What is an Uncertain Contractual Term, and what effect would one have on a contract? To explain, let us look at a practical hypothetical. I’d like to introduce you to Bob. Bob is thirty five and works as a builder. Bob is married to a lovely woman by the name of Jane. Bob and Jane have two children and are expecting their third. Bob has always been the sole breadwinner in his family. He is a good financial provider but has recently been exploring other ways to make more money. With the arrival of Bob and Jane’s third child, a little extra money would go a long way towards making their lives easier. Towards this end, Bob has signed a contract with Big Co Pty Ltd (Big Co). Big Co grow and distribute bananas. Bob has never been much of a banana man but he has recently signed a contract under which he is to promote the sales of Big Co bananas and sign on new wholesalers and retailers. Per a term of the contract, Bob was to use his best endeavours to sign on five (5) new wholesalers and/or retailers per quarter. Bob has only managed to sign on three (3) wholesalers and retailers in the last quarter and Big Co is now accusing Bob of breaching the contract. Bob claims that under the contract he was expected to use his “best efforts” to sign on new wholesalers and/or retailers but there was never any expectation that Bob was to successfully sign on a set number of banana resellers. Big Co claim that the contract gave rise to a strict obligation to sign on a set number of resellers.

Unable to come to an amicable solution with Bob, Big Co have instituted proceedings for breach of contract and are seeking compensatory relief under the same. The issue before the Court is the legal interpretation of the terms “best efforts”. It appears that Big Co and Bob cannot come to an agreement as to what this term means, as such it is an uncertain contractual term. Accordingly, the task before the Court is one of contractual construction. Thus the question arises, what legal principles do Courts rely on in interpreting uncertain contractual terms? For the avoidance of doubt, when we refer to uncertain contractual terms, we are referring to contractual language that is either not sufficiently precise and clear, or uses terminology that is susceptible to more than one meaning.

Uncertainty Will Not Necessarily Invalidate a Contract

From a policy perspective, the Courts will not wholly invalidate a contract simply because one or more contractual terms in the document are uncertain or are capable of producing more than one result when applied (Upper Hunter Country District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429). Provided that an uncertain contractual term is not entirely devoid of meaning, the Courts will ascribe it the meaning they believe to be reflective of the term upon its proper construction (BHP Petroleum (Timor Sea) Pty Ltd v Minister for Resources (1994) 49 FCR 155). Towards this end, the Courts will go a long way to ensure that transactions (particularly those that have been reduced into writing) are upheld as far as is practicable and reasonable.

Uncertain Terms and The Intention of the Contracting Parties

The object of construing uncertain contractual terms is to, as far as practicable, give effect to the intention of the parties. When we refer to intention, we are not referring to the subjective musing of each party at the time of contract. What is referred to is the objective express intention of the parties as disclosed in the words of the contract. To put it another way, the intention of the parties is to be determined from the words used rather than the parties’ actual intentions at the time (Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337). As a general rule of construction, a party’s objective intention is judged by what a reasonable person would have thought in the circumstances.

Legal Principles of Construction

Policy and contextual considerations aside, the Courts will refer to a specific set of legal rules and principles when attempting to interpret and contribute meaning to uncertain contractual terms. The main legal rules include, but are by no means limited to, the following:

  1. In determining the meaning and legal effect of uncertain contractual terms, the entire contract is to be construed and considered, including its purpose, effect and operation (Luna Part (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286).
  2. Construction of uncertain contractual terms is a commercial exercise. That is, uncertain language is to be interpreted broadly and fairly as opposed to narrowly and pedantically. The aim is to give commercial effect to the the document (Country District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436).
  3. In interpreting uncertain contractual terms, a common sense approach is to be adopted (International Fina Services AG v Katrina Shipping Ltd (The Fina Samco) [1995] 2 Lloyd’s Rep 344 at 350).
  4. Generally, in attributing meaning to uncertain contractual terms, certainty may be achieved by understanding, analysing and taking into consideration the practices of business persons, including those in the particular trade or profession inquisition (Three Rivers Trading Co Ltd v Gwinear & District Farmers Ltd (1967) 111 Sol Jo 831).

Per the parole evidence rule, subject to certain exceptions, where other external evidence exists, which sheds light on the uncertain contractual term, it is not to be referred to and is inadmissible. In other words, any negotiations entered into by the parties prior to or during entry into the contract would be excluded under the parol evidence rule.

Takeaways

If you would like to know more about contractual construction, the interpretation of uncertain contractual terms or the legal principles employed in undertaking the same, why not contact our friendly team of LegalVision lawyers? We would be happy to assist you with any queries that you may have. Call us on 1300 544 755 for a fixed-fee quote.

Vanja Simic

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