Lost in translation: when the legal effect of a contract departs from its literal meaning

What was this case about?

This case illustrates the complications that can arise when the parties to a contract prepare the contractual document themselves, without any legal training, in a language other than English; leading to disputes over the English translation of the contract and its intended effect, as properly construed.

Ultimately, the plaintiff’s claim did not turn on a point of translation. Rather, the key issue for the courts to determine, at first instance and then on appeal, was whether to give the parties’ choice of words their literal meaning or a different legal effect based on the broader context and business objectives of the contract as a whole.

In a two-to-one majority decision, consistent with recent judgments in the High Court that stress the importance of context, the Court of Appeal upheld the primary judge’s decision to favour a legal effect that departed from the literal meaning of the contract, notwithstanding such an interpretation was ‘somewhat strained’. However, the minority opinion of Brereton JA sought to emphasise the primacy of the words chosen by the parties in determining a contract’s legal effect.

What happened?

Mr Guangyi Sui (Sui) was a Chinese businessman pursuing investment opportunities in Australia as a requirement of his visa. Sui met Mr Zhaoquing Jiang (Jiang), a fellow businessman and prominent member of the Australian Dongbei Chinese Association. Together Sui and Jiang met with representatives of the Northern Territory Government to discuss a potential investment in two particular plots of land in the Northern Territory, each being 10 square kilometres (Land), to grow Chinese herbs.

To that end, in May 2017, Sui and Jiang entered into a written agreement to develop the Land (Contract). The Contract was:

  • drafted almost entirely in Chinese Mandarin
  • only five clauses long
  • drafted by Sui without the involvement of a lawyer
  • perhaps unsurprisingly, the subject of proceedings before the Supreme Court of New South Wales, at first instance, and subsequently the Court of Appeal.

The contract

Both parties accepted the Contract provided that Sui would:

  • invest $1.5 million AUD in a company, Australian Fulin Agriculture Pty Ltd (Fulin) which owned interests in the Land
  • acquire a 40% shareholding in Fulin
  • receive a 10% return on the funds invested, each year for three years.

The controversy in this case concerned what the parties had agreed would happen in the fourth year. The relevant provision of the Contract (translated into English) stated:

From the fourth year onwards, [Sui] is entitled to request an increase in the return on his investment, or choose to take part in the company's operation and become a true 40% shareholder, or choose to leave the company, but [Sui] is entitled to transfer the 40% equity in the 20 square kilometres to others at the then market price. In the event the sale price is for less than AUD1.5 million, [Jiang] shall make up the difference. Prior to the transfer of the land, [Jiang] guarantees that [Sui] has legal ownership of 8 square kilometres of the agricultural land and shall provide [Sui] with relevant legal documents.

The controversy arose as a result of Fulin’s failure to comply with the conditions of the Crown leases that Fulin had acquired from the Northern Territory Government for the Land (Lease). The Lease required Fulin to:

  • clear and cultivate with agricultural crops at least 1% of the Land in each year of the five years of the term of the Lease
  • construct sufficient infrastructure on the Land as to enable the Land to be worked, within five years of the commencement of the Lease.

If Fulin satisfied these conditions, the Lease entitled Fulin to convert the Crown lease to a freehold.

However, after two years from the commencement of the Lease, no crops had been planted and no infrastructure had been constructed on the Land. After learning this, Sui commenced proceedings claiming that Jiang had repudiated the Contract.

Sui claimed that Fulin’s failure to comply with the conditions of the Lease prevent the conversion of the Crown leases into freehold interests and, by extension, prevented Jiang from transferring a freehold interest in 40% of the Land to Sui pursuant to the Contract, if Sui elected to exit the arrangement and leave the company in the fourth year. Sui commenced proceedings in the third year of the Contract and, accordingly, claimed damages for anticipatory breach.

In Jiang’s defence, he submitted that the Contract merely gave Sui a right to sell his 40% shareholding in Fulin; rather than 40% of the Land itself.

Competing translations

Incidentally, the parties dedicated significant efforts to arguing over the English translation of a clause in the Contract that was found to be ‘essentially irrelevant’ to Sui’s principal claim (as his counsel admitted in oral submissions to the appellate court). The clause contained the Mandarin word 'gu quan' (股权), which has a variety of meanings including:

  • ‘shareholding’
  • ‘equity’ (including both an interest in land or an interest in a company)
  • ‘legal ownership’; or
  • ‘shareholder’s rights’.

