Macquarie Journal of Business Law
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DR BRUNO ZELLER*
Literature and case law has acknowledged that a paradigm shift in the interpretation of legal texts has occurred. The textual approach is being slowly replaced by a contextual one. This article intends to point out that such a development is inevitable as international treaties and soft laws mandate a shift to a contextual approach. As many treaties have become part of domestic law – and most of these treaties demand a contextual approach – certainty can only be achieved if domestic law moves in the same direction. This is especially so if the enormous impact of globalization on business in general is taken into consideration.
The problem of interpreting contractual document has produced a debate which has not been completely resolved. His Hon. J J Spigelman in his illuminating and most useful contribution to the debate has forcefully argued the textual approach. He pointed out that “law is a fashion industry”[1] and he voiced the concern whether “the change in the general style of contractual interpretation – from text to context – has undermined the desirable objective of ensuring commercial certainty.”[2]
His Honor importantly pointed out that ensuring commercial certainty in all cases is a desirable objective. Therefore what is understood under the term of “commercial certainty” needs to be fleshed out. It is indeed true to say that certainty must have a link to risk allocation and hence financial decision making. Certainty can also be achieved by universally adopting either a textual or contextual approach. This is where the real problem and definition of certainty must rest. Certainty in essence must be linked to a uniform application of laws irrespective where the conflict arises. This is so as globalization and internationalization of trade opened the world. It is not by accident that it can be said that the world is flat[3]. The important effect of globalization is that legal boundaries do not any more equate to political boundaries. Conventions and treaties have permeated and influenced domestic systems to a great extent. The result is that decisions in one state are as close as possible as in another one despite the fact that their domestic legal systems are different.
It is not by accident that Lewison, when discussing the attitude of the court in the interpretation of commercial contract can point out that the emphasis in interpretation should include the commercial purpose of the contract. He notes:
“This attitude has grown remarkably in recent years, and is perhaps the single most important change in the construction of all classes of written instruments this century.”[4]
Spigelman JJ. agrees that there is no doubt that a “business like” interpretation is an acceptable constraint on contractual interpretations.[5]
This paper attempts to explain briefly that methods rooted in domestic legal systems should not be viewed as the only determining factor in contractual interpretations. It really does not matter whether a textual approach is sound and justified if the results it produces are not in step with international legal developments. In the end justice is not served if the same contract can yield different results only because one is decided using domestic principles while the other one has been decided pursuant to international uniform laws, both laws, being part of the same municipal system of law.
The “dualism” of legal principles has been influenced by transplantations of legal documents as well as conventions and treaties. To that end they have influenced directly or indirectly the way contracts are and need to be interpreted. One example will briefly illustrate the transplantation effects on our domestic system namely the Warsaw Convention. It is now established that in certain circumstances where a law has been transplanted techniques other than the ones explored in Australia can be used.
The Australian High Court has recognized that the “goal” of international law is the mandate of uniformity. It is encouraging to note that the High Court understands that uniformity of law is an important feature which contributes towards certainty and predictability in international trade. In a domestic matter the High Court noted:
“decision must be reached by this court with close attention to any relevant developments of international law, including decisions of the municipal courts of other states parties “[6]
The Australian High Court went even further and clearly stated that “no differentiation could be drawn on the basis that it was not obligatory for Australia to apply the language of the Warsaw Convention to domestic carriage by air within Australia.”[7]
The mere fact that the Warsaw convention was transplanted into Australian domestic law was sufficient for the High Court to abandon ethnocentric interpretation in favor of an international one. Arguably a reason not to adopt an international interpretation would be difficult to maintain and would run contrary to the objective of certainty.
This leads to another point of variance namely where a particular area of law such as the sale of goods is covered by two domestic instruments. On one hand we have the common law and related State statutes such the Sales of Goods Acts and on the other hand we have the Sale of Goods (Vienna Convention) Acts (CISG). One deals with domestic sales the other one exclusively with international ones. It is of more than passing interest that the CISG in its mandate included an interpretational article which cannot be overruled by using any other techniques which may be current in domestic law.
The differenced are far reaching. If a textual approach of interpretation would be applied to the CISG the law would be wrongly applied and could lead arguably to an appeal in law as the interpretative articles 7 and 8 mandate the contextual approach. Furthermore if the textual approach would be used to domestic contracts a contextual approach would be needed for international contracts hence creating a dual system of interpretation. Such an outcome does not contribute to certainty or justice.
