Check your contracts! Do they actually reflect your agreement?
The High Court of Australia recently re-affirmed the importance for contracts to accurately contain the terms that each party involved understands their agreement to be.
The High Court refused an application for special leave to appeal by Western Export Services Inc (Western) against the decision of the New South Wales Court of Appeal concerning the interpretation of a contract it had with Jireh International Pty Ltd (Jireh).
The original dispute between the parties arose because there was a disagreement about the interpretation of a contract between them.
Western argued in its appeal to the High Court that the Court of Appeal should have had “regard to the surrounding circumstances and object of the transaction”, rather than confining the examination only to the expressed terms of the contract. The High Court rejected this submission and re-affirmed the decision of the New South Wales Court of Appeal.
Broadly speaking, it is the case that parties will be bound by the terms of their written contracts and not by their understanding of what they intended the contract to provide for, even if that understanding is shared between the parties. This means that if a written contract contains terms which are contrary to what the parties intended, the parties will still be bound by those terms.
This case therefore serves as a timely reminder that:
where there is a material change in a contractual relationship or a departure from what was originally agreed, serious consideration should be given as to whether the contract should be formally varied in writing or a new contract executed;
it is far better to be proactive and ensure a contract is formally varied in writing, or a new contract executed, rather than trying to persuade a judge that a contract should not be interpreted as it plainly reads, but rather as the parties understood or intended it to read.
You should therefore:
before signing any new contracts, carefully consider whether the terms accurately reflect your understanding and intention. In doing so, you will need to consider how a reasonable person would interpret the terms of your contracts, as this is the test that the Court will apply;
ensure that all new contracts contain all agreed terms, not just core terms; and
conduct regular contract audits to ensure that your contracts continue to accurately reflect the parties understanding and intention.
For more specific information on any of the material contained in this article please contact Tom Pledge 8210 1262 or firstname.lastname@example.org.