CONSTRUCTION OF CONTRACTS: THE AMBIGUITY GATEWAY AND THE CURRENT STATE OF THE LAW, PART 4

iv Intermediate Courts

New South Wales has been the most proactive in expressing the view that ambiguity is no longer required to admit extrinsic evidence.[1] [2]

In Franklins Pty Ltd v Metcash Trading Ltd36 all three members of the NSW Court of Appeal (Allsop P, Giles and Campbell JJA) held, in light of the earlier High Court authorities which did not expressly address the question of an ambiguity gateway, that ambiguity was no longer a gateway to the admissibility of evidence of surrounding circumstances.

Franklins concerned an agreement for the supply of groceries by Metcash to Franklins. Franklins complained that it had been overcharged because Metcash had not passed on to it ‘confidential discounts’ that Metcash had received from suppliers.

In its cross appeal, Metcash sought to construe the supply agreement by reference to surrounding circumstances known to both parties, the parties’ common understanding of the language in the supply agreement, the subsequent conduct of the parties, and the commerciality of the construction that the primary judge had adopted.

Campbell JA meticulously traced the judicial statements relevant to the ambiguity threshold issue. His Honour referred to decisions of courts lower in the hierarchy than the High Court, for example Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 223 ALR 560, in which Justice Finn J at first instance, and on appeal Justices Weinberg, Kenny and Lander, had all said that there was no longer an ambiguity gateway.

The NSW Court of Appeal stated that:

The construction and interpretation of written contracts is to be undertaken by an examination of the text of the document in the context of the surrounding circumstances known to the parties, including the purpose and object of the transaction and by assessing how a reasonable person would have understood the language in that context. There is no place in that structure, so expressed, for a requirement to discern textual, or any other, ambiguity in the words of the document before any resort can be made to such evidence of surrounding circumstances.37 (Emphasis added)

Similar views were expressed by the Victorian Court of Appeal in MBF Investments Pty Ltd v Nolan [2011] VSCA 114. In a joint judgment, the Court referred to earlier authorities, including High Court authorities such as Pacific Carriers3 Toll,39 and Lion Nathan40 and said that these authorities had resolved what they described as the previous ‘lively debate’ as to when a court could have regard to the circumstances surrounding the making of a contract for the purpose of the construction of its terms. They also said that the ambiguity gateway enunciated by Mason J in Codelfa in his ‘true rule’ had been rejected in the subsequent authorities.

V The High Court Intervenes

In Western Export Services Inc v Jireh International Pty Ltd,41 the High Court in 2011, in joint written reasons by Gummow, Heydon and Bell JJ, whilst dismissing an application for special leave, reprimanded the Courts of Appeal of New South Wales and Victoria for unilaterally presuming that the ‘true rule’ of [3] [4] [5] [6] [7] contractual construction as articulated by Mason J in Codelfa had been abrogated in Australia.

Jireh concerned the construction of clause 3 of a letter agreement providing for the franchising of Gloria Jeans coffee shops. The primary judge found against the need for an ambiguity threshold.

In the New South Wales Court of Appeal, the leading judgment was that of Justice Macfarlan, who held that the primary judge had erred, not with regard to rejecting the ambiguity threshold, but by:

disregarding unambiguous language simply because the contract would have a more commercial and business-like operation if an interpretation different to that dictated by the language were adopted”[8] (emphasis added), and by having “acted on the basis that the provision would make more sense from a commercial point of view.[9]

Their honours in the High Court went further. The applicant for special leave relied on material in English authorities that were inconsistent with an ambiguity gateway, and their Honours in the High Court said that acceptance of these submissions would require reconsideration of Justice Mason’s true rule. The applicant asked the High Court to reject the requirement for ambiguity in a contract before the court has regard to surrounding circumstances.

Unusually for an unsuccessful special leave application, the High Court published written reasons, stating at paragraphs [3] – [5]:

  • Until this court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.
  • The position of Codelfa, as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council and it should not have been necessary to reiterate the point here.
  • We do not read anything said in this court in Pacific Carriers Ltd v BNP Paribas, Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd, Wilkie v Gordian Runoff Ltd and International Air Transport Association v Ansett Australia Holdings Ltd as operating inconsistently with what was said by Mason J in the passage in Codelfa to which we have referred.

