Updated: Oct 7, 2021
Certainty is one of the key ingredients of a legally binding contract under Australian law.
Under contract law, a contract will be considered 'certain' if the provisions of the contract are properly described, clear and unambiguous. The meaning of the contract must be capable of being determined with a reasonable degree of certainty.
In Investors Compensation Scheme Ltd. v. West Bromwich Building Society, Lord Hoffman stated the principles of contractual interpretation:
One party's subjective understanding of the contract or any evidence of previous negotiations is unacceptable proof of what the contract means
Words should used in their ordinary and natural meaning
When interpreting a contract, understanding should be relative to a reasonable person who has all the background facts
There are two main competing considerations - enforcing certain terms versus striking out vague terms. Australian Courts are inclined to enforce contracts whenever possible. However, the Courts will not be so inclined to enforce terms which are too vague and where the meaning is not capable of being ascertained with a reasonable degree of certainty.
In some cases, it may be possible to severe an uncertain term from the contract, with the balance of the contract terms remaining in force. However, if the whole of the contract lacks certainty, one of the essential ingredients of a legally binding contract will not be made out and there will be no contract at law.
Author: Farrah Motley, an Australian contract lawyer.