Australia: Contracts and Literal Meaning - Be aware of the scope of your contractual obligations and rights

Introduction

The High Court has recently reaffirmed that parties are bound by the literal meaning of words in a contract. Even if the effect of the literal meaning is unfair or lacks business sense, the parties will be bound unless it is patently absurd or ambiguous: see Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45¹.

This decision is a reminder of the need to ensure that any assumptions on which the parties are proceeding are clearly identified and the contractual terms spelled out clearly.

Background

Jireh International Pty Ltd (Jireh) and Western Exports Services Inc (WES) entered a written agreement in March 1996 (Agreement). WES agreed to assist Jireh obtain the right to operate and franchise Gloria Jean's Gourmet Coffee Stores (GJGC Stores) in Australia. Clause 3 of the Agreement between WES and Jireh provided that:

For sales by Jireh 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.

In March 2004, Jireh entered into agreements with two other companies (associated with Jireh's directors) (the Third Parties). The Third Parties then commenced supplying products to GJGC stores instead of Jireh.

The Proceedings

WES commenced proceedings in the NSW Supreme Court, alleging that the Clause 3 commission was payable on the sales by the other companies to GJGC Stores.

The primary judge at first instance found in favour of WES², but the judgment was overturned by the NSW Court of Appeal. Justice MacFarlane found that Clause 3 operated perfectly well in its ordinary meaning, and did not apply to sales by the Third Parties³. The Court should not ignore the unambiguous words of the Agreement⁴.

WES's application to the High Court for special leave to appeal was dismissed. The High Court indicated that Courts cannot override unambiguous language simply because the contract would have a more "commercial and businesslike" operation if an interpretation different to that dictated by the language were adopted⁵.

The High Court also reaffirmed that:

• Evidence of surrounding circumstances is only admissible to assist in interpreting a contract if the language is ambiguous - it cannot be used to contradict the language of the contract when it has a plain meaning⁶.
• When interpreting the terms of a contract, the actual intention of the parties is not relevant - the court must only have regard to the presumed intent of the parties, ascertained by the actual language of the written agreement and, where necessary, the objective framework of facts within which the contract was formed⁷.

Lessons to Take Away

• When drafting agreements, understand that you will be bound by the words used - you will generally not be able to refer back to what you "thought" you were agreeing to if that does not match the literal meaning.
• Any assumptions you are making should be clearly expressed.
• If a dispute arises, only in cases where a provision is absurd or ambiguous will you be able to have recourse to evidence of the circumstances surrounding the formation of the contract.

Addisons is able to advise on drafting contracts that will accurately reflect your intentions, as well as advising you on your rights and obligations under existing contract.

The assistance of Alec Bombell, Graduate, of Addisons in the preparation of this article is noted and greatly appreciated.

Footnotes

¹ Affirming Jireh International Pty Ltd (t/as Gloria Jeans Coffees) v Western Exports Services Inc [2011] NSWCA 137.

² See Western Export Services Inc v Jireh International Pty Limited [2010] NSWSC 622.

³ Jireh International Pty Ltd (t/as Gloria Jeans Coffees) v Western Exports Services Inc [2011] NSWCA 137 at [64]-[65].

⁴ Jireh International Pty Ltd (t/as Gloria Jeans Coffees) v Western Exports Services Inc [2011] NSWCA 137 at [55].

⁵ Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 at [1]; Jireh International Pty Ltd (t/as Gloria Jeans Coffees) v Western Exports Services Inc [2011] NSWCA 137 at [55].

⁶ Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 41 ALR 367 at 374-375.

⁷ Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 41 ALR 367 at 375.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.