We move now in our general inquiry into the content of the contract to the terms themselves. We have by now established which terms constitute the agreement between the parties. What we have looked at so far answers the question: exactly what have the parties agreed to, or at least what must they be taken to have agreed to? We now turn to looking at the terms which constitute the agreement between the parties and see what they actually mean.

If they are clear, then no problem arises. But, as is very commonly the case, they are not clear then the meaning may have to be ascertained.

The Objective Test

We have already seen when we dealt with the problem of uncertainty how a court goes about attempting to resolve problems of interpretation of the terms of the contract. The court will do its best in order to avoid the consequence of striking out a term as meaningless, or, worse still, finding the whole contract void because the term cannot be severed. The court's task is to attempt to ascertain the intention of the parties by applying an objective test: what would a reasonable person have thought that the particular clause or group of clauses meant? The classic statement, which we have already looked at when we studied uncertainty is that of Barwick CJ in

in particular the 2nd para on p 128.

In applying the objective test, the question arises: what may the court look to to help it in interpreting the contract? Does it just look at the words of the contract itself? Can it look to the surrounding circumstances? Can it look to the conversations which took place before and after the document was agreed to? We turn now to trying to answer these questions which can be summed up in: what material or evidence is available to the court in interpreting the terms of a contract?

The Parol Evidence Rule

We return to our old friend the parol evidence rule. We looked at it before in the context of asking whether we could add to the terms of a written contract. The rule also has something to say about the interpretation of a written contract. In its raw form the rule says that extrinsic evidence cannot be used to interpret the terms of the contract. But, remember that the rule is surrounded by exceptions. It is true that extrinsic evidence cannot be used to modify or contradict what is plain in the contract. If for example the contract says "delivery by Friday close of business" then if one party tried to say "What that really means is delivery by Monday start of business" he or she would not get very far. The contract is clear. Kirby P in the next case (B and B Constructions) makes this very clear in his second point and also makes the point that a subjective test i("the unfathomable depths of subjective intention") is generally not acceptable.

There is some controversy about how broadly the court is permitted to roam in allowing extrinsic evidence, when it is allowed. It seems pretty clear that the parties' intentions cannot be ascertained by reference to what they said they meant. In other words a subjective test is not used. But, as Mason J points out in the Codelfa case extract on p 746 2nd last para, what the parties said may be relevant and admissible to set the background to their deal, that is, establish objective facts which may be used to interpret the intention of the parties. The expression "factual matrix" is used in this context. The court may have regard to the factual matrix in order to establish what the parties intended. Broadly, it is true to say that the courts have become more relaxed about looking to all the relevant material when confronted with the task of interpreting a contract. Kirby P makes this point in the B and B Constructions case (below), drawing a parallel with construction of statutes where a more liberal approach has emerged in so far as recourse can be had to extrinsic material.

One of the exceptions to the parol evidence rule is that extrinsic evidence may be admiited to clear up an ambiguity.

This is discussed in

The extract is just some statements of principle by Kirby P. We have already noted two points from this judgment. The ambiguity exception is considered in point 3 on p 452 where Kirby P addresses the difficulty of what exactly means to say there is an ambiguity. Extrinsic evidence is clearly allowed to clear up a patent ambiguity. It seems that it is also allowed to show that there is an ambiguity which is not obvious on the face of it (a latent ambiguity) and then the extrinsic evidence may be used to clear up the ambiguity if possible - see points 5 and 6 on p 453. Point 4 makes the common sense point that a sensible interpretation is to be preferred over one which has the effect of undermining the contract. .

In order to find an exception to the parol evidence rule there really must be an ambiguity. Barristers are expert at manufacturing ambiguities but it does not always work. This is illustrated by

Here we have what appears to be a straightforward contract. It is for the supply of equipment which is described in a schedule. Apparently the equipment did not work very well and the person hiring the equipment tried to argue that there had been a breach because what was intended was that the contract should be for new equipment, not second-hand equipment. The judgment of Latham CJ dealt with this submission pretty shortly.

First, it was argued that this is the kind of case where parol evidence is admissible to identify the subject-matter of the contract. See last para on p 454. Latham admitted that this an exception to the parol evidence rule and gave examples of this exception. But this clearly was not such a case.

Secondly, it was argued (2nd para p 455) that there was a latent ambiguity. This is a typical example of the barrister at work trying to manufacture ambiguities. It is true, Latham CJ conceded, that the description of the equipment could be either new equipment or old equipment, but if this was to be treated as an ambiguity then just about any description of anything is latently ambiguous. Some philosophers of language would agree and would no doubt develop very elaborate theories on this premise. But the law is more practical and does not countenance the argument that everything is ambiguous. Latham CJ concluded that what the defendant was really trying to do here was to add a new term to the written agreement. This the parol evidence rule forbids.

