Drawing together principles regarding contract construction, the Court of Appeal has recently dismissed an appeal in relation to the High Court’s decision concerning the construction of various agreements relating to intellectual property rights (Kason Kek-Gardner v Process Components).

Process Components (PCL) and Kek-Gardner Ltd (KGL) each entered into a sale agreement with the administrators of a company called Kemutec Powder Technologies (KPT) and then entered into a licence agreement which purposed to grant an exclusive licence to KGL in relation to the intellectual property rights owned by PCL pursuant to its sale agreement. However, when a competitor of PCL purchased KGL, the relationship came to an end and the licence agreement was terminated. A dispute subsequently arose because KGL purported to own intellectual property rights which PCL stated it had purchased under its sale agreement.

The case concerned interpretation of these agreements and the Courts had to determine what intellectual property rights had been acquired by PCL and KGL after both parties had seemingly purchased undefined rights and whether PCL’s sale agreement should be rectified to give effect to an intention for PCL to purchase all of KPT’s intellectual property rights.

In the first instance, the High Court rejected PCL’s reliance on the “common assumption” principle on the basis that it relied too much on the subjective intentions of the parties. In making its decision, the Court relied upon Arnold v Britton and stated that the correct approach to interpretation was to consider the language of the contract and noting that reliance on “commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed”.

KGL appealed the High Court’s decision but the appeal was dismissed by the Court of Appeal. In reaching its conclusion, the Court of Appeal summarised the following principles relating to contractual construction:

  • Admissible background to a contract is limited to facts which were known or reasonably available to all parties and does not include declarations of subjective intention;
  • Extrinsic evidence is admissible to identify the subject matter of a contract;
  • A term will not be implied into a commercial contract unless it is necessary to give the contract business efficiency or it is so obvious that it goes without saying;
  • Where the Court corrects an error on the face of a contract under the principle

This case follows Wood v Capita Insurance Services where the Supreme Court confirmed that with regard to interpretation, the Courts will look at both the language of the clause and the commercial context in which it was drafted.

Although this case does not state anything new, it provides further clarification as to the Court’s approach to contract interpretation. Subsequently, a number of other decisions in relation to contract interpretation have reiterated that the Courts are inclined to take a linguistic approach to interpretation rather than relying on the business common sense approach which was seen in Rainy Sky SA v Kookmin Bank.

Importantly, these cases act as reminders to ensure that your contracts are sufficiently clear and certain at the time of entering into them in order to avoid ambiguity and the potential for future dispute.