Key takeaways 

Three recent cases reaffirmed longstanding principles of contract law relating to the proper interpretation and operation of contracts in Australia. 

• It is important to have these principles in mind when drafting contracts, and to ensure that the terms and conditions of proposed contracts are drafted sufficiently clearly and do not rely on the parties’ subjective intentions or circumstances that are only known to specific parties at the time. 

• It can be difficult to infer what may be the intentions of the parties, as to the proper operation of contractual terms and conditions, from the circumstances surrounding the formation of the contract or extrinsic materials allegedly relevant to the purported meaning of the contractual provisions. Courts will consider only the objective facts rather than any subjective intentions or feelings of the parties.

• It is also important for the parties to a contract to ensure that they understand the extent to which a repudiation of the contract affects their past and future contractual rights and obligations. 

Introduction 

When drafting contracts, it is imperative that you consider the principles of contract law and how a court may interpret the contract.

There are enduring principles of contract law relating to the manner in which Courts may consider extrinsic materials and surrounding circumstances to aid the proper interpretation of a contract, and how the Courts respond to the repudiation of a contract, each of which are based in an objective approach to interpretation (regardless of the parties’ subjective intentions). 

These principles are emphasised and reaffirmed in the following recent cases:

• Commissioner of Taxation v S.N.A Group Pty Ltd (S.N.A Group)
• Campbelltown Central 2 Pty Ltd v Chief Commissioner of State Revenue (NSW) (Campbelltown);
• McDonald Jones Homes Pty Ltd v Driver (McDonald).

Specifically, S.N.A Group and Campbelltown reaffirm key legal principles relating to the relevance of surrounding circumstances and the importance of objectivity in interpreting contracts by reference to such circumstances. McDonald considers the effect that repudiation has on the parties to a contract and their obligations.

We will consider and outline the key takeaways from these cases further below.

Background and key facts 

To briefly summarise the subject-matter of each case:

• Campbelltown considered whether a deed between a corporate group and special purpose corporate entities within that corporate group, relating to the ownership of commercial property, constituted a declaration of trust for the purposes of the Duties Act 1997 (NSW).
   
• In S.N.A Group, the Court considered whether a taxpayer group had an ongoing contractual liability, after the expiry of the contract, to continue making payments to related trustee companies.
   
• In McDonald, the Court considered whether settlement deeds should be enforced after the respondent failed to comply with his agreed payment obligations under those settlement deeds. 

Formation of a contract 

In S.N.A Group, the Court reaffirmed that identifying the formation of a contract and its terms is determined by considering the words and conduct of the contracting parties and what those words and conduct ‘would be reasonably understood to have conveyed to reasonable people in the position of those parties, not upon the actual subjective intention of those parties’^[1]. This reaffirms the core principle that evidence about the subjective intentions of the parties cannot be used to determine whether a contract actually exists.

Further, the Court considered when the formation of a contract can be inferred from the parties’ conduct. To determine if a contract exists in the absence of clear and express words, the Court will consider whether ‘the conduct of the parties, viewed in light of the surrounding circumstances, shows a tacit understanding or agreement’^[2]. The conduct of the parties must also be sufficient to prove ‘all the essential elements and terms of an express contract’^[3].

However, the Court also noted that the circumstances in which a contract will be inferred by the parties’ conduct are rare.^[4] Accordingly, it is important that you do not rely on inferences to establish a contract, as it is not certain that arrangements of that kind will be considered to be contracts by the Courts.

Surrounding circumstances 

In Campbelltown, Bennett J confirmed that, when considering the circumstances surrounding the formation of a contract to inform the proper interpretation of that contract, the Court may only take into account: ‘the surrounding circumstances…which are known to all parties to the document’^[5].

Further, Bennett J reaffirmed that only objectively demonstrated circumstances may be taken into account as ‘it is not permissible to have regard to the parties' statements and actions reflecting their actual intentions and expectations’^[6].

In S.N.A Group, McElwaine, Feutrill and Wheatley JJ found that, when inferring the meaning of a contract in light of surrounding circumstances, the ultimate question remains ‘what would be objectively communicated to people in the position of the parties’^[7] to the contract. 

Additionally, their honours reaffirmed that the private thoughts or intentions of the parties are not relevant and cannot communicate to ‘reasonable people in the position of the parties a mutual intention to contract on particular terms’^[8].

Repudiation 

In McDonald, Manousaridis J considered the effects of a repudiation of a contract on the innocent party when there was no express term in the contract relating to repudiation. Manousaridis J confirmed that ‘a contract does not come to an end only because a party to the contract repudiates it’, rather, repudiation allows the innocent party to elect either to ‘accept the repudiation and terminate the contract, or to affirm it and insist on the defaulting party performing its obligations under the contract’^[9].

Manousaridis J also considered the effect of repudiation on the parties’ rights and liabilities in relation to the contract. In particular, Manousaridis J confirmed that rights and liabilities that have ‘unconditionally accrued in the course of the performance of the contract before the acceptance of the repudiation remain unaffected’^[10].

Finally, this case reaffirmed that a repudiation, and subsequent termination, only ends the contract to the ‘extent that the contract remains executory’^[11]. This means that the contract is only terminated in regards to the obligations that have not become due for performance as at the time of the termination.