Category: Contract Law

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Representation – Term or Collateral Contract?

In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; 55 ALR 417 the majority agreed with the conclusion of the trial judge (and that of the Court of Appeal) that statements made by the distributors were promissory. Gibbs CJ disagreed but did note at 61-62:

“A representation made in the course of negotiations which result in a binding agreement may be a warranty — i.e., it may have binding contractual force — in one of two ways: it may become a term of the agreement itself, or it may be a separate collateral contract, the consideration for which is the promise to enter into the main agreement. In either case the question whether the representation creates a binding contractual obligation depends on the intention of the parties. In J. J. Savage & Sons Pty. Ltd. v. Blakney , at p. 442 and Ross v. Allis-Chalmers Australia Pty. Ltd. at pp. 565, 567, it was said that a statement will constitute a collateral warranty only if it was “promissory and not merely representational”, and it is equally true that a statement which is “merely representational” — i.e., which is not intended to be a binding promise — will not form part of the main contract. If the parties did not intend that there should be contractual liability in respect of the accuracy of the representation, it will not create contractual obligations. In the present case Mr. Blackman, who made his statements fraudulently, had, of course, no intention that they should amount to contractual undertakings, but he could not rely on his secret thoughts to escape liability, if his representations were reasonably considered by the persons to whom they were made as intended to be contractual promises, and if those persons intended to accept them as such. The intention of the parties is to be ascertained objectively; it “can only be deduced from the totality of the evidence”: Heilbut, Symons & Co. v. Buckleton , at p. 51. In other words, as Lord Denning said in Oscar Chess Ltd. v. Williams , at p. 328:
“The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice.”

The intelligent bystander must however be in the situation of the parties, for “what must be ascertained is what is to be taken as the intention which reasonable persons would have had if placed in the situation of the parties”: Reardon Smith Line v. Hansen-Tangen , at p. 574.” [footnotes omitted]

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Waiver

Commonwealth v Verwayen (1990) 170 CLR 394 at 406. At 406-407 Mason CJ said:

“According to its strict legal connotation, waiver is an intentional act done with knowledge whereby a person abandons a right by acting in a manner inconsistent with that right: Craine v Colonial Mutual Fire Insurance Co Ltd [(1920) 28 CLR 305, at p 326.]; Grundt v Great Boulder Pty Gold Mines Ltd [(1937) 59 CLR 641, at p 658.] However, the better view is that, apart from estoppel and new agreement, abandonment of a right occurs only where the person waiving the right is entitled to alternative rights inconsistent with one another, such as the right to insist on performance of a contract and the right to rescind for essential breach: see Kammins [[1971] AC, at p 883.] This category of waiver is an example of the doctrine of election.

Another category of waiver is one in which a person is prevented from asserting, in response to a claim against him, a particular defence or objection which would otherwise have been available. Here waiver is said to arise when the person agrees not to raise the particular defence or so conducts himself as to be estopped from raising it: see Kammins [[1971] AC, at p 883.].”

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Principles surrounding the construction of commercial contracts

The principles surrounding the construction of commercial contracts are well established.

In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] the plurality (French CJ, Hayne, Crennan and Kiefel JJ) stated,

“The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean”.

The Court stated that

“it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract”

You can also see further in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[49]; Simic v NSW Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [78]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]; Victoria v Tatts Group Limited (2016) 90 ALJR 392; [2016] HCA 5 at [51].

As was pointed out by Gleeson CJ in McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65 at [22], commercial contracts should be given a businesslike interpretation and that requires attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure.

Source: [229] Macquarie International Health Clinic Pty Ltd v Sydney Local Health District [2020] NSWCA 161 per Bathurst CJ

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Construing a policy of insurance

As the policy is a commercial contract, the Court should, in construing it, “ask what a reasonable businessperson would have understood [the relevant] terms to mean”: Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 (Electricity Generation) at [35].

The task is an objective one; it involves identifying the imputed intention of the parties, by reference to the contractual text construed in the light of its context and purpose: Electricity Generation at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 (Mount Bruce) at [46]-[51] and [108]-[109]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]-[75]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47; (2016) 91 ALJR 108 at [18].

Importantly, in their joint judgment in Mount Bruce, French CJ, Nettle and Gordon JJ said (at [48]) that: 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. (Footnote omitted)

Their Honours also emphasised that “context” may be discerned from the entire text of the contract in question: at [46].

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Interpretation of insurance exclusion clauses

The applicable principles are as follows:

There was also no issue about the principles which govern the resolution of what lies in issue as to the proper construction of the endorsement to this insurance policy.