As noted above the CISG includes two interpretative articles into its regime. The problem in interpreting contracts is to ascertain the intentions of the parties. The long standing argument in the common law has been to determine the intentions in an objective sense and not in a subjective one. In Toll (FGCR) Pty Ltd v Alphapharm Pty Ltd[9] the High Court affirmed the objective approach. However a closer reading suggests that the objective approach as formulated by Lord Hoffman in Investors Compensation Scheme was not followed as the court noted:
“The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.”[10]
At the same time it can be argued that “the previous negotiations of the parties and their declarations of subjective intent”[11] have not been embraced. However as Spigelman JJ. notes, “Alphapharm affirms the longstanding view, also expressed in Codelfa, that the orthodox approach to interpretation is objective.”[12]
Such interpretations are at odds with the mandate of the CISG. The questions which need to be looked at are: what are the required interpretational techniques used within the CISG?
The starting point is Article 7(1) which is very specific in stating:
“In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.”
Two main issues pertinent for this discussion can be clearly established. First that any interpretation of the convention must be undertaken with the view to “promote uniformity in its application” Secondly that such interpretation must be conducted by observing the principle of good faith.
What this means has been clarified by academic writing[13] as well as court decisions[14] is that recourse to domestic principles and laws is not permitted hence it must be interpreted autonomously.
On the other hand Downs Investments Pty Ltd (in liq) v Perwaja Steel SDN BHD[15] is an example where the mandate of article 7 was not followed. Of the forty-four cited cases, only two, Delchi Carrier S.P.A. v Rotorex Corp.[16] and Roder Zelt- und Hallenbaukonstruktionen GmbH v Rosedown Park Pty Ltd (in liq),[17] had any connection to the CISG. The remainders were only relevant in domestic matters. Furthermore it is ironic that the only relevant case namely Delchi Carriers, which was relied upon by the court is noted by many scholars as an example where the court could not overcome its ethnocentric interests[18]. Chan Leng Sun has put the problem succinctly by noting:
“It can be seen that common law jurists have a lot of baggage to discard when faced with the CISG. The tricky question is what to discard and what to apply in conjunction with the stipulations in the CISG. The CISG is not exhaustive. There is still an important role for domestic law, but there is a risk of the homeward trend even on matters governed by the CISG. The knee-jerk recourse to the comfort of familiar domestic methodology must be suppressed.”[19]
Of importance is the fact that domestic legislation can track the CISG. It would be “trite to argue that because the laws are similar or even the same the outcome would be the same.”[20] This is specially so when article 8[21] is taken into consideration which in brief allows recourse to the subjective intentions of the parties. The court in MCC MarbleCeramic Center, Inc. v Ceramica Nuova D’Agostino S.P.A[22] stated categorically:
“…article 8(3) of the CISG expressly directs courts to give due consideration … to all relevant circumstances of the case including the negotiations …to determine the intent of the parties … article 8(3) is a clear instruction to admit and consider ….evidence regarding the negotiations to the extent they reveal the parties ‘subjective intent.”[23]
That is not to say the CISG only relies on the subjective intent of parties. Indeed the convention in article 8 clearly established an interpretation ladder where, failing the subjective intent, the objective intent of the parties must be taken into account. This is a common sense approach as it fosters the legitimate expectations of contractual parties.
The Federal District Court of Kansas[24] was asked to establish whether the parties only intended to treat the sales contract as a mere verification. The court noted:
The plain language of the CISG requires the Court to evaluate a party's subjective intent, so long as the other party was aware of that intent. Otherwise, paragraph two of article 8 applies.[25]
The court could not establish that the parties knew or could not have been unaware of their intent and thereof article 8(2) is applicable. The court stated:
Because the Court is confined to Article 8(2) of the CISG, it is to look at the objective evidence of the parties' intent. In other words, the Court must consider whether ACI's actions made its subjective intent to treat the sales contracts as mere verifications known to the understanding of a reasonable person of the same kind as the other party (i.e., Guang Dong) in the same circumstances.[26]
At first glance this is a clear mandate to courts to abandon the parol evidence rule or the textual approach. The question may be asked with is the better or superior approach to the problem? However this question simply is a theoretical one. The real question is what the law is saying on this particular issue. If the attention is turned back to what his Honor Spigelman had to say, the clear conclusion is that the textual approach is to be the preferred way contracts can be interpreted. The textual approach however is not a mandatory substantive rule. Turning back to international instruments and in this case particularly the CISG the answer is different. The only solution which can and must be found rests within the regulations of the CISG. The relevant rules are to be found in articles 7 and 8 which mandate the contextual approach.
