A WA Position

In McCourt v Cranston,[1] the WA Court of Appeal in considering the effect of Jireh stated that:

None of the statements in Paribas, Toll, Wilkie or Ansett were preceded by a qualification that a contract had to be “ambiguous or susceptible of more than one meaning” before evidence of surrounding circumstances could be received. Many judges around Australia did not appreciate that there was such a qualification. However the reasons in Jireh require courts to consider whether the statements in those cases should be read with that qualification; “until” the High Court embarks upon “a reconsideration” of Codelfa. In doing so, courts will have to consider whether the pronouncements in Jireh were ratio or “seriously considered dicta”. In that respect, consideration will have to be given to whether a set of reasons of the High Court dismissing an application for special leave have anything more than persuasive value.

In view of the pronouncements in Jireh, when an issue arises about the proper construction of a contract and there is evidence of surrounding circumstances known to the parties or evidence of the purpose or object of the transaction, that evidence will not be admissible unless the court determines that the contract is:

  • “ambiguous”; or
  • “susceptible of more than one meaning”[2] (Citations omitted).

The Court then went on to discuss the ambiguity gateway arising from Mason J’s true rule. It stated that the expression of “ambiguous or susceptible of

more than one meaning” could also just mean “difficult to understand”. [3] Lindgren agrees with this approach. He stated that this formulation “favour[s] a wide gateway which is the next best thing to abandoning one.”[4]

Subsequently, President McLure comprehensively addressed the issue of the admissibility of surrounding circumstances evidence to aid in the construction of contracts in Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216 [76] – [79] in which her Honour said:

The practical limitation flowing from the Codelfa true rule is that surrounding circumstances cannot be relied on to give rise to an ambiguity that does not otherwise emerge from a consideration of the text of the document as a whole, including whatever can be gleaned from that source as to the purpose or object of the contract.

In other words, in the absence of some sort of identifiable ambiguity first being found in the text of a contract, evidence of surrounding circumstances must not be admissible in order to demonstrate the presence of a latent ambiguity.

With regard to showing ambiguity (or more than one meaning), the President


The word ‘ambiguous’, when juxtaposed by Mason J with the expression ‘or susceptible of more than one meaning’, means any situation in which the scope of applicability of a contract is doubtful…Ambiguity is not confined to lexical, grammatical or syntactical ambiguity.

Moreover, the extent to which admissible evidence of surrounding circumstances can influence the interpretation of a contract depends, in the final analysis, on how far the language of the contract is legitimately capable of stretching. Generally the language can never be construed as having a meaning it cannot reasonably bear. There are exceptions (absurdity or a special meaning as the result of trade, custom or usage) that are of no relevance in this context.[5]

Generally speaking, Western Australia has been the most hesitant jurisdiction to stray from the High Court’s original position. The passages above, and a number of other authorities,[6] demonstrate that reluctance.

vii A Low Threshold

It is evident from the above analysis, from a pragmatic sense, that imposing a threshold of first showing some level of ambiguity (or more than one meaning) as a ‘gateway’ to admitting surrounding circumstance evidence because the language of the text presents as doubtful could hardly be described as setting down some onerously high bar to the admissibility of such evidence, particularly where the evidence might assist in the interpretation of the contract.[7]

viii 2014 – New Developments?

A The High Court Speaks

In early 2014, the High Court had an opportunity to resolve the Codelfa saga once and for all when it heard an appeal dealing with a commercial contract in Electricity Generation Corporation v Woodside Energy (2014) 251 CLR 640. Regrettably, the decision in that case has been the subject of much criticism[8] and did not provide any clarity.[9]

In Woodside, four of the five justices reversed the WA Court of Appeal’s unanimous interpretation of a supply clause in a take or pay gas contract.

As regard the ‘true rule’ of construction, any importance in the Court