In this decision, the New South Wales Court of Appeal considered the principles relating to the construction and interpretation of contracts, specifically whether recourse may be had to prior proposals and negotiations in interpreting a contract.

Key Learnings

This case makes clear that ambiguity in the language of the contract must be identified before the court can have regard to evidence of the surrounding circumstances of a contract. Accordingly, parties to contracts must ensure that the written contract is clear and covers all relevant issues between the parties, as pre-contractual negotiations and discussions will often be inadmissible in interpreting a contract.

Case Note

This decision related to appeals in two separate proceedings: the joint venture proceedings and the loan proceedings. This note will focus only on the joint venture proceedings.

In the joint venture proceedings, Schwartz entered into a Deed of Agreement ("the Deed") with Hadid. Under the Deed, Schwartz 'agreed at his discretion to buy one or more properties' as part of a joint venture with Hadid. Prior to the Deed being executed, Schwartz and Hadid had conversations about buying one property and taking out options over, or buying, another two. Hadid had also submitted a written proposal. Schwartz bought one of the properties, but refrained from purchasing, or obtaining an option to purchase, the other two. Hadid brought proceedings for breach of contract, claiming that the Deed -properly construed using the conversations and proposal - imposed an obligation on Schwartz to purchase or option the other two properties. Schwartz made alternative submissions concerning the Deed, but this Update will focus only on the construction issue.

At first instance, McDougall J found that Schwartz was liable to Hadid for breach of contract in the joint venture proceedings.

On appeal, in separate judgments, Macfarlan and Meagher JJA (Basten JA dissenting) allowed the appeal, finding that McDougall J had wrongly had recourse to the conversations and proposal in construing the Deed. Drawing on Macfarlan JA's judgment in the New South Wales Court of Appeal in Western Export Services, the majority affirmed that the court's ability to give business sense to the language of commercial agreements is 'constrained by the language used by the parties'. If, after considering the contract as a whole, the court concludes that the language is unambiguous, it must give effect to that language, unless doing so would give the contract an absurd operation. In the construction of a commercial agreement:

  • the underlying task is to construe the words that the parties have used;
  • the meaning of these words is to be assessed objectively, in the sense that it is governed by what a reasonable person would understand by the use of that language, not by the subjective beliefs or understandings of the parties; and
  • the preferred meaning is that which makes business sense and gives effect to the parties' aims and purposes, although the notion of business sense does not permit the 'judicial rewriting' of the agreement in disregard of the language which the parties have adopted.

Read literally, the language used by the parties indicated that there was no contractual obligation on Schwartz to purchase or obtain an option to purchase the other two properties. Accordingly, Macfarlan and Meagher JJA upheld Schwartz's appeal.

To see the full judgment in this case, please click here.