Principles of construction
53 There was no dispute between the parties as to the general principles which the Court ought to apply in resolving the question of the correct construction of a commercial agreement. The applicants referred to the observations of the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116-117, [46]-[51] (Mount Bruce Mining) by French CJ, Nettle and Gordon JJ where the principles of contractual construction were identified as follows:
[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
[47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
[48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
[49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
[50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
[51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". (footnotes omitted)
54 Both parties sought to have recourse to the alleged commerciality of their proffered constructions. That said neither addressed the Court in any great detail as to the manner in which a Court construing an agreement might assess the commerciality of the consequences of a particular construction. No doubt a construction which "flouts" commercial common sense is to be avoided and it is a particularly relevant consideration in the construction of a contract that on one interpretation an unreasonable result arises. However, there is a distinction between the commerciality of the legal effect or construction of a clause on the one hand and, on the other, the commerciality of the operation of the contract as a whole. 148's submissions focussed on the latter though it is obvious that, in respect of the lease under consideration, a court cannot reasonably assess that save in a very general sense. It is one thing to consider the legal operation of a clause in a contract consequent upon a particular construction as flouting business common sense. However, given the myriad factors impacting upon commerciality of the whole contract, it is another thing for a court to conclude that a contract is or is not a commercial deal. That is particularly so when any such assessment would need to be made in an artificial environment where the motives and intentions of the parties for entering into the agreement cannot be known.
55 148 relied upon the learned reasons for judgment of Muir J in Kilkerrin Investments Pty Ltd v Yiu Ying Mei Pty Ltd (2001) Q ConvR 54-551, [27] to the effect that that it is desirable to construe commercial documents so as to make commercial sense of them. However, the context of his Honour's observation was where two constructions of the clause in question were equally open and a choice had to be made between them. His Honour was not giving any imprimatur to the proposition that an agreement should be given an interpretation which is not actually open on the text of the words merely because that might be, on one view, more commercial than a competing contention. Indeed (at [31]), Muir J expressly referred to the observations of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 as follows:
It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used 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 purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, 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, "even though the construction adopted is not the most obvious, or the most grammatically accurate", to use the words from earlier authority cited in Locke v Dunlop, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's Case. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. (footnotes omitted)
56 These observations were largely reaffirmed by the High Court in the passage from Mount Bruce Mining cited above.
57 However, a rule which supports a preference for one of two alternative constructions that will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust does not greatly assist where neither proffered construction meets that description. Here 148 submitted that if it can be said that neither proffered construction is of the type identified, if one is "more commercial" than the other, the impasse may be answered by the observations of Kiefel, Bell and Gordon JJ in Ecosse at [16]:
It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it. (footnotes omitted)
58 It was submitted that the hypothetical reasonable business person placed in the position of the parties will interpret the words used by the parties in a way that has greater commercial common sense. This was the opinion of Longmore LJ in Barclays Bank Plc v HHY Luxembourg SARL [2010] EWCA Civ 1248 where his Lordship said:
The Judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction.
Those observations were expressly approved of by the UK Supreme Court in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 (Rainy Sky), [29]-[30].
59 Importantly, in the speeches of their Lordships in Rainy Sky, the focus of the application of the "business common sense test" was the clause or clauses in respect of which the parties were in dispute rather than of the contract as a whole. No doubt the court assesses the commercial operation of the legal effect of the clause in the context of the contract, but it could not easily assess the commerciality of the contract as a whole as influenced by the alternative constructions. Commercial agreements are inevitably the product of negotiations with each party applying their own perception of the value of each separate integer. In the course of negotiations a party may be prepared to suffer a loss on the operation of a clause or clauses because of perceived benefits from other clauses or from entry into the agreement as a whole. Such a dynamic renders it extremely difficult for a court to analyse the commerciality of the operation of a contract as a whole. Indeed, the consideration of the commerciality of the operation of a clause in isolation from the operation of the whole of the agreement is also a difficult task.
60 With that in mind it can be accepted that in construing the subject clause where two reasonable constructions are open, the interpretation to be preferred is that which a reasonable business person, placed in the position of the parties, including the circumstances surrounding the contract and its commercial purposes and object, would perceive to be more commercial. In this respect consideration must be given to the evidence which is adduced in respect of those surrounding circumstances. Here Pipe submitted that, whilst there may exist various reasons why the parties agreed upon the terms they did, in the absence of admissible evidence, such speculation is irrelevant. There is force in that submission in two respects. First, the motivation of the parties as to why they agreed to any particular term is irrelevant to the question of construction: Gramotnev v Queensland University of Technology [2015] QCA 127. Secondly, to the extent to which the evidence meets the character of surrounding circumstances known to both parties, it can be taken into account, but the Court cannot engage in speculation as to what other evidence may or may not exist. For instance, Pipe submits that the change to the rental structure brought about by the 2017 Lease may have been due to a decline in the market for the tenancy. However, there is no evidence that such was the case or, if it was, that it was a fact known to both parties. Similarly, Pipe suggests that the SGES Fee was removed from the Lease Agreement, perhaps, because the infrastructure associated with it had amortised over the initial period of 10 years. Again, there is no evidence of that either. Equally there is no evidence for 148's suggestion that the quid pro quo for the deletion of the SGES Fee was the entitlement of 148 to profit on the supply of utility services to an almost equivalent degree. If the above facts were matters known to both parties and agreed upon they may have been relevant. However, that was not the case.