The inevitable conclusion to such as question is which law should prevail. Two considerations need to be taken into account. First established wisdom dictates that the first instrument to be looked at is the contract. If the matter is clear, any questions arising out of the contract can be resolved by taking recourse to the wishes of the parties as expressed in the contract. If the contract is not clear then recourse has to be had to the law. In this case the CISG would overrule the common law or the Goods Act in cases involving international sales.
It must be noted that drafters of contractual contract whether they fall within he common law or the CISG always have the option to include an “entire agreement clause” into the contract. Both instruments the common law and the CISG via article 6 observe the important maxim of contractual freedom. If such a clause is included into the contract the question of contextualism vs texstualism would be resolved in favor of textualism irrespective of any law used in Australia.
Secondly it must be established that the CISG does not breach mandatory rules of the sovereign state in which the matter is resolved. In other words the question is whether the parol evidence rule is a mandatory rule. A question as to the application of a mandatory law has been recently asked in the Supreme Court of Victoria[27] not in the context of the parol evidence rule but in relation to the Trade Practices Act.1974 (Cth) (TPA)
The facts are simple. The arbitration clause contained a term whereby the seat of arbitration was to be Singapore and the proper law of the contract was the Philippines. However the arbitration took place in Melbourne. One of the questions was which law was applicable to deal with a misrepresentation which was made by persons present within Australia.[28] The arbitral tribunal applied the law of the Philippines.
In a similar case[29] Gleeson CJ stated that:
“The fact that the proper law of the contract is the law of a foreign country does not prevent the conduct of one party to the contract from falling within the purview of s.52, if it would do so otherwise.”[30]
However in the Victorian Supreme Court Hollingworth J noted that the Law of the Philippines was applicable, a contrary view as the one expressed by Gleeson CJ.
The argument can be advanced that the clear distinction of domestic law vs. foreign law has been blurred and what may be clearly a mandatory law in a domestic setting may be weakened if applied in the international context.
As far as the parol evidence rule is concerned no mandatory law in Australia is applicable hence the contextual approach must be applied. Spigelman JJ also correctly pointed out that Australian and English interpretative methods are not identical.[31] It can be argued that Australian courts are closer connected to the contextual approach than their English counterparts. This is all in line with a shifting legal landscape due perhaps to the ever increasing introduction of international uniform laws whether they are black letter law or soft laws.
His Honor also mentioned the Principles of European Contract Law (PECL) and the UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles) as an example where English law will depart from Australian Law.[32] However the point is that these principles will also impinge on our laws specifically in the area of arbitration where UNIDROIT principles are frequently used. An interesting point to consider would be if a party to a domestic contract would include the UNIDROIT principles as the governing law. As the parol evidence rule or the textual approach is not a mandatory rule or approach the contractual terms would need to be given priority. This would lead to a contextual approach, as the UNIDROIT principles, taking their lead from the CISG, also include the subjective approach into their regime. Furthermore courts and tribunals increasingly look for guidance from international instruments such as the UNIDROIT principles and the CISG when interpreting domestic contracts.
Courts have referred to the Principles on several occasions. It is specifically instructive to note the views expressed in Hideo Yoshimoto v Canterbury Golf International Ltd.[33] The New Zealand Court of Appeal found it necessary to refer to the UNIDROIT Principles and the CISG as they grappled with difficulties in interpreting a contract. Specifically the advantages of article 4.3 of the Principles were explained as allowing the court a more realistic approach in the interpretation of contracts. However the court did not apply the Principles or the CISG for that matter, as they were not prepared to go beyond these declarations. The court commented:
“But while this Court could seek to depart from the law as applied in England and bring the law in New Zealand into line with these international conventions, I do not think it would be permitted to do so by the Privy Council.”[34]
Arguably therefore there is sufficient evidence that domestic systems have engaged in considering the Principles in the process of “creeping” transplantation. Bonell points out that the Principles are useful as a means of interpreting and supplementing the otherwise applicable law in cross border transactions.[35] The argument Bonell advances is that even if the CISG is applicable the UNIDROIT principles can be used as a guide to clarify otherwise unclear matters where the CISG is either silent or not explicit.
