How does a Court interpret a contract?

Apr 20, 2023 | Publication

The interpretation or ‘construction’ of contracts is a sub-set of contract law.

In Australia, when interpreting a contract, Courts will attempt to give effect to what the parties intended.  What the parties intended is to be assessed objectively not subjectively.

What a commercial contract means is to be determined by what a reasonable business person would understand those terms to mean.

The starting point is the words actually used.  The Court will give express terms their plain and ordinary meaning unless doing so would result in manifest absurdity.  Australian dictionaries generally should be used rather than English dictionaries in determining the plain and ordinary meaning of words.

If a term of a contract is ambiguous or capable of more than one meaning, the court will attempt to give the contract a businesslike and commercial interpretation.

Some common words and phrases which commonly appear in contracts (e.g. “use all reasonable endeavours”) have been decided by the courts and have obtained a legally accepted meaning as a result.

The “parole evidence rule” means that evidence of prior negotiations is not admissible to the interpretation of contract terms unless it provides evidence of the surrounding circumstances.  Such evidence is admissible but not in aid of a subjective interpretation of the problem clause.

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