Clear as Mud – interpreting terms in Commercial Contract Disputes

Whether it be a sense of urgency to obtain a fully signed contract, frustration over a long and drawn out negotiation period, or simply wanting to strike while the iron is hot, it may be an all too common story in which parties to a commercial contract of sale may hurriedly scribble a hand-written clause into the special conditions. However, such a special condition drafted without careful consideration may come back to rear its ugly head if dealings turns sour and the parties end up in a dispute over its meaning.

If parties disagree about the correct meaning or construction of the clause in dispute, a court may be asked to consider how that clause should be interpreted. The general principle or ‘true test’ for determining the meaning of commercial contract terms is to look at the text objectively, considering the commercial purpose or objects to be secured by the contract, and asking ‘what a reasonable businessperson would have understood those terms to mean’. That is to say, the terms of the contract should be examined without any regard to external facts (such as discussions between the parties in relation to the inclusion of a special condition).

There is, however, an exception to the above principle that will allow for certain objective external facts outside the contract to be admissible in assisting a court in determining contract meaning (that is, facts known to both parties prior to entering a contract). This exception occurs where there is ‘ambiguity’ in the text, or the language is ‘susceptible of more than one meaning’. As the question of whether or not ambiguity exists in any given contractual clause can be a complex question in itself, this has led to some differing views across Australian courts on when to let certain external materials in for examination.

Traditionally, Victorian courts have leaned towards the ‘true test’ and have been reluctant to look beyond the pages of a contract unless the terms are ambiguous. This view was upheld by the Victorian Supreme Court recently in Definity Clinic v AMD Rifat [2021], in which the Purchaser (Definity) sought to terminate a contract of sale pursuant to the following hand-written Clause 3.1 that had been inserted into the contract by an agent of the Vendor (AMD) immediately before signing:

This contract is subject to and conditional upon vendor obtaining a medical permit for the premises for two (2) practioners [sic]. This will be done at the purchasers [sic] costs and will be payable upon invoice. Settlement will occur 14 days from when permits are issued or on the 18th January 2018 which ever is earlier.

Prior to settlement and at the request of AMD, Council issued a notice of decision to amend the planning permit in relation to the property which changed its use from café to medical centre. The decision amended the existing permit to provide that the property could have no more than 2 people providing health services within the premise, with a maximum of six patients attending the Medical Centre each day. This was, in the view of Definity, insufficient for their intended use of the property – a Day Procedure Clinic that primarily provided liposuction procedures.

After enquiring with Council and concluding that a planning permit that would meet the needs of their intended use would be seemingly unattainable, Definity sought to terminate the contract and recover its deposit on the basis that AMD had failed to satisfy Clause 3.1. AMD refused, arguing that they had in fact satisfied Clause 3.1 on its correct interpretation.

The Court found there was ambiguity in the meaning of the words ‘medical permit’ (to which both parties openly agreed) and also in the meaning of ‘two practitioners’. As the ambiguity threshold was met, surrounding facts were permitted in the Court’s interpretation of the meaning of Clause 3.1. The crucial facts were that firstly, prior to signing AMD knew that Definity intended to purchase the property to operate a cosmetic surgery and, secondly, AMD assured Definity that the ‘medical permit’ that could be obtained by AMD for the property ‘would be fit for their intended use’. These facts, the Court found, could not be reconciled with a submission from AMD that a ‘medical permit’ was essentially any planning permit that allowed a medical use and, in fact, such a construction ‘would in effect deprive special condition 3.1 of its commercial purpose’.

It was uncontroversial that, in light of the construction of special condition 3.1 which I have adopted, it must follow that the condition was not satisfied by the obtaining of the May permit. Definity is accordingly entitled to recover the deposit that it paid under the contract and AMD’s counterclaim must fail.

For parties engaging in commercial contracts, the findings of Definity Clinic v AMD Rifat serve as a reminder to ensure all Special Conditions are drafted in as clear and certain terms as possible. Further, if Special Conditions are inserted it may be prudent to make it known (in writing preferably) to all parties involved of the intention behind the clause prior to signing up, as post-contract discussions or conduct will be inadmissible in determining contractual construction. If you require assistance or advice on preparing commercial contracts of sale, please contact Nevetts Lawyers for advice.

Author: Josh Curtis

Published: 25 November 2022


The information in this article is general in nature and is not to be relied upon as legal advice. As always, we recommend you seek thorough legal advice to consider your own circumstances and determine whether the information contained in this article is applicable to you.  This article is current as at the date of publishing but will not be updated as circumstances change.