Australia: Refresher On Interpretation Of Clauses

Last Updated: 9 July 2009
Article by James Berg

In Shepherds Producers Co-operative Limited v Lamont & Ors [2009] NSWSC 294, Justice Einstein provided a comprehensive overview of the interpretation of contractual provisions with particular emphasis on releases.

On 17 December 2003, solicitors for the liquidator of the plaintiff, Shepherds Producers Co-operative Limited (Shepherds) notified the defendants (Lamont & Ors) of potential claims to be made against them by Shepherd/the liquidator.

Proceedings were commenced and a settlement was reached at mediation as follows:

  • Lamont & Ors to pay Shepherds AU$3.45 million, with such agreement to be given effect by way of deed of release.
  • The proceedings to be dismissed with no order as to costs.

The release provided for the following:

'The plaintiffs hereby release the defendants from all claims, actions, suits, demands arising from or in any way connected with the Proceedings, the allegations contained in the Statement of Claim and of the liquidation of the (company) plaintiff.'

Shepherds commenced a second action against Lamont & Ors. Lamont & Ors pleaded the release and the following question was referred for separate decision:

'Whether (the release) operates to release the (defendants) from the causes of action the subject of these proceedings.'

Justice Einstein's decision is more informative for its constructive analysis of contractual clauses and releases, as opposed to his finding that the release did operate to protect Lamont & Co in the second proceeding. Essentially, the finding came down to whether the word 'and' was disjunctive or conjunctive in the context of the release clause. His Honour found that 'and' operated disjunctively in the context of the release.

Construction of contracts

The following principles are relevant:

  • Where the language of an agreement is ambiguous or susceptible to more than one meaning, the factual matrix, its aim, object or commercial purpose may be taken into account in the construction of an agreement: Reardon Smith Line Ltd v Hansen-Tangen [1976] WLR 989 at 997, cited in Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 per Mason at 350 to 352.
  • Primacy is to be given to the actual words used in a written contract. In Peppers v Hotel Capital [2004] NSWCA 114, Justice McColl said:

'If the words...are unambiguous the Court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The Court has no power to remake or amend a contract for the purposes of avoiding a result which is considered to be inconvenient of unjust.

...if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust.... construing written contracts it should be presumed that the parties did not intend their terms to operate unreasonably....If the parties did intend an unreasonable result, it is essential that that intention be made abundantly clear...'

  • The primary focus is the agreement itself which must 'speak for itself' but must do so 'in situ and not be transported to a laboratory for microscopic analysis': International Fina Services AG v Katrina Shipping Ltd [1995] 2 Lloyd's Rep 344.
  • Even if evidence of surrounding circumstances is admissible it cannot be used to construe a meaning to the document that is contrary to the express language: Ryledar Pty Ltd v Euphoric Pty Limited [2007] NSWCA 65:

'When the Court is construing a commercial contract, it begins with the words of the document; there it often finds expressed the factual context known to both parties and the common purpose and object of the transaction. But the Court is alive to the possibility that what seems clear by reference only to the words on the printed page may not be so clear when one takes into account as well what was known to both parties but does not appear in the document....It is...the Court's task to identify which of the possible meanings represents the parties' contractual intention.'

  • The proper approach seeks:

'...the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably be available to the parties in the situation in which they were at the time of the contract...': Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70.

  • Commercial contracts should be construed to be given a sensible commercial operation: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429.
  • The parole evidence rule operates to exclude the following from the construction of an agreement where the words are clear and unambiguous:
    • Evidence of the parties' subjective intentions – the construction of a contract is an objective question for the Court: Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61.
    • Pre-contractual conduct – is only admissible on questions of construction if the contract is ambiguous and the pre-contract conduct casts light on the genesis of the contract, its objective aim, or the meaning of any descriptive term: Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337.
    • Post-contractual conduct – is not admissible on the question of what a contract means as distinct from the question of whether it was formed.

Construction of releases

In Karam v ANZ [2001] NSWSC 709, Justice Santow identified the following principles as applicable to the construction of releases, or purported releases:

  • The Court should ascribe the meaning that the release would convey to a reasonable person having all the background knowledge which would have been reasonably available to the parties at the time they signed the document containing the release: ICS v West Bromwich BS [1998] 1 All ER 98.
  • A party may agree to release claims or rights of which it is unaware and of which it could not be aware, provided clear language is used to make plain that that is its intention: Salkeld v Vernon (1758) 1 Eden 64; 28 ER 608.
  • In the absence of clear language, Courts have been slow to infer that a party intended to surrender rights and claims of which it was unaware and could not have been aware: BCCL v Ali [2001] 1 All ER 961.
  • The 'cautionary principle' referred to above has been frequently cited and most recently by Justice Bergin in Amaca Pty Limited formerly known as James Hardie & Co Pty Limited v CSR Limited [2001] NSWSC 324 but in doing so, her Honour took into account the purpose of the contract and the circumstances in which it was made.

Arising out of or in any way connected with

This very common wording has also come under judicial scrutiny. In IBM Australia Ltd v National Distribution Services Ltd (1991) 22 NSWLR 466, the relevant component of the release being scrutinised used the words 'or related to'. Justice Clarke said as follows:

'The phrases "in relation to" and "related to" are of the widest import and should not, in the absence of compelling reasons to the contrary, be read down.'

Justice Handley observed that the words 'arising out of' appeared to cover every conceivable claim. He confirmed that although the wording was extremely broad, the words should not be read down in the absence of a compelling reason to do so.

The words 'in connection with' were considered by Justice Giles in Elkateb v Lawindi (1997) 42 NSWLR 396:

'The phrase...(is)...of considerable width,...but it should not be read down unless there be compelling reason to do so.'

And – conjunctive or disjunctive

The ordinary meaning of the word 'and' is conjunctive. However, in Adbooth Pty Limited v Ryde City Council [2006] NSWLEC 783 Justice Preston held:

'The word "and" generally does not mean "or". There are two exceptions to this general rule. First, if "and" was given its natural meaning, the result would be so extraordinary that in order to make sense of the provision the Court would be obliged to read the word "and" as if it had been "or".

The second is where there is a list of items and the items are joined by "and" and the list is governed or affected by words which showed that the list was a list of alternatives. In such a case, the word "and" which is used to join the items in the list is truly cumulative....'

On the basis of the two exceptions referred to in Adbooth, Justice Einstein determined that the word 'and' in the release in Shepherds Producers had disjunction application. The first exception was found to apply because the ordinary construction would render two-thirds of the substance of the clause ineffective. The second exception applied because reference to the following were considered to be alternatives:

  • First Proceedings.
  • Statement of Claim.
  • Liquidation of Shepherds.

In other words, a party to the release needed to satisfy only one of the three components for the release to operate.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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