At the time, those statements came as something of a surprise, particularly to the Court of Appeal of New South Wales who had decided Franklins and to the Court of Appeal of Victoria who had decided MBF.[10]

VI 2012: Post Jireh

Staying with Jireh for a moment, the High Court there has created what President McLure (as her Honour then was) called “a heated controversy”.[11] The difficulty with Jireh, as a non-binding precedent, is the limitation in its application. It was handed down after only 37 minutes of argument and 11 minutes of deliberation.

The doctrine of precedent means that a court is bound by the ratio decidendi of any decision made by a court higher in the hierarchy in which an appeal from the first court directly lies. However such a decision must resolve the dispute in a final way, which a refusal to grant special leave does not. Rather, it leaves the decision of the court below it untouched.[12] [13] In other words, until special leave is granted, there is no proceeding before the High Court and the decision is not authority by way of a precedent.

Special leave was refused in Jireh on 1 June 2011. It was first cited on 4 November 2011. Between that date and the end of May 2017, it has been the subject of no less than 155 citations of various forms. This is not surprising given the number of cases that present in court involving the construction of written

47

contracts.

Further, Wong and Michael suggest that Jireh is not binding on Appellate courts.[14] They considered that in 2007, the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd,49 stated that:

intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction unless they are convinced that the decision is “plainly wrong”.”[15] [16] However, Bond J states that “Although decisions on special leave applications do not carry the weight of precedent, they may nevertheless be thought to be a strong indication of the approach of the High Court.[17]

[1]  Franklins (2009) 76 NSWLR 603 at [14] to [18] per Allsop P, at [49] per Giles JA and at [239] to [305] per Campbell JA; Synergy Protection Agency [2009] NSWCA 140 at [22] per Allsop P (with whom Tobias and Basten JJA agreed); Masterton Homes (2009) 261 ALR 382 at [3] per Allsop P (with whom Basten JA agreed); Movie Network Channels [2010] NSWCA 111 at [68] per Macfarlan JA (with whom Young JA and Sackville AJA agreed).

[2]  (2009) 76 NSWLR 603.

[3]  Franklins (2009) 76 NSWLR 603, 616 [14].

[4]  Pacific Carriers (2004) 218 CLR 451.

[5]   Toll (2004) 219 CLR 165.

[6]  Lion Nathan Australia (2006) 236 ALR 561.

[7]  (2011) HCA 45.

[8]  Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55].

[9]  Jireh International [2011] NSWCA 137 at [56].

[10] The Hon Justice Kenneth Martin, ‘Surrounding Circumstances Evidence: Construing Contracts and Submissions about Proper Construction: The Return of the Jedi (sic) JUDII’ (July 2015) 42(6) Brief 26­33, at 27.

[11] Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd (2013) 298 ALR 666 at [107]. See further The Hon Kevin Lindgren, ‘The ambiguity of ‘ambiguity’ in the construction of contracts’ (2014) 38 Australian Bar Review 153, 161-7.

[12] The Hon Sir Anthony Mason, ‘The Use and Abuse of Precedent’ (1988) 4 Aust Bar Rev 93 at 96-7, citing Blackore v Linton [1961] VR 374 at 380; Mihaljevic v Longyear (Australia) Pty Ltd (1985) 3 NSWLR 1; Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609.

[13] The Hon Lindgren, above n 40, 163.

[14] Derek Wong and Brent Michael, ‘Western Export Services v Jireh International: Ambiguity as the gateway to surrounding circumstances?’ (2012) 86 Australian Law Journal 57, 64-5. See also The Hon Lindgren, above n 40, 162. See also Oliver Jones, ‘Are the High Court’s reasons for refusing special leave binding?’ (2013) 87(11) Australian Law Journal 774-783; N B Rao, ‘The High Court ruling in

Western Export Services v Jireh International Pty Ltd: Implications for contract interpretation’ (2012) 23(3) Insurance Law Journal 332-333.

[15] (2007) 230 CLR 89, 151-2 [135].

[16] Wong and Michael, above n 43, 65.

[17] The Hon Justice John Bond, ‘The use of extrinsic evidence in aid of construction: a plea for pragmatism’, paper delivered for the Current Legal Issues Seminar Series 2016 (QSC) [2016] QldJSchol 9. See also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [108],

[111]-113] per Kiefel and Keane JJ in which their Honours found that Jireh is not a precedent binding courts below.

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