The UNIDROIT Principles and the CISG have also found their way into English case law. In ProForce Recruit Ltd v Rugby Group Ltd[36] - a domestic case – Mummery LJ noted:
“careful consideration may have to be given to the aims to be achieved by contractual interpretation and the precise extent to which the law requires an objective interpretation, It may be appropriate to consider a number of international instruments applying to contracts. It is sufficient to take two examples. The UNIDROIT Principles of International Commercial Contracts give primacy to the common intention of the parties and on questions of interpretation requires regard to be had to all the circumstances, including the pre-contractual negotiations of the parties (art 4.3). The UN Convention on Contracts for the International Sale of Goods (1980) provides that a party's intention is in certain circumstances relevant, and in determining that intention regard is to be had to all relevant circumstances, including preliminary negotiations”[37]
Similar sentiments were expressed in another English domestic case by Lady Ardon in The Square Mile Partnership Ltd v Fitzmaurice McCall Ltd.[38] It certainly can be argued that the English courts are increasingly becoming aware of the need to “modernize” contractual interpretation in order to stay in step with international developments.
A further points needs to be made. The EU currently is making progress with the writing and eventual introduction of a uniform European Sales law. No doubt such a move will change the English Common Law. On an official political level, unification of sales laws has played an important part. A few years ago, the European Parliament passed a resolution requesting the European organs to start work on a pan-European Contract Law. That was in 1989 and a second time in 1994.[39] Although at the beginning the Commission was reluctant, it has now become active. It listed in its communication of 2001[40] the various options available for a further development of Contract Law in EU. Based on the opinions which the Commission received, the European Commission published an ‘action plan’ for a coherent European Contract Law.[41] In this action plan, the Commission provides for the drafting of a so-called ‘reference frame’ for Contract Law,[42] which should form the basis for further reflection on an optional instrument in the area of European contract law. The reference frame is expected to be published by the end of 2007. Several ‘think tanks’ have taken up the work, and the ‘soft law codification’ in the form of the Principles of European Contract Law (1995/1999/2003) shows that the sceptics of a unified, ‘Europeanized’ contract law are wrong.[43]
The conclusion simply is that unification of laws in general and sales laws in particular are strongly embedded in legal thinking in the EU. No doubt the unified EU sales law will reflect its parentage namely the CISG and PECL and hence as far as interpretation of contracts is concerned, rely on a contextual approach. Whether the UK, or any other domestic system for that matter, can “hold out,” remains to be seen.
The conclusion which can be drawn is the likelihood that the textual approach will give way to the contextual approach because international instruments are basing the interpretation of contracts on the subjective as well as the objective intent of the parties and hence the textual approach has been abandoned. After all a contract is the culmination of the wishes of two parties. In many cases not all the agreed terms are contained within the contract as they are either steeped in customary dealings or are assumed as having been settled in pre-negotiations. The problem with the textual approach is that a third party namely the court attempts to determine what the parties intended to agree on without asking the parties. The surrounding circumstances are ignored or at best not taken fully into consideration. Certainty may be achieved as far as the law is concerned but the question whether the true meaning of the business relationship has been determined remains unanswered.
The fact that the UNIDROIT principles in particular are increasingly finding their way into court decisions is also telling. Courts arguably are at least comparatively addressing the alternative to the parol evidence rule or the textual approach and despite the fact that in many cases the decisions is not based on the UNIDROIT principles the fact remains that international documents are attracting the attention of some courts where the textual approach is still favored.
The point to make is that the international instruments are not following the textual approach and hence domestic law for the sake of unity and certainty should be encouraged to follow the same path and not restrict the scope of surrounding circumstances .
* Associate Professor, Victoria University, Adjunct Professor, Murdoch University, Perth.
1 Spiegelman JJ. “From text to context: Contemporary contractual interpretation” (2007) 81 ALJ 322, at 322.
[2] Spigelman JJ n 1 at 323.
[3] Friedman, T, The world is flat: a brief history of the globalized world in the twenty-first century Allan Lane, London (2005).
[4] Lewison, K., The Interpretation of Contracts 2004, (3rd ed. Sweet & Maxwell) London, p 236.
