecosse) concerns the construction of a 99-year lease entered into in 1988 and whether clause 4 imposes complete liability on the lessee for all rates, taxes, assessments and outgoings in relation to the leased property and as submitted by the Appellant, or only those charges payable by a lessee as argued by Gee Dee Nominees Pty Ltd.

High Court ruling

Preferring the reasoning of the Judge at first instance (Croft J) and Kyrou JA’s Victorian dissenting judgment on appeal, the High Court of Australia reversed the decision of the Victorian Court of Appeal and construed the provision in favour of the Appellant and current lessor.
The majority (Kiefel, Bell and Gordon JJ and Gagelar J in a separate judgment) held that the unclear clause and lease more broadly should be read to give effect to the parties’ objective intention to create a lease that resembled the conditions following a sale (which could not be achieved as originally intended because of planning restrictions that prevented a subdivision of the land).

Nettle J’s dissenting judgment differs from the majority in two main ways. First, His Honour does not consider the clause ambiguous but as conferring a limited liability on the lessee when properly viewed within the lease as a whole and given its plain and ordinary meaning.

Marked up text

Interestingly, all of the judges considered the implications of deleted text which were evident from a precedent, rather than considering the clean text without reference to the markups. In our view, this is a softening of the rule that negotiations and prior drafts should not be taken into account. In our view, the clause should have been construed in a “clean” fashion without considering deletions. The way in which all judges analysed the text opens a door for prior drafts to be considered as part of the parties’ intentions rather than the final text. While some effort was made to distinguish this because it was a “precedent”, there is no sound theoretical basis for distinguishing strike throughs on a precedent from ordinary drafts produced during detailed negotiation process.

Commercial common-sense

Nettle J also takes issue with the majority’s emphasis on what His Honour considers a preferred commercial outcome for one party at odds with the wording and nature of the obligations in the lease. His Honour’s application of commercial common-sense extends only so far as requiring that the plain and ordinary reading not produce an uncommercial result which in his view it does not, contrary to the majority’s analysis. To place any more weight on such considerations (which as the document was drafted in 1988 involves a fair degree of retrospective conjecture) is in Nettle J’s view to stray outside the proper purview of the court’s role in clarifying disputed terms.

A move away from Codelfa Constructions?

Does this case provide authority for a softening of the rule in Codelfa Constructions or the ‘ambiguity gateway’ as argued by some commentators? In the view of these authors, the answer is no. The majority view the Applicant and Respondents’ conflicting interpretations of the clause as both plausible and it is from this position of textual ambiguity that they look to the surrounding circumstances to determine the parties’ objective intentions. That this decision reiterates the relevance of a contract’s commercial context in ascertaining the objective intention of the parties to determine the meaning of an ambiguous and contested clause is not tantamount to a departure from Codelfa Constructions or contrary to established principles of construction.

 

Co-authored by Laura Keily and Chloe Armstrong.