The court considered evidence provided by expert translators to determine which possible meaning of ‘gu quan’ was the best fit for the proper construction of the Contract.

However, in respect of the clause set out above, upon which Sui based his claim for anticipatory breach, there were few salient differences between the translations advanced by each party’s expert witnesses.

The judgement

The primary judge found that the Contract did not entitle Sui to acquire a freehold interest in the Land, and the Court of Appeal upheld that judgement in a two-to-one majority decision. In dismissing Sui’s construction of the Contract, Leeming JA (with whom Gleeson JA agreed) reasoned that:

  • the Contract did not identify which particular eight square kilometres were to be transferred to Sui, or any mechanism for doing so, and some parts of the Land were presumably more valuable than others. Accordingly, it would not make commercial sense if the Contract entitled Jiang to choose the least valuable eight square kilometres to transfer to Sui, at the time when the parties were separating their commercial interests;
  • if Sui became entitled to legal ownership of eight square kilometres of the Land, he would have to somehow relinquish his 40% shareholding in Fulin but the Contract was silent in that regard;
  • if Sui’s shareholding was a security interest in the Land analogous to that of a mortgagee (as Sui contended), the Contract was conspicuously silent about repayment of the $1.5 million;
  • evidence of the background to the parties’ transaction showed that Sui had bought out a minority shareholder in Fulin (with whom Jiang had been ‘having some personality difficulties’). His Honour concluded that Sui’s right to sell in the fourth year of the Contract correlated to what he had bought in the first place; that is, a minority shareholding in Fulin rather than the Land itself; and
  • Sui’s translator admitted under cross-examination that she thought that the parties’ words, translated literally as ‘prior to the transfer’, implicitly referred to the transfer of the Land but the Contract did not include an express reference to the Land in the relevant sentence. The Court of Appeal majority held that the parties’ choice to not mention the Land made Jiang’s construction of the Contract more plausible than that argued by Sui.

In reaching its decision, the Court of Appeal majority relied upon the well-established legal principles for construing commercial contracts:[1]

In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

Leeming JA conceded that the majority judgment’s interpretation of the Contract departed from the literal meaning of the words chosen by the parties, lamenting that ‘there is no way of construing this admittedly imperfectly drafted contract without there being some distortion from the literal meaning’.

However, in his dissenting judgement, Brereton JA held that the last sentence of the relevant clause (which clearly and explicitly envisaged the transfer of ownership of the Land to Sui) was ‘intractable’ and consistent with the Contract as a whole, which was primarily focussed on the Land – being Fulin’s only real asset.

Further, Brereton JA found that the absence of any provisions in the Contract dealing with the various commercial matters that the majority of the appellate court counted against the construction argued by Sui (e.g. the retransfer of his shares and subdivision of the Land) was ‘unremarkable’; given that the Contract was drafted by laypersons and provided that ‘matters not covered by this agreement may be dealt with through friendly negotiation’.

Key takeaways

This is not the first time the Chinese language has vexed commercial dealings in Australia.[2] However, in an increasingly global market, contracts can be expressed in a variety of languages and Australian courts have shown a willingness to scrutinise translations.

While Australian government entities rarely enter into contracts written in a language other than English (aside from international treaties, which are frequently stated to be authoritative in multiple languages), there are often substantial parts of commercial contracts drafted by government officials who have no particular expertise in contract drafting or Australian contract law. For example, detailed specifications of the goods or services being procured are often set out in a Statement of Requirements or Statement of Work prepared by technical subject-matter experts (SMEs), sometimes without any legal review.

The words typically chosen by SMEs may be commonplace amongst those in the industry, but might not necessarily be intended to connote the ordinary meaning of the word (which is what a court might understand such terms to mean) nor carry any special meaning recognised by the industry, to which an expert witness might attest.

Further, with a focus on the relevant goods or services themselves, SMEs might not think to address in their drafting the context of other relevant provisions of the contract or the broader commercial purposes of the parties, to which the courts will have regard when construing the objective meaning of contractual terms.

This case study demonstrates how the application of legal skills to the art of contract drafting, based on an expert understanding of the principles of contract interpretation, would have helped to ensure that the legal effect given to the words chosen by the parties (as determined by the courts) matched up with the parties’ actual intentions as to the meaning of those words.