The judgment of Dixon J illustrates that arguing for extrinsic evidence to explain a term of the contract may be just an attempt to add an implied term in another guise. Dixon J chose to see the defendant's argument in terms of attempting to add an implied term. This was not going to work because of an entire agreement clause which reinforced the operation of the parol evidence rule, a point I made in an earlier lecture.

I have already mentioned that the expression "factual matrix" is used to describe what is admissible to explain or interpret a term of the contract. This expression was used by Mason J in the course of his discussion of the implied term argument in

It will be recalled that Codelfa tried to argue that there was an ad hoc implied term in the contract to cater for the unexpected event which happened, namely, the reduction of the work time allowed to Codelfa because of an injunction restraining it from working a 3 shift day. The argument for an implied term was not successful. In the course of considering this argument, Mason J canvassed the whole question of written contracts, the parol evidence rule, exceptions to the rule and the implication of terms. He deals with the parol evidence rule in part on page 743 half way down through to page 747 half way down. In the course of this long exposition, Mason J makes it clear that there has been a liberalising trend in the application of the parol evidence rule. The rule is, in other words, applied less strictly nowadays. Evidence of the surrounding circumstances in which a contract is made may be admitted to assist in the interpretation if the language is ambiguous or susceptible of more than one meaning. There are differences of views (discussed on p 745 2nd main para) about whether evidence is admissible to create an ambiguity where none exists but it is certainly an uphill task if such an argument is tried (but compare what Kirby P said in the B and B Constructions case). Evidence of prior negotiations may be allowed to establish objectively what the parties intended but cannot be used simply to supply a subjective meaning to a particular clause, as we have already noted. It is the presumed, not the actual, intention of the parties which must be ascertained - which is just another way of stating the familiar old objective test.

Thus, in some cases, the prior negotiations of the parties may be admissible. What about their subsequent conduct? Logically, if you want to know what was intended then subsequent conduct should be just as admissible as prior negotiations. On the other hand, it is the court's task to ascertain the intentions of the parties at the time they made the contract, so, on this view, what was said or done after the contract started would not be relevant. This issue was discussed in

The facts are complicated and deal with a financing facility in relation to overseas trade. We do not have to be concerned about the details. A seller of goods to an overseas buyer generally wants to get cash immediately and not have to wait for the goods to arrive and then be paid for by the buyer. Third parties such as banks can assist in this sort of situation and provide a financing facility to the seller. In this case the facility was indefinite in the sense that it was available from year to year. Each facility or transaction was for 180 days. The contract provided for the termination of the relationship by giving 6 months' notice. The contract did not say what the position would be if a notice was given to terminate the relationship and a particular facility was raised which might stretch beyond the 6 months' expiry date. The case was about whether a particular facility could do this.

This raised the question of whether the correspondence which took place after the notice had been sent could be used to answer the question of interpretation that the court was faced with. In the end all judges either did not need to call on this evidence or found it of no help. But there were different views about whether such evidence could be used.

Kirby P said that there was no need to draw on this evidence because he concluded that the 180-day facility could stretch beyond the end of the contract as a matter of simply ascertaining the presumed intention of the parties. But, Kirby said, he doubted whether evidence of words or conduct after the contract was formed could be used to interpret that contract.

Priestley JA (with whom Meagher JA agreed) took a more liberal approach to the use of post-contract words or conduct. As a matter of precedent there was a High Court case in 1943 (White v Australian and New Zealand Theatres Ltd) which took a very liberal approach to this question. But later High Court cases were more equivocal, including what Mason J had to say in the Codelfa case. Priestly JA was inclined to think that such evidence should be admissible. But on the particular facts before him, the evidence was not helpful.

Though this was not mentioned, it seems that allowing such evidence is consistent with the approach taken in uncertainty cases where the subsequent conduct of the parties can sometimes clear up an uncertainty.

Exclusion clauses, etc

We turn now to a particular type of term where the courts have adopted a particular attitude. These are exclusion clauses or sometimes called exemption clauses or limitation of liability clauses. These are not terms of art but merely descriptive of the various forms that these clauses take. Another form is an indemnity clause which is a bit like an exclusion clause in reverse, that is instead of saying "I don't have to pay if..." it says "You pay me if..."

These clauses are, broadly, risk allocating devices. They look forward in a contractual relationship and ask "what if this happens, or that happens?" and then spell out the consequences in terms of who bears the risk.

In ordinary commercial transactions these clauses are perfectly legitimate to allocate risk which often dictates who should take out insurance against that risk. In consumer transactions they are often unfair. They are presented to the consumer on a take-it-or-leave-it basis and they may be of very wide compass so that the provider of goods or services is essentially saying they are not liable to the customer, however lousy a job they do or however shoddy the goods are.

