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The Courts avoid an inconvenient result.

03/05/2011

The Supreme Court of NSW, in McLaughlin v Dungowan Manly Pty Ltd, has examined how a contract should be interpreted where a literal interpretation led to an most inconvenient result.  The owners of a company title apartment building agreed to surrender their shares in return for strata titles to the apartments.  The plaintiffs waited until all the other shareholders had surrendered their shares and then took control of the company and conducted it oppressively to their own advantage.

The question for the Court was whether the agreements meant that shareholders lost their rights immediately on signing the agreement.  The documents were silent on the point.

In general, the Court preferred to construe the contracts objectively. The contract is taken to record the actual intentions and expectations of the parties and overtakes all negotiations that preceded it. The subjective intentions and expectations of either party are irrelevant. A contract should be enforced according to its words, without regard to the ways that either party hoped it should operate.

If the language can be read in two ways, a construction which avoids a capricious, unreasonable, inconvenient or unjust result will be preferred over another which is more grammatically accurate.  Words mean different things to different people. The meaning of words can vary depending on the circumstances.  The words should be interpreted in the way that the parties who chose them understood them to mean. Contractual interpretation is not simply a matter of dictionaries and grammar.

The plaintiffs argued for an implication, as a matter of fact or law, that shareholders should not claim to retain or exercise any right to the shares or right, qualification or office arising from the surrendered shareholding.  However, that implication was not supported by a logical analysis of the words chosen by the parties.  Nor was the implication to be found in a need to give business efficacy to the contract. As a matter of fact, the contracts were ambiguous. The Court preferred a contractual construction that does not lead to impractical, random or inconvenient consequences.  It is probable that the parties chose not to express the words for which the plaintiff agitated because they did not intend that the contract should have dramatic and inconvenient consequences.

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