Is the literal interpretation of a contract always the correct interpretation?

How should a contract be construed when the literal interpretation leads to a result that is uncommercial and, presumably, unintended? Many contract law disputes during 2020, as in previous years, were a product of the tension that often arises between:

  • a literal interpretation of the particular words used in the contract; and
  • an interpretation that is more commercial and more consistent with the likely intention of the parties.

Numerous cases summarised in this year's Contract Law Update involve Australian appellate courts considering different means for trying to resolve this tension. These include:

  • arguing that the proper construction of the agreement is not necessarily the most literal construction;[1]
  • asking the courts to imply a term into the agreement, to supplement the words actually used;[2]
  • asserting that the powers granted by a contract cannot be exercised literally because they are subject to a good faith obligation (whether expressed or implied);[3] or
  • seeking to alter the terms of the contract by an order for rectification.[4]

Even if a plaintiff successfully proves a breach of contract, there may be limitations on the right to terminate or on other 'penal' contractual consequences.[5] There may also be uncertainty as to the quantum of damages (if any) to which a plaintiff is entitled. Some of the 'damages' issues considered by Australian appellate courts last year include the 'Bellgrove Principal, the availability of 'reliance damages; and the presumptions that can be made about the 'counterfactual'.[6]

Where to from here?

A year ago, we might have anticipated that the 2020 Contract Law Update would be dominated by consideration of 'force majeure' clauses and the doctrine of frustration. Although that did not happen last year, it may be in 2021 that these issues reach Australian appellate courts.

In this year's Contract Law Update, we will look at the most significant recent judgment of Australian appellate courts in the areas of:

  • interpretation of contracts;
  • implied terms;
  • termination, relief against forfeiture and penalties; and
  • damages.

1 These cases are discussed in Section 1 of this Update. 2 See Section 2. 3 See some of the cases discussed in Section 1. 4 There are no rectification cases in this Update, although there are cases in Section 1 that consider 'rectification by construction'. 5 See Section 3 for cases on termination and penalties. 6 See section 4 of this Update.

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