We saw an example in L'Estrange v Graucob Ltd where the supplier of the cigarette vending machine effectively took no responsibility for its quality. This sort of commercial behaviour has been very largely controlled by consumer protection legislation, such as the Trade Practices Act s 68 and s 68A which disallow exclusion of the terms implied by the legislation into contracts for goods or services.

The courts have over the years taken against these types of clauses and have done their best to cut them down. They have never just simply said that this is unfair and we won't enforce it. We saw when we looked at the ticket cases that the courts have never claimed a general power to rule out unfair clauses. So they resorted to other tactics, such as making the reasonable notice test in ticket cases apply very stringently so as to exclude the clause at the outset. Another trick was to interpret the clause very narrowly. You will see references to a Latin phrase - contra proferentem - which means that an exclusion clause will be construed by the court against the person proffering the clause, that is, the person who is trying to hide behind the clause.

But note that both of these approaches for cutting down exclusion clauses allowed a shrewd player to use an exclusion clause if they got it right, that is, they made sure that it was part of the contract (by using a red hand and so forth if it was a ticket case) and by drafting the clause so that there were no "holes" in it. To that extent the courts maintained a laissez-faire approach to contractual dealings.

In more recent times the courts have taken a more discriminating approach to these types of clauses. As I said, they used to be really down on them, no matter what context they were used in. Now the courts are more likely to look to the commercial setting and see whether the clause is used as simply a risk allocating device between big players or whether it is being used as a device for shrugging off responsibility against someone who cannot protect his or her interests, such as in a consumer transaction. As already mentioned, consumer protection legislation has largely taken care of the latter type of case.

We look at a sample of cases which show the various ways in which courts approach these types of clauses.

The first short extract deals with the way the courts approach exclusion clauses. They compare the words of the clause with the event which happened and ask whether the words are sufficiently clear to cover that event. So for example, suppose a clause covers "loss" of the goods in, say, a contract of carriage and the goods are in fact soaked in ice cream and melted lollies because a refrigerated van stopped refrigerating. Is destruction of the goods in this way covered by the word "loss"? The point which is being made in those rather difficult passages in this extract, replete with double or triple negatives, is that a clause may be drafted to exclude even an event which undermines the whole purpose or object of the contract. If it is clear and comprehensive, then the court will give it effect.

The next case was one where the High Court took a "hard-nosed" approach to exemption clauses, stressing that it is generally the court's task to interpret the clause. When I say "hard-nosed" I mean the High Court allowed a clause which was very sweeping and which excused what would otherwise be a serious breach. In other words, in commercial transactions, the assumption is made that the parties do not need the court's protection. They can look after themselves.

A word of explanation. There is a reference to the doctrine of fundamental breach. This was an English doctrine championed principally by Lord Denning which said that an exclusion clause, no matter how well it was drafted, could not be expected to protect someone who was in "fundamental breach" of the contract. This doctrine gave rise to all sorts of difficulties. It was never quite clear what a "fundamental breach" was. Anyway, it never took off in Australia and was finally knocked on the head by the House of Lords. (It actually required two attempts to knock it on the head because after the first time Lord Denning revived it again.)

In Australia the courts have always approached exclusion clauses as a matter of construction, albeit with a bias against the clause, that is, applying the contra proferentem rule. The construction approach (viz. does this clause by its words cover this event or this cause of action?) is stressed as the correct approach by the High Court in Darlington. Note that in stressing this approach the High Court puts in the qualification at the very end of the 1st para on page 709 that they are talking about "formal commercial contracts between business people where no question of the reasonableness or fairness of the clause arises..." This is a reference to a different, more protective, approach which would be adopted in consumer-type transactions.

The Darlington case involved a contract between a broker who invested on the futures market and an investor. The High Court upheld an exclusion clause which had very wide operation and protected the broker from the consequences of engaging in transactions which had not been authorised by the investor.

Here we have, by contrast to the Darlington case, a consumer transaction. One can predict in such a case that the court will try its hardest to find a hole in the clause. The extract merely deals with the approach which a court will take to an exclusion clause. Mahoney JA pointed out on p 710 6th para that exclusion clauses are not necessarily bad. "Whatever the position may have been seen to be in the past, the attitude of the courts to exclusion clauses is now not one of unqualified hostility..."

He then went on to point out in the next para that, nevertheless, exclusion clauses can operate harshly and that the court may have to use whatever means they can to try and avoid a harsh result. He mentioned the contra proferentem rule and then went on to make four points about how the courts deal with exclusion clauses where a harsh result may ensue from the clause.

