CONSTRUCTION OF CONTRACTS: THE AMBIGUITY GATEWAY AND THE CURRENT STATE OF THE LAW, PART 3

MAHA CHAAR

iii Subsequent High Court Authorities

Since 2000, a series of construction contract appeal decisions were handed down by the High Court that had not mentioned any need to satisfy the ‘true rule’.⁸

A Maggbury v Hafele Australia

In Maggbury v Hafele Australia,⁹ the majority of the High Court held:

Interpretation of a written contract involves, as Lord Hoffmann has put it: ‘the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’.^{[1] [2] [3] [4] [5] [6] [7]}

It has been argued that, taken alone, this passage could suggest a departure from Codelfa.¹¹ However, the High Court then went on to cite Codelfa with approval.

B Royal Botanic Gardens and Domain Trust v South Sydney City Council

In Royal Botanic Gardens and Domain Trust v South Sydney City Council,¹² the High Court heard arguments asking the court to accept the broader English approach to the construction of a contract. However, the High Court rejected these arguments and stated that surrounding circumstances should be taken into account where “…an appreciation of the commercial purpose of a contract presupposes knowledge of the genesis of the transaction, the background, the context, [and] the market in which the parties are operating.”¹³

Although the High Court explicitly affirmed that extrinsic evidence may be used to resolve ambiguity, it did not suggest that this is the only purpose for which extrinsic evidence may be used. It did ultimately affirm Codelfa as the binding authority in Australia.

C Pacific Carriers Ltd v BNP Paribas

In Pacific Carriers Ltd v BNP Paribas,¹⁴ the High Court observed:

What is important is not Ms Dhiri’s subjective intention, or even what she might have conveyed, or attempted to convey, to NEAT about her understanding of what she was doing. The letters of indemnity were, and were intended by NEAT and BNP to be, furnished to Pacific. Pacific did not know what was going on in Ms Dhiri’s mind, or what she might have communicated to NEAT as to her understanding or intention. The case provides a good example of the reason why the meaning of commercial documents is determined objectively: It was only the documents that spoke to Pacific. The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction.¹⁵ (Emphasis added).

D Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd

In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd}⁶ the High Court unanimously held:

This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. 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.¹⁷ (Emphasis added).

E Wilkie v Gordian Runoff Ltd

In Wilkie v Gordian Runoff Ltd,¹⁸ Gleeson CJ, McHugh, Gummow and Kirby JJ quoted with approval Gleeson CJ’s statement in McCann v Switzerland Insurance Australia Ltd¹⁹ “Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.”^{20 [8] [9] [10] [11] [12] [13]}

Gleeson CJ’s statement was a paraphrase of what Viscount Sumner had said in Lake v Simmons: “Everyone must agree that commercial contracts are to be interpreted with regard to the circumstances of commerce with which they deal, the language used by those who are parties to them, and the objects which they are intended to serve”. ^[14]

In relation to these two excerpts, Prince argues:

Neither statement says anything about evidence of surrounding circumstances. A contract can still be construed in a “businesslike” way, or in a “commercially sensible” manner, or by having regard to the “commercial circumstances which the document addresses”, without evidence of surrounding circumstances. Often, what is businesslike or commercially sensible is a matter of submission not evidence, and the commercial circumstances which the document addresses will be obvious from the document itself. In none of these cases did the court look to evidence of surrounding circumstances to resolve the question of construction. The question of ambiguity simply never arose.^[15]

F International Air Transport Association v Ansett Australia Holdings Ltd

In International Air Transport Association v Ansett Australia Holdings Ltd,^[16] Gleeson CJ stated:

In giving a commercial contract a businesslike interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract, and the objects which it is intended to secure. An appreciation of the commercial purpose of a contract calls for an understanding of the genesis of the transaction, the background, and the market. This is a case in which the Court’s general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes its meaning.^{[17] [18]}

The majority cited the above passage in Toll and re-affirmed the principle of objectivity in contract construction.²⁵

G Byrnes v Kendle

In Byrnes v Kendle,²⁶ the plurality held:

“The approach taken to statutory construction is matched by that which is taken to contractual construction. Contractual construction depends on finding the meaning of the language of the contract – the intention which the parties expressed, not the subjective intentions which they may have had, but did not express. A contract means what a reasonable person having all the background knowledge of the “surrounding circumstances” available to the parties would have understood them to be using the language in the contract to mean. But evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of “surrounding circumstances”.^{[19] [20]}

This extract was described as “an orthodox restatement of the rule that extrinsic evidence may not be used … to establish subjective intentions of parties”.^[21]

Interestingly, a number of the High Court decisions analysed above, which concern the issue of contractual interpretation, have gone about such a task without expressing any need to satisfy the ambiguity threshold in the true rule. It is clear that these cases ‘tiptoed’ around the true rule but did not directly address it. They discussed at length the admission of extrinsic evidence, the objective intentions of the parties, the purpose and object of the transaction, and the like.