Where an insurance company prepares the document, it is bound to make its meaning as clear as possible: Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305; [1920] HCA 64. “A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure”: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65 at [22].

The meaning of commercial documents must be determined objectively, their construction being determined by what a reasonable person in the position of the parties would have understood them to mean, which requires consideration both of the text of the documents and also the surrounding circumstances: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22].

If there is ambiguity, resort can also be had to the surrounding circumstances known to the parties: Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 at 352; [1982] HCA 24.

The interpretation of an exclusion clause “is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.”: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510 [1986] HCA 82.

Where two meanings are open, “it is proper to adopt that meaning that will avoid consequences that appear irrational and unjust”: Public Transport Commission of New South Wales v J Murray-More (NSW) Pty Ltd (1975) 132 CLR 336 at 350; [1975] HCA 28. Further, in the event of ambiguity it is proper to give a construction “that would avoid irrational consequences that it is unlikely that the parties intended”: Distillers Co Bio-chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 11; [1974] HCA 3.

A court may also depart from the “strictly literal meaning of a particular expression to place upon it an alternative construction which is more reasonable and more in accord with the probable intention of the parties if the words will bear that construction.”: Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520; [1986] HCA 32.

The contra proferentem rule is one of last resort, however, applying only when ambiguity remains after all other avenues of construction have been exhausted: Beefeater Sales International Pty Ltd v MIS Funding No 1 Pty Ltd [2016] NSWCA 217.

From

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How to construe an insurance policy

From: Muriniti; Newell v Lawcover Insurance Pty Ltd (No 2) [2018] NSWCA 311 beginning at [39]

Legal principles

The principles governing the construction of insurance policies are well established and were not in dispute. In McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65, Gleeson CJ stated, at [22]:

“A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.” (footnotes omitted)

This statement was cited with approval by the High Court in Wilkie v Gordian Runoff (2005) 221 CLR 522; [2005] HCA 17 at [15], the Court adding, at [16]:

“In construing the policy, as with other instruments, preference is given to a construction supplying a congruent operation to the various components of the whole.” (footnote omitted)

In Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang (2016) 93 NSWLR 561; [2016] NSWCA 370 Leeming JA observed, at [86]:

“Where there is more than one available legal meaning, a court looks at the text, context and purpose, with a view to determining which potential meaning best accords with those considerations. Sometimes, text, context and purpose all point in the same direction, and all support the same conclusion as to the legal meaning of the contractual provision; that was the case in Victoria v Tatts Group Ltd (2016) 328 ALR 564; [2016] HCA 5 at [51] and [75]. Sometimes, as here, text, context and purpose point in different directions. But it remains necessary to assess the potentially available legal meanings against those matters.”

Leeming JA found the observations of Mance LJ in Gan Insurance Co v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047; [2001] 2 All ER (Comm) 299 of assistance where there is a constructional choice as to the proper meaning of a contract or a term of a contract. In Gan Insurance Co v Tai Ping Insurance Co Ltd (No 2), the concern was with a clause which had at least two possible meanings. Mance LJ stated, at [16]:

“… In these circumstances, it is especially important to undertake the exercise on which the judge declined to embark, that is to consider the implications of each interpretation. In my opinion, a court when construing any document should always have an eye to the consequences of a particular construction, even if they often only serve as a check on an obvious meaning or a restraint upon adoption of a conceivable but unbusinesslike meaning.”

This passage was unanimously approved by the United Kingdom Supreme Court in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900; [2011] UKSC 50; at [26]. See also the observations to the same effect in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 per Gibbs J at 109, upon which the primary judge relied:

“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.”

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What is an indenture?

We’ve already examined the historical distinction between a deed poll and an deed inter-parties. But here is another!

Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

Oh, one more thing, so as not to confuse. In the United States they call what we call a ‘trust deed’, an indenture.

 

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Deed poll vs deed inter-parties?

 

The difference between a deed poll and a deed inter partes is absolutely crucial because of the difference as to who may enforce the deed in question.

It is clear that any person named or sufficiently indicated in a deed poll may sue to enforce any obligation undertaken in that deed poll in his favour despite the fact that he is, by definition, not a party to the deed poll and has not executed the deed poll.

By contrast however a person cannot sue on a covenant made in his favour which is contained in a deed inter partes unless he is a party (and named as a party) to the relevant deed. Even if a third party executes a deed inter partes he cannot sue on it unless he is named as a party to the deed. The only way in which a person who is not a party to a deed inter partes can enforce a covenant in his favour contained in that deed is to come within one of the exceptions to the Doctrine of Privity e.g. he would be able to enforce the covenant if he was able to show that there was a completely constituted trust of the covenant in his favour.