61 The above difficulties emphasise, if that be needed, the caution which a Court must have in the application of perceived business common sense to the interpretation of commercial contracts. The question of construction of contracts must begin with the words which the parties have used, for they have been chosen by the parties as the expression of their agreement. That is especially so in carefully drafted ad hoc agreements. Attempts to derive a meaning supported by business common sense does not authorise the application of principles of construction which ignore the words used by the parties but commence in a search for a perceived commercial position which the parties ought have to have agreed upon had they considered the issue more closely. The court is not to rewrite the agreement between the parties in order to make it conform to its view of what satisfies business common sense: Co-operative Wholesale Society Ltd v National Westminster Bank Plc [1995] 1 EGLR 97 (CA) at 99 per Hoffmann LJ. Whilst commercial common sense is an important factor, a court should be slow to reject the natural meaning of the words used so as to save a party from an imprudent contract, a bad bargain or the consequences of poor advice: Arnold v Britton [2015] AC 1619, 1629. For what may appear to be lacking in business common sense by one party may be a reflection of astute negotiation or prescience by another and the application of the rule must be evaluated from both sides. Further, a distinction must be drawn between the unintended economic consequences of the businesslike construction of a clause and the construction itself, even though the two may be closely intertwined. In this respect, Neuberger LJ's words of admonition in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732 at [21]-[22], particularly those in the latter paragraph, should be kept firmly in mind:
21. As already mentioned, the interpretation of the provision in the commercial contract is not to be assessed purely by reference to the words the parties have used within the four corners of the contract, but must be construed also by reference to the factual circumstances of commercial common sense. However, it seems to me right to emphasise that the surrounding circumstances and commercial common sense do not represent a licence to the court to re-write a contract merely because its terms seem somewhat unexpected, a little unreasonable, or not commercially very wise. The contract will contain the words the parties have chosen to use in order to identify their contractual rights and obligations. At least between them, they have control over the words they use and what they agree, and in that respect the words of the written contract are different from the surrounding circumstances or commercial common sense which the parties cannot control, at least to the same extent.
22. Particularly in these circumstances, it seems to me that the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may must or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood. Of course, in many cases, the commercial common sense of a particular interpretation, either because of the peculiar circumstances of the case or because of more general considerations, is clear. Furthermore, sometimes it is plainly justified to depart from the primary meaning of words and given them what might, on the face of it, appear to be a strained meaning, for instance where the primary meaning of the words leads to a plainly ridiculous or unreasonable result.
62 That is not to say that judges ought not seek to identify the commercial purpose of a clause or feel shy about doing so: cf Lord Drummond Young in Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43, [10]; but caution ought to be exercised before proceeding too far from the words of the contract.
63 Even if it is correct to say that the iterative process of construction of contracts involves testing the possible interpretations of a clause against the commercial consequences: per Lewison LJ in Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-Rata CLO 2 BV [2014] EWCA Civ 984, [32]-[33]; there is a difference between identifying a sensible commercial operation of a clause in a legal sense on the one hand and, on the other, the financial or economic consequences of the operation of a particular part of the clause as construed in particular market circumstances. Courts are particularly good at ascertaining the legal consequences of competing interpretations of a disputed clause and, indeed, ascribing to those consequences a general level of commerciality. However, ascertaining the economic or financial consequences of competing constructions in particular circumstances and attributing to them a relevant degree of commerciality is vastly more difficult. There is a danger in inflating the importance of the financial or economic consequences of the competing constructions into a metric of the veracity of a proffered construction. First, save in a general sense, it is often difficult to foresee how a particular clause will operate especially when, as in this case, it operates in the context of a market and involves agreements with third parties to the agreement. Secondly, to travel the path of examining the economic consequence of competing constructions requires a wide ranging inquiry of potentially numerous market scenarios, the validity of which will necessarily be speculative or dubious. Thirdly, it is often difficult to assess the overall economic advantages to one party flowing from the performance of a commercial agreement and even more difficult to assess the economic impact of the consequences of the operation of a particular clause. Fourthly, the exclusion of evidence of the parties' intentions by reason of the parol evidence rule prevents the Court from examining the reasoning process which led a party to accept the term in question. Necessarily that excludes consideration of questions of whether, in relation to the operation of a particular clause in a particular scenario, a party was prepared to suffer a loss in the hope of greater gains by the operation of other parts of the agreement.
64 It may be that, save in the most obvious of circumstances, the economic or financial consequences of the particular construction of a clause are unlikely to be a suitable mechanism for determining the commerciality of competing constructions. The obvious circumstances are where the consequences of a particular construction are capricious, unreasonable, inconvenient or unjust. Where, however, the economic or financial consequences do not reach that level, the qualitative weighing of such consequences of the competing constructions is an inappropriate tool for discovering the correct interpretation of a clause. Were it to be otherwise, any party who realises, with the benefit of hindsight, that they have entered into an improvident bargain will seek to find an ambiguity which will offer a pathway to more favourable interpretation. More apposite for the construction of contracts is a consideration of the commerciality of the consequential legal positions of the parties derived from the various possible interpretations. In that sense the commerciality of any postulated interpretation is ascertained by reference to the resulting distribution of the relative commercial, economic or fiscal power to the parties flowing from the legal rights and obligations inherent in that interpretation. Generally, it is the distribution of commercial power or rights produced by the interpretation of a clause which is relevant to ascertaining the commerciality of a construction, and not the perceived financial consequence of that interpretation in either the operation of the clause or the contract as a whole.