The High Court has forcefully reiterated that a Court interpreting a contractual term whose meaning is plain and unambiguous cannot ignore that meaning in order to give that term a more commercial and business-like operation. 

Where the words of a contractual term have a plain and unambiguous meaning, your assumption that, as a matter of commercial reality, it works or should work in some other way is irrelevant.

It is vital that your contracts accurately reflect the way things are actually done or intended to happen.  And when you change the way you do things, it is vital that your contracts allow for or reflect this.  Otherwise, you may find that your understanding of how the contract works — even if it is shared with the other party — is trumped by the contract’s terms.  A recent decision by the High Court provides a salutary lesson.

On 28 October 2011, the High Court refused special leave to appeal in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45.  Unusually, the High Court has decided that its (short) reasons for that refusal will be published in the Commonwealth Law Reports.  In giving those reasons, the High Court has forcefully reiterated the rule that it set down in Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352, which is that:

“… evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.  But it is not admissible to contradict the language of the contract when it has a plain meaning.”

In effect, the High Court has said that a Court can only take a purposive approach to the interpretation of a contractual term if the words of that term are ambiguous or admit of more than one meaning.  Where those words have a plain and unambiguous meaning, that meaning will prevail even if it does not reflect how the parties intended that term to operate as a matter of commercial reality.

In this case, the contract contemplated that Western Export Services Inc would supply Gloria Jean’s products to Jireh International Pty Ltd (the master franchisee of Gloria Jean’s in Australia), which would then supply those products to Gloria Jean’s franchises throughout Australia.  Clause 3 of the contract provided that:

“One of the primary goals of negotiations with GJGC CORP. is to establish JIREH INTERNATIONAL PTY LTD., or an associated entity, as a roaster/supplier of Gloria Jean's, or other branded coffees, teas and other products for sale in GJGC STORES in Australia ….  For sales by JIREH INTERNATIONAL PTY LTD. to GJGC STORES in Australia and to other countries, WES shall receive a commission of 5% of the ex-factory price of the coffees, teas and other products.”

The trial judge found that “sales by JIREH INTERNATIONAL PTY LTD.” in the second sentence of clause 3 extended to sales by “an associated entity” — even though he held that “On the plain English meaning of the words, there is no ambiguity and no warrant to read in the words 'or an associated entity' … where they do not appear.”  In his view, this finding accorded with what “a reasonable person in the position of the parties would have understood” and gave clause 3 “a commercial and business-like operation”.  The New South Wales Court of Appeal overturned and the High Court disapproved of that finding.

The issue arose because, some years after the contract was entered into, Jireh International Pty Ltd interposed a related company as “Preferred Supplier” of Gloria Jean’s products to Gloria Jean’s franchises throughout Australia.  (The trial judge found that the agreement effecting that interposal did not create an agency and was not entered into in order to avoid the commission obligation in clause 3.)

This case is a salutary reminder of the need to ensure that:

  • contracts are drafted precisely;
  • the plain meaning of contractual terms reflects their intended commercial operation; and
  • where commercial practices change, the plain meaning of contractual terms should allow for or otherwise reflect such changes.