[5] Spigelman JJ n 1 at 330.
[6] Air Link Pty Limited v Paterson [2005] HCA 39 (10 August 2005] at [40].
[7] Air Link Pty Limited v Paterson n 6 at [49].
[8] This discussion is not a detailed one as excellent material can be found which analysis articles 7 and 8 in detail. As an example see Zeller B. “Determining the Contractual Intent of Parties under the CISG and Common Law - A Comparative Analysis” (2002) Vol. 4, No. 4 European Journal of Law Reform (Kluwer) 629.
[10] Alphapharm n 9 at 179.
[11] Lord Hoffman in Investors Compensation Scheme Ltd. V West Bromwich Building Society [1997] UKHL 28; [1998] 1 All ER 98 1 WLR 896 at 912-913.
[12] Spigelman JJ n 1 at 330.
[14] See as an example Italy 12 July 2000 District Court Vigevano (Rheinland Versicherungen v. Atlarex) [http://cisgw3.law.pace.edu/cases/000712i3.html] viewed 10 January 2008.
[15] [2001] QCA 433; [2002] 2 Qd R 462.
[16] [1995] USCA2 1270; 71 F 3d 1024 (2nd Cir 1995).
[17] [1995] FCA 1221; (1995) 57 FCR 216.
[18] See for example Cook S “The UN Convention on Contracts for the International Sale of Goods: A Mandate to Abandon Legal Ethnocentric” (1997) 16 Journal of Law and Commerce 257.
[19] Presented in "Celebrating Success: 25 Years United Nations Convention on Contracts for the International Sale of Goods" (Collation of Papers at UNCITRAL – SIAC Conference 22-23 September 2005, Singapore), [http://cisgw3.law.pace.edu/cisg/biblio/sun1.html] viewed 10 January 2008.
[20] Zeller, B. CISG and the Unification of International Trade Law. (Routledge-Cavendish 2007) p 83.
[21] Article 8 states:
(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.
(2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.
(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.
[22] [1998] USCA11 1817; 144 F.3d 1384 (11th Cir. (Fla) 1998 http://www.cisg.law.pace.edu viewed 10 January 2008
[23] MCC Marble 1387 n8 and 1388 n 11.
[24] United States 28 September 2007 Federal District Court [Kansas] (Guang Dong Light Headgear Factory Co. Ltd. v. ACI International, Inc.).
[http://cisgw3.law.pace.edu/cases/070928u2.html] viewed 10 January 2008.
[25] United States 28 September 2007 Federal District Court [Kansas] n 24, 52.
[26] United States 28 September 2007 Federal District Court [Kansas].
[27] Transfield v Pacific Hydro Ltd [2006] VSC 175.
[28] Megens, P and Bonnell, M. “The Bakun dispute: Mandatory national laws in international arbitration” (2007) 81 ALJ 259, at 260.
[29] Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160.
[30] Ibid 164.
[31] Spigelman JJ,n 1 at 337.
[32] Spigelman JJ n 1 at 331.
[33] Court of Appeal, Wellington, 2000 NZCA 350.
[34] Court of Appeal, Wellington n 33 at [90]. It should be noted that the English Privy Council was still the highest court of Appeal in the New Zealand Court Hierarchy. This has now changed in 2004.
[35] Bonell, M. “The UNIDROIT Principles and Transnational Law” in Berger, K.P. (ed) The Practice of Transnational Law, (2001) Kluwer Law, 37.
[37] [2006] EWCA Civ 69 n 36, [57].
[38] See for details United Kingdom 18 December 2006 Court of Appeal (Civil Division) (The Square Mile Partnership Ltd v Fitzmaurice McCall Ltd)
[http://cisgw3.law.pace.edu/cases/061218uk.html] viewed 10 January 2008.
[39] ABl C 158 p. 400-401, Europäische Zeitschrift für Privatrecht 1995, 669.
[40] Communication from the Commission to the European Parliament and the Council, A more Coherent European Contract Law, COM(2003) 68 final.
[41] Ibid.
[42] This common frame of reference should provide for best solutions in terms of common terminology and rules, i.e. the definition of fundamental concepts and abstract terms like ‘contract’ or ‘damage’ and of the rules that apply for example in the case of non-performance of contracts.
[43] Zeller B., n 20 at 15.
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