Australia: Drafting contracts: guidance on managing ambiguity

Construction Update
Last Updated: 1 February 2012
Article by Scott Alden, Alex Ottaway and Jennifer Tetstall

In an ideal world, the wording of contracts would be clear, easy to read and unambiguous. Ambiguity in contracts leads to disputes about the intended meaning or interpretation where one or both parties assert that more than one interpretation is possible. It is an unfortunate fact, however, that despite the efforts of even the best contract drafter, no contract will be perfectly clear, and every contract will contain some ambiguity.

Chief Justice Knox of the High Court of Australia has described this by saying that "experience shows that the words of many, if not most, documents are capable... of more than one meaning." Accordingly, it is essential that ambiguity is managed effectively. For example, special provisions may be inserted into a contract to ensure that in interpreting ambiguous clauses, the meaning which best favours one or other of the contractual parties is the one which is ultimately adopted. This article provides guidance as to how the courts resolve ambiguity and how parties may best manage ambiguity in contracts.

Golden rule

When the courts adjudicate disputes about the meaning of an ambiguous provision, they generally apply the so-called "golden rule".

This rule requires the court to take the following steps:

  1. Determine the ordinary and natural meaning of the words used in the provision
  2. Consider the context of the contract, which includes matters such as the purpose of the contract, any "recitals" or "background" clauses, and any other relevant provisions of the contract
  3. If the ordinary and natural meaning is inconsistent with the context of the contract, or if it gives rise to any absurdities, modify the meaning as appropriate.

The meaning derived by this method, in the vast majority of cases, will be adopted by the courts.

Contra proferentem rule

In a minority of cases, however, the courts will consider that the ambiguity is so great that it cannot be resolved by the above method. In these cases, the courts may resort to the so called "contra proferentem rule". This rule states that the ambiguity should be interpreted against:

  • The party who prepared the contract (eg for standard form contracts, which are usually offered on a "take it or leave it"' basis); or
  • The party who seeks to rely on the ambiguous provision (eg the beneficiary of a guarantee, indemnity, limitation or exclusion provision).

To illustrate, the head contractor (Contractor X) of construction works might indemnify the principal who commissioned the works (Principal Y) with respect to "any damage" incurred by Principal Y in connection with the carrying out of the building works. Assume that a wall collapsed on a passer by, who sued Principal Y and received an award of damages for personal injury. Principal Y may seek to rely on the indemnity given by Contractor X. Contractor X may dispute that "damage", as opposed to "damages", referred to property damage rather than court-awarded damages. If this dispute were determined by a court, it is likely that Contractor X's interpretation would be adopted. This is because the formulation of the contra proferentem rule requires the word "damage" to be interpreted against the interests of Principal Y, the party seeking to rely on the indemnity.

Contracting out of the contra proferentem rule

In the example given above, a different outcome may have been reached if the contract contained the following provision, or similar:

"In the interpretation of this contract or any part of it, no rule of construction shall apply to the disadvantage of any party on the basis that that party:

  1. Prepared this contract or any part of it; or
  2. Seeks to rely on this contract or any part of it."

Such a provision was considered by the Court of Appeal of New South Wales in the case of GL Nederland (Asia) Pty Limited v Expertise Events Pty Limited (1999) NSWCA 62. In that case, a wholesale distributor of jewellery was exhibiting its jewellery at Darling Harbour, Sydney when one of its suitcases containing jewellery was stolen. The distributor sued the organiser of the exhibition (with whom it had a contract) for negligence. The organiser attempted to rely upon a clause in the contract excluding all "responsibility or liability whatsoever for damages to exhibits". (The suitcase of jewellery was found to be an "exhibit".)

The Court of Appeal considered that the meaning of the exclusion clause, although not easy to determine, was unambiguous. Accordingly, there was no scope for the contra proferentem rule to apply. However, Giles JA (Spigelman CJ and Beazley JA agreeing) noted that even if the clause was ambiguous, "I see no reason why the parties should not have agreed, as they did in cl1(e), upon appropriate rules for construction of their contract, including negating the contra proferentem rule." In other words, in this case the judges determined that the parties were free to contract out of the rule by using clauses such as that set out above.

Of course, parties must determine whether or not contracting out of the contra proferentem rule best serves their interests. In the example given above, Contractor X would be well advised to resist any contracting out, because the rule could only work in its favour. Conversely, Principal Y, who seeks to rely on the indemnity, would be advised to negotiate for contracting out of the rule. Similarly, parties who put forward standard form contracts on a "take it or leave it" basis (eg banks, insurers and other large service providers) should, in most cases, seek to contract out of the rule.

Approach in other jurisdictions

The approach taken by the Court of Appeal in the GL Nederland case is consistent with the approach taken by the courts in overseas jurisdictions. In the case of Re Coward; Coward v Larkman (1887) 57 LT 285, Fry LJ of the English Court of Appeal stated that rules of interpretation (including the contra proferentem rule) "point out what a Court shall do in the absence of express or implied intention to the contrary". Bowen LJ in that same case stated that rules of interpretation are mere presumptions which "disappear at once if a contrary intention appears" in the contract. The decisions of their Lordships have been applied by the High Court of Australia (in Nicol v Chant (1909) 7 CLR 569 at 591) and by the Court of Appeal of New Zealand (in Re Lowry's Trust; Logan v Lowry (1948) NZLR 738 at 755).


Parties who prepare contracts or who seek to rely on contractual provisions such as guarantees, indemnities, limitations or exclusions may wish to consider contracting out of the contra proferentem rule. Case authority in Australia, New Zealand and England suggests that such contracting out is possible. Conversely, parties who have not had a large part in preparing a contract, or who grant an indemnity or guarantee under the contract, may wish to resist any such contracting out.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.