Terms and construction 

Once a contract exists, the question becomes what it says. Two steps: identifying which statements form part of the contract, and construing what those terms mean.

Which statements are terms

Not everything said in negotiation becomes a term. A statement may be a term, promised and actionable in contract, or a representation, which induces the contract but is addressed by misrepresentation and the statutory prohibitions on misleading conduct.

The test is objective: would a reasonable person conclude the parties intended the statement to be promissory? Factors include the importance attached to it, the relative expertise of the parties, whether the maker invited verification, and the interval between the statement and contracting.

Incorporation

Terms in a document become part of the contract by signature, by reasonable notice given before or at the time of contracting, or by a consistent course of dealing between the parties. Signature is powerful — a party who signs is generally bound whether or not they read the document — but is displaced by misrepresentation as to the document's effect, or where the document would not reasonably be taken to be contractual.

Notice must be given before the contract is concluded. A term delivered afterwards, on a receipt or a sign inside the room, comes too late.

Construction

Australian courts construe contracts objectively: what a reasonable businessperson would understand the language to mean, read as a whole and against the surrounding circumstances known to both parties. The exercise is about meaning, not about what a party subjectively hoped for.

Established points:

• Read the contract as a whole. A clause is construed in the context of the document, not in isolation.
• Commercial purpose matters. Where language is capable of more than one meaning, courts prefer the construction that produces a commercially sensible result — Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640¹ is the leading modern statement of this approach.
• Surrounding circumstances are admissible in aid of construction, but Australian law is more cautious than some jurisdictions about the extent to which ambiguity is a precondition, and evidence of prior negotiations and subjective intention is generally not admissible to construe the words.
• The parol evidence rule limits the use of extrinsic evidence to add to, vary or contradict a wholly written contract — subject to significant exceptions, including collateral contracts, rectification and partly-oral agreements.

Classifying terms

Terms are classified by the consequences of breach: a condition (breach permits termination), a warranty (damages only), or an intermediate term, where the remedy depends on the seriousness of the actual breach. Classification is a question of construction — the label the parties used is relevant but not decisive.

Applying this in a problem question

1. Separate statements into terms and representations, and say why.
2. For written terms, address incorporation: signature, notice, or course of dealing.
3. Construe the disputed term objectively and in context.
4. Classify the term if termination is in issue.

Terms not expressly agreed may still be implied, and terms limiting liability face particular scrutiny as exclusion clauses.

Where the authority sits

Common law, with a substantial body of Australian High Court authority on construction. Because the Australian position on surrounding circumstances differs in emphasis from English law, cite Australian authority.