Consequently it is vital where you are preparing a deed poll which is to be enforceable by third parties that you do not use language which suggests that there is more than one party to the deed and that it is a deed inter partes. For example avoid phrases such as “this deed is made between”. Conversely, if you are preparing a deed inter parties, make sure that any person who you wish to be able to enforce the deed is named as a party (unless one of the named parties is to be a trustee of the benefit of the deed for a third party beneficiary).

The other historical distinction was between a deed poll and an indenture. Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

The practice of indenting originated in early times when deeds were short; often a deed between parties would be written out two or more times (according to the number of parties) on a single sheet of parchment which was then divided by cutting it with an irregular edge so that each part could be fitted into the other to demonstrate its authenticity.

At first this rule was very strict and a deed executed before 1845 was not an indenture unless it was actually indented, even though it was stated to be an indenture. However in 1845 legislation in the UK was passed providing that a deed between parties has the effect of an indenture even though the parchment on which it is written was not actually indented.

Consequently for all practical purposes the term “indenture” is now a thing of the past and the only real important differentiation nowadays is between deed polls and deeds inter partes.

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What is a deed inter-parties or indenture?

A deed inter-parties is a deed which expressly states that it is made between two or more named persons.

The difference between a deed poll and a deed inter partes is absolutely crucial because of the difference as to who may enforce the deed in question. It is clear that any person named or sufficiently indicated in a deed poll may sue to enforce any obligation undertaken in that deed poll in his favour despite the fact that he is, by definition, not a party to the deed poll and has not executed the deed poll.

By contrast however a person cannot sue on a covenant made in his favour which is contained in a deed inter partes unless he is a party (and named as a party) to the relevant deed. Even if a third party executes a deed inter partes he cannot sue on it unless he is named as a party to the deed. The only way in which a person who is not a party to a deed inter partes can enforce a covenant in his favour contained in that deed is to come within one of the exceptions to the Doctrine of Privity e.g. he would be able to enforce the covenant if he was able to show that there was a completely constituted trust of the covenant in his favour.

Consequently it is vital where you are preparing a deed poll which is to be enforceable by third parties that you do not use language which suggests that there is more than one party to the deed and that it is a deed inter partes. For example avoid phrases such as “this deed is made between”. Conversely, if you are preparing a deed inter parties, make sure that any person who you wish to be able to enforce the deed is named as a party (unless one of the named parties is to be a trustee of the benefit of the deed for a third party beneficiary).

The other historical distinction was between a deed poll and an indenture. Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

The practice of indenting originated in early times when deeds were short; often a deed between parties would be written out two or more times (according to the number of parties) on a single sheet of parchment which was then divided by cutting it with an irregular edge so that each part could be fitted into the other to demonstrate its authenticity.

At first this rule was very strict and a deed executed before 1845 was not an indenture unless it was actually indented, even though it was stated to be an indenture. However in 1845 legislation in the UK was passed providing that a deed between parties has the effect of an indenture even though the parchment on which it is written was not actually indented.

Consequently for all practical purposes the term “indenture” is now a thing of the past and the only real important differentiation nowadays is between deed polls and deeds inter partes.

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What is a Deed Poll?

It is a basic rule of Australian contract law that, save for limited exceptions, a contract cannot confer rights or impose obligations arising under it on any person except the parties to the contract. This basic rule is known as the “Doctrine of Privity” and there are several different aspects of the doctrine namely:

  1. a person cannot enforce rights under a contract to which he is not a party;
  2. a person who is not party to a contract cannot have contractual liabilities imposed on him by that contract; and
  3. contractual remedies are designed to compensate parties to the contract, not third parties

Deed polls constitute one of the limited exceptions to the basic doctrine of privity under Australian law; they are flexible and, provided they are used carefully, can be of great assistance in capital markets and other finance type transactions.

Lets start with a little bit of history. A deed poll is a deed made by and expressing the active intention of one party only, or two or more persons who join together in expressing a common active intention of them all e.g. a deed poll by two or more guarantors whose liability is joint and several.

The name deed poll comes from the fact that historically the parchment required for such deeds had been shaved even or “polled” at the top. This was historically in contrast to an indenture (see below). The most important fact to note in relation to deed polls is that they are the act of one party only (or two or more persons acting together i.e. the joint and several guarantors example above); in essence they are one sided unilateral instruments to which there is only one party not a two sided (bilateral) instrument like a contract.

A deed poll must be distinguished from a deed inter partes and an indenture.

See next Blog deed inter-parties.