Introduction

When it comes to interpreting contracts, the standard approach is to give words their natural and ordinary meaning. But just how literal do you have to be? What scope does a court have to come up with an alternative interpretation which more neatly fits with what the parties may have intended?

A recent decision of the New South Wales Supreme Court confirms that the courts have very little scope to depart from the natural or ordinary meaning of a contract, even if this results in an interpretation which is unreasonable. It’s only when there is an ambiguity in the wording that the courts have wriggle room to apply an interpretation which differs from the literal meaning.

Background

The recent case of Westpac Banking Corporation v Newey [2013] NSWSC 847 arose from Westpac’s acquisition and integration of St George Bank.

Westpac acquired St George in December 2008. After the acquisition, St George was initially operated as a wholly-owned subsidiary of Westpac. The business of St George was subsequently transferred into Westpac on 1 March 2010. At that time, the separate legal entity that was St George Bank Limited was deregistered, and the “St George” business was thereafter carried on as an operating division within Westpac Banking Corporation.

Various former employees of the St George business threatened claims against Westpac. Most of these employees had their employment terminated by St George Bank Limited prior to final integration with Westpac on 1 March 2010. However, some of the employees transferred into Westpac and had their employment terminated by Westpac after 1 March 2010.

Several of the aggrieved former employees engaged a law firm to pursue their claims against Westpac. Apart from the employees who engaged the law firm, there were potentially other aggrieved former employees for whom the law firm could have acted (the circumstances were similar to a class action).

As it eventuated, the law firm entered into a settlement deed with Westpac under which the law firm agreed that, apart from its current “Applicants” and certain “Prospective Applicants”, it would not bring any claims against Westpac (or any of its related bodies corporate) on behalf of any former employee of St George Bank Limited whose employment was or is terminated “by Westpac”. The deed also contained some other restraints against bringing claims on behalf of certain former employees of St George.

The deed defined Westpac by virtue of the way it was described as a party to the deed i.e. “Westpac” meant “Westpac Banking Corporation”. Whilst the operative clause of the deed expressly sought to prevent claims being made by the law firm against Westpac “or any of its related bodies corporate”, the deed did not contain any special interpretation provisions so that references to Westpac included its related bodies corporate. Therefore, when the restraint clause referred to termination of employment “by Westpac”, the clause literally only meant termination by Westpac Banking Corporation (not St George Bank Limited).

It seems that the law firm was still keen to act for as many former employees as possible. It argued for the literal interpretation. In its view, the deed did not cover employees who had been terminated by St George Bank Limited (even though St George Bank Limited was a related body corporate of Westpac). The law firm argued that the restraint clause was unambiguous and should be given its literal interpretation.

Since most of the former employees had been terminated by St George (not Westpac), this interpretation meant that, at a practical level, the restraint was largely ineffective from Westpac’s perspective. Therefore, Westpac argued that the court should give a broader interpretation so as to interpret the word “Westpac” as meaning “Westpac or any of its related bodies corporate”. Westpac essentially argued for a more business like interpretation which, in Westpac’s view, better accorded with the intention of the parties.

What Did the Court Say?

The Court agreed with Westpac.

The Court noted that whilst commercial agreements should be given a “business-like” interpretation, the courts are ultimately constrained by the actual words used in the contract. It said that “unless there is some ambiguity or it is clear that something has gone wrong with the language or unless the language gives rise to an absurd operation, the chosen words are paramount, especially where those words have been selected by sophisticated and well resourced commercial parties”. The court also referred to an earlier High Court decision where it was stated that “if the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different” (see Australian Broadcasting Commission v. Australasian Performing Rights Association (1973) 129 CLR 99 at 109).

So how did Westpac manage to convince the Court to depart from the literal and seemingly unambiguous meaning of the contract?

It did so by identifying an ambiguity.

As mentioned above, the restraint did not apply to the existing “Applicants” or those former employees who were listed in the definition of “Prospective Applicants”. It just so happened that the employment of one of the Prospective Applicants was, as a matter of undisputed fact, terminated by St George, not by Westpac. Westpac argued that unless “Westpac” was interpreted broadly, there was no reason to include that former employee as one of the Prospective Applicants. The law firm argued that inclusion of the employee in the list was just a harmless “incongruity which could safely be ignored”. As far as it was concerned, it simply wanted the employee excluded from all of the restraints in the deed (noting that some of the restraints in the deed did not depend on who did the terminating).

The court agreed with Westpac. It concluded that the inclusion of this particular employee in the definition of Prospective Applicant revealed an “anomaly” which suggested that “something different was intended”. This then gave the court freedom to depart from the literal interpretation so as to include related bodies corporate. The court noted that: “Only when that is done, does the whole of the [restraint clause] operate harmoniously”.

Key Points

The key points are:

  • Courts will only depart from the literal meaning of a clause if there is an ambiguity.
  • If there is no ambiguity, the courts will apply the literal interpretation even if that may result in an unreasonable outcome. This is consistent with a range of recent decisions applying literal interpretations, including the High Court’s hearing of the special leave application in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 and the High Court’s decision in Montevento Holdings Pty Ltd v Scaffidi [2012] HCA 48.

  • In this case, Westpac was lucky that an ambiguity existed. Absent the ambiguity, it would have lost the interpretation case. This demonstrates that drafters need to nail the wording. Be as clear as possible so that the words are capable of only one meaning – the meaning you intend. If this means that more words need to be included then so be it. The extra time invested upfront can avoid costly litigation.

  • Evidence regarding prior negotiations is admissible for the purposes of a rectification claim (see further below), but evidence of prior negotiations is not admissible for the purpose of interpreting the contract. This meant that Westpac was precluded from submitting evidence of prior negotiations which, it argued, showed that the intention of the parties was to cover employees who had been terminated by either Westpac or St George.

  • In this case the Court was also prepared to order rectification of the contract so as to include the “related body corporate” wording. It would be prudent to include a claim for rectification as part of your litigation strategy given the risk that a court may refuse to budge from a literal interpretation.