Lawyers draft agreements that should reflect the parties intentions. That is their skill and the reason why clients engage their services. Disputes however often arise as to whether the agreement as drawn makes Òcommercial senseÓ and/or truly reflects the partyÕs intentions. This can also arise where parties themselves have drawn and entered into Agreements that may be unclear or not reflect their intentions. The agreement may simply not make Òcommercial senseÓ.

This is also a timely reminder why drafting Contracts in plain English and commercial language that can be readily understood by the parties and their advisors is the preferred course. There is no excuse for lawyers to draft provisions that need to be ÒinterpretedÓ.

How do Courts deal with these issues?  Does the Court strictly adhere to the terms in the Agreement even if it makes no commercial sense?

Background
A case on point which highlights the principles applied by the Courts is Battery World Pty Limited v Heavenly Bound Pty Limited & Ors.

The franchiseeÕs legal team argued that by the agreement simply expiring at the end of its term, that ÒexpiryÓ did not mean ÒterminationÓ.  Therefore a number of clauses that were expressed to have operation only upon ÒterminationÓ of the Franchise Agreement would not apply to protect the franchisor on expiry.

The purpose of the ÒterminationÓ provisions was to enable the franchisor to continue to operate the franchise after the franchise expired.

The agreement enabled the business assets, such as customer information, permits and other approvals and the Franchise premises to be retained by the franchisor.

The Franchisees argued that the ÒterminationÓ terms and conditions were dependent on clause 11 of the agreement, which set out circumstances for termination other than through the effluxion of time (ÒexpiryÓ),  where the Franchisee was in default, for example:

• Failing to remedy a breach in a timely fashion;
• External administration of the Franchisee;
• Failure to commence trading within 3 months of commencement

The Court disagreed with the defendant (franchisees) argument and stated Ò[t]here [was] no rational commercial reason as to why they ought to be tied togetherÓ.

Principles of Construction
The Court applied the following recognised principles in interpreting a commercial contract:

1. To ascertain and give effect to the intentions of the contracting parties;
2. To construe commercial contracts with a view to making commercial sense of them;
3. To ascertain the meaning of a document by reference to the reasonable business person having regard to all the background knowledge reasonably available to them;
4. To avoid narrow, technical or artificial interpretations of commercial contracts; taking into account the reasonableness and commerciality of the outcome or a particular outcome; and
5. That a semantic and syntactical analysis of a word in a commercial contractÉmust yield to business commonsense and reasonableness and avoid absurdity.

The Franchisors Argument
The Franchisor (Plaintiffs) position was that the ordinary English meaning of the word ÒterminationÓ should be applied and that it could apply and include expiry of the term of the Franchise Agreement. The Franchisee argued that the Agreement did not terminate it simply came to the end of the term, that is expired.  This argument was not accepted by the Court.

The franchisee argument was based on the fact that:

1. The parties agreed to leave all rights and obligations upon ÒexpirationÓ of the term to the parties rights at common law, equity and statute; and.
2. That the plaintiff (franchisor) would be left to rely on those complex legal rights to enforce any rights it had.

This argument was not accepted by the Court.  The Court held that there was no rational commercial reason why the parties would take that course suggested by the franchisee which involved uncertainty, delay and additional cost. 

Is the Word ÒTerminateÓ Ambiguous?
The franchisee also relied on the case of Orrong Strategies Pty Ltd v Village Roadshow Ltd (Habersberger J, Supreme Court of Victoria, 25 January 2007, unreported). In that case, the Judge relied on various cases that recognised that the word ÒterminateÓ by itself was ambiguous.

The Judge in the Battery World case, found that the Judge in Orrong Strategies Pty Ltd v Village Roadshow Ltd took the conventional approach looking at the proper meaning of the word in question and the commercial purpose and result.

The Judge in Battery World stated that in construing a commercial contract, it begins with the words of the document, and that it is often there that the factual context between the parties, common purpose and object between the parties is revealed.

The Outcome
The franchisees sought to argue against accepted principles of interpretation and construction of commercial contracts and failed.  The Court in Battery World applied the following principle:

ÒThat narrow, technical or artificial interpretations of commercial contracts are to be avoided and it is necessary for the Court to take into account the reasonableness and commerciality of the outcome of a particular construction; the more unreasonable the result, the more unlikely it is that the parties intended itÓ.

The meaning of  ÒterminationÓ the franchisee sought to argue would have led to an Òuncommercial and absurd outcomeÓ and therefore, the Court found in favour of the franchisor.

This case highlights that a party can not reasonably rely on an error or ambiguity that may not have been intended by the parties which does not make commercial common sense.

Now there is a franchisor common sense.  This may be the only time we as lawyers and clients can agree that the Court has finally applied common sense!

The devil is always in the detail for specialist contract advice and commercial common sense drafting contract experienced business law specialists.