Case: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 ; (2004) 219 CLR 165
Outcome: applied
it has for some time now been indicated "with tolerable clarity" ( Masterton Homes , at [1]) that, in interpreting a contract, one is entitled to consider context, background and surrounding circumstances without the need first to find some textual ambiguity: see Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 ; (2004) 218 CLR 451 ; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 ; (2004) 219 CLR 165 at [40] ; Synergy Protection Agency Pty Ltd v North Sydney Leagues Club [2009] NSWCA 140 at [22] ; Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2005] FCA 1812 ; (2005) 223 ALR 560 at 573-547; Douglas, "Modern Approaches to the Construction and Interpretation of Contracts" (2009) 32 Aust Bar Rev 158. Secondly, the rights and liabilities of the parties to a contract are determined by the "principle of objectivity": Pacific Carriers Ltd , at [22]. As was explained in Toll (FGCT) at [40]: It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. 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. The "standard of endeavour" prescribed by a best efforts clause is characteristically measured by what is reasonable in the circumstances having regard to the particular contract in its business setting and to what could reasonably be expected of the party subject to the obligation: see Transfield Pty Ltd v Arlo Internation Ltd [1980] HCA 15 ; (1980) 144 CLR 83 at 101; see also Farnsworth, Contracts , &#167;7.17. Or to put it shortly, the party's obligation is "to do what [it] reasonably could do in the circumstances": Terrel , at 237. It is nonetheless important in this setting to emphasise the importance of context in giving practical substance to the prescribed standard of endeavour. As Gibbs CJ said of a best efforts obligation in Hospital Products Ltd (at 64): ... it is trite to say that the meaning of particular words in a contract must be determined in the light of the context provided by the contract as a whole and the circumstances in which it was made, and that decisions on the effect of the same words in a different context must be viewed with caution. Today this probably does no more than emphasise the contemporary significance of context in contractual interpretation: see Toll (FGCT) Pty Ltd at [40]; and, relevantly for present purposes, that a commercial contract is to be given "a businesslike interpretation": International Air Transport Association at [8]; or as Lord Steyn put it ( Mannai Investment Co Ltd at 771): "a commercially sensible construction". Factual Setting