1. The court does not and cannot simply cut down the clause because it is unfair.

2. If there are alternative meanings to the clause, one wide and harsh, the other less wide and not so harsh, then the court will read the clause down to the less wide meaning. This is the contra proferentem approach at work. It is therefore the task of the barrister arguing against the clause to try and find that the clause is ambiguous or could apply to a number of situations and then invite the court to interpret the clause at its narrowest.

3. The court will be very slow to read something into the clause by implication. The general rule is that a clause must be clear and unambiguous. If it is not, then an argument for reading something into the clause will, in all likelihood, fall on deaf ears.

4. An exclusion clause can, if it is properly drafted, exclude negligence liability as well as breach of contract liability. But the courts over the years have consistently said that if the person relying on the clause wishes to exclude liability for his or her own negligence, then he or she must generally say so explicitly. General words such as (in this case) "no responsibility will be accepted..." are not explicit enough. Excluding liability for negligence requires, almost invariably, that the word "negligence" should appear in the clause.

There are some rare examples where the courts have been prepared to say that a clause covers negligence even though it does not use the word "negligence" if the clause must on its natural meaning be intended to cover negligence because there is a little else that it could cover.

The NSW Court of Appeal concluded that the clause in this case was not wide enough to cover the accident which took place in this case, namely, an accident due to the ice in the skating rink being higher in one spot than the rest of the rink. The clause, as drafted, only covered the usual sort of accident which skaters might have as a normal part of skating.

This case was decided in the hey day of the courts taking a very restrictive attitude to exclusion clauses. This was the time when the doctrine of fundamental breach was flourishing in England. As I pointed out, the Australian courts did not accept or apply the doctrine of fundamental breach. But they came very close to it and used an approach which made it almost impossible for businesses to use restrictive exemption clauses, particularly against consumers.

In West's case Mr West parked his car in the defendant's car park. When he came to pick it up it had gone. It had been delivered to a rogue who had posed as a Mr Robinson and who had obtained a duplicate ticket for a different car by saying that he had lost his ticket. He then drove the plaintiff's car away without any objection.

The car park wised to rely on an exclusion clause in the ticket which was handed to each customer. The clause is reproduced on pp 712-3. In a case like this there are two questions: is the ticket and its terms part of the contract? If it is, does the clause by its terms protect the car park in relation to the event which happened? The court considered the first point and may have come to the conclusion that there was not reasonable notice but, in the end, left this question undecided - see p 712 square brackets in 5th para. Instead they held that the clause was not drafted sufficiently comprehensively to cover what had happened.

Before looking at the reasoning of Barwick CJ and Taylor J, note that the Full Court of the Supreme Court had applied the doctrine of fundamental breach. See the quote from Lord Denning in Spurling v Bradshaw on p 713. On last para p 713 the judges specifically reject the fundamental breach approach.

What they said was that it is all a matter of construing the contract. This involves asking whether the words cover the particular event. In this case, they spent no time looking at the words themselves but, instead, just said that they could not possibly have been meant to apply to the delivery of the vehicle to the wrong person. This was something which was not authorised or permitted by the contract. Had the car park attendant been merely negligent in carrying out the contract then the car park would have been protected. But this was something else.

Kitto's judgment is difficult to follow but what he did was to compare the clause with the various causes of action which might be brought by Mr West. In the course of doing this he referred to the tortious actions of detinue and conversion and concluded that the clause would protect the car park. Similarly with breach of contract where the breach was failing to keep the vehicle safely. But he appeared to conclude that the contract imposed a more specific duty, namely, to deliver the car only to the right ticket holder. The car park was not protected when it failed to fulfil this contractual duty.

The upshot of this kind of analysis is that it is possible to draft a clause, as we have already seen, to cover events which could be described as neither permitted nor authorised by the contract. The Darlington Futures case was an example. Another example is the Glebe Island Terminals case mentioned on p 717 in which exclusion clauses were effective to prevent liability from arising out of the loss of two containers of Chivas Regal whisky. (This is one of the few cases in the history of the common law where a judge gave a plug for a product!)

Remember that the Curtis case made it clear that if someone enquires about the scope or effect of an exclusion clause, then the company relying on the clause can only rely on it as it was represented not as it actually was drafted. This could also be explained in terms of an estoppel. Yet another way of looking at this, as we shall see, is that it is misleading conduct contrary to the Trade Practices Act s 52 to give someone a wrong impression of what is contained in an exclusion clause.

Similarly, an exclusion clause may be displaced by a person who is assertive enough to make it clear that he or she is not prepared to contract on the basis of the exclusion clause. Obviously, the opportunities for doing this are limited. Try it at a car park next time you are in town.

NB Trade Practices Act 1974 (Cth) ss 68 and 68A (HPH 722-23).