Many intermediate appellate courts have taken their lead from these cases to reject the ambiguity gateway.^[22]

As a result, it appears that over this time most intermediate Australian appellate courts (but not in Western Australia) had assumed, by reference to these cases, that it was no longer necessary to demonstrate ambiguity so as to provide a basis to admit evidence of surrounding circumstances at trial.^[23]

It has been suggested that although these cases do not acknowledge the need for ambiguity, they still comply with the position in Codelfa³¹ This is because, perhaps, during those appeals, which were argued by Australia’s best silks over clearly opposing contractual interpretations, the ambiguity was so obvious that it was not necessary to mention it in the judgment.^{[24] [25] [26]}

Reynolds specifically rejects Prince’s approach to the interpretation of the above High Court authorities. Prince advocated for the existence of an ambiguity gateway by demonstrating that all of the High Court cases have stated, in some way or another, that they affirm Codelfa³³ In relation to this approach, Reynolds states that “[t]he problem with this approach is that it assumes that on each occasion that the High Court has affirmed Codelfa, it has had in mind the specific interpretation of Codelfa that Prince advocates.”^[27]

^[1] Since 2000, there have been ten High Court cases that have considered the construction of a contract. These are discussed in this paper.

^[2] (2001) 210 CLR 181.

^[3]  Maggbury v Hafele Australia (2001) 210 CLR 181, 188 [11].

^[4]   Thomas Prince, ‘Defending Orthodoxy: Codelfa and Ambiguity’ (2015) 89 Australian Law Journal 491,496; See also Daniel Reynolds, ‘Construction of contracts after Mount Bruce Mining v Wright Prospecting’ (2016) 90 Australian Law Journal 190, 193.

^[5]  (2002) 240 CLR 45.

^[6]  Royal Botanic Gardens and Domain Trust (2002) 240 CLR 45 at [10].

^[7]  (2004) 218 CLR 451.

^[8]  Pacific Carriers (2004) 218 CLR 451,461 [22].

^[9]  (2004) 219 CLR 165.

^[10] Toll (2004) 219 CLR 165, 179 [45].

^[11] (2005) 221 CLR 522.

^[12] (2000) 203 CLR 529, [22].

^[13]McCann (2005) 221 CLR 522, 529 [15].

^[14] [1927] AC 487, 509.

^[15] Prince, above n 11,498.

^[16] (2008) 234 CLR 151.

^[17] International Air Transport Association (2008) 234 CLR 151, 160 [8].

^[18] International Air Transport Association (2008) 234 CLR 151, 174 [53].

^[19] (2011) 243 CLR 253.

^[20] Byrnes (2011) 243 CLR 253, 284 [98].

^[21] Reynolds, above n 11, 196.

^[22]  See e.g. Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 236 ALR 561, 570 [46], 581 [98]-[100] 607 [238]; Ryldar Pty Ltd t/as Volume Plus v Euphoric Pty Ltd (2007) 69 NSWLR 603, 625-6 [105]-[108]; Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382, 406 [113]; Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140, [22]; McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) (2011) 284 ALR 196, 202 [17]; See also Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111 at [68], citing Franklins (2009) 76 NSWLR 603, [14]-[18], [239]-[305].

^[23] See e.g. Lion Nathan Australia (2006) 236 ALR 561, 570 [46], 581 [98]-[100] 607 [238]; Ryldar (2007) 69 NSWLR 603, 625-6 [105]-[108]; Masterton Homes (2009) 261 ALR 382, 406 [113]; Synergy Protection Agency [2009] NSWCA 140, [22]; McGrath (2011) 284 ALR 196, 202 [17]; See also Movie Network Channels [2010] NSWCA 111 at [68], citing Franklins (2009) 76 NSWLR 603, [14]-[18], [239]-[305].

^[24] The Hon Justice Kenneth Martin, ‘Contractual Construction: Surrounding Circumstances and the Ambiguity Gateway’ (2013) 37 Australian Bar Review 118, 123-4.

^[25] The Hon Justice Martin, above n 30.

^[26] Prince, above n 11,496-9.

^[27] Reynolds, above n 11, 203.