In this recent case of the NSW Supreme Court decided by Sackar J, the construction of a commercial contract was in dispute. The plaintiff, Visy Paper Pty Ltd (‘Visy’), runs a recycling service, picking up waste products from around Sydney and processing them at their recycling plant. They entered into a Supply Agreement with Glass Granulates Pty Ltd (‘Granulates’) which runs a glass recycling plant, to supply them with glass. A condition of the Supply Agreement is that Granulates agrees to deal with ‘rubbish’ which might be mixed in with the glass so long as it doesn’t exceed 7% of the load. The definition of ‘rubbish’ in the Supply Agreement is ‘paper, plastic, cardboard and other contaminants in the glass fines, which are not recoverable by Granulates and must be disposed of at a licensed waste facility.’
On a number of occasions Visy attempted to supply a load of glass to Granulates containing asbestos. Granulates refused to accept the load on the basis that asbestos did not come within the definition of ‘rubbish’ and thus they weren’t obliged to accept the load and deal with the asbestos. Visy sued for breach of the Supply Agreement. Therefore, the main issue was whether, on the proper construction of the Supply Agreement, asbestos is included in ‘other contaminants’.
Sackar J begins his judgment with an overview of current rules of contractual construction, reiterating that an objective approach is followed. This means that in the context of a commercial contract, the meaning of terms are determined by what a reasonable business person would understand them to mean, having regard to the language used and the commercial context, purpose and objects of the contract. Although surrounding circumstances known to both parties can be referred to in order to resolve ambiguities in the meanings of certain terms, the subjective intention of the parties is irrelevant.
In addition, Sackar J notes that the principle of ejusdem generis is still a valid tool of construction in commercial contracts. The principle stipulates that where general words follow particular words, the general words may be construed as being limited to the same kind as the particular words. For example, in a condition for ‘cheese, milk, yoghurt and other products,’ the definition of ‘other products’ (which in isolation has a very broad meaning) will probably be understood as being intended to mean ‘other dairy products.’
In relation to this contract, Sackar J agreed with the arguments of Granulates that asbestos could not be construed as included in the definition of ‘other contaminant’. Applying the ejusdem generis principle he reasoned that the inclusion of explicit examples of ‘paper, plastic, cardboard’ in the definition of rubbish was objectively intended to qualify the natural and ordinary meaning of ‘contaminant’ to benign, harmless or non-hazardous substances. The words are not included, as contended by Visy, simply as a demonstration of the most common waste products since there is no commercial purpose in stating the obvious. Likewise, if the parties didn’t objectively intend to qualify the definition, it would make no commercial sense to have introduced those specific words.
Sackar J considered the surrounding circumstances pointed out by Visy, such as there being no material change to the parties operations for many years, the requirement that the rubbish be disposed of at licensed waste facilities or the fact Granulates had policies in place for dealing with asbestos. Although admissible in the construction of the contract, Sackar J found them to be irrelevant to the determining the definition of ‘rubbish’.
As Sackar J favoured Granulates construction of the contract, they didn’t need to consider their alternate argument that forcing Granulates to receive asbestos rendered the contract void for illegality, as Granulates did not have the requisite statutory licenses to handle asbestos. However, Sackar J found that if he had construed the contract in favour of Visy’s interpretation, the contract would not be void for illegality as it carried an implicit obligation on behalf of both parties to equip themselves to fulfil contractual obligations according to the law.
This case is a handy reminder of what you need to keep in mind when creating contracts. If a court ever engages in a construction of your contract, what you actually intended to achieve will be irrelevant. The court will only be concerned with the objective intention that can be ascertained from the words actually used. When there is ambiguity in the words used, the Court will be able to look to the surrounding circumstances of the contract to ascertain that objective intention. Although Courts will be keen to construe a contract with commercial objects in mind, they will always be limited by the actual words used.
For this reason, it is always recommended to use a lawyer when creating commercial contracts. Lawyers are trained to think ahead and consider how certain conditions might be construed. They have experience in identifying where certain terms and conditions might be considered ambiguous. Your best bet of ensuring your contract reflects your actual intentions is to use a lawyer.
This article was prepared in October 2014 and the law may have changed when you read it. If you require any assistance with commercial contracts, please do not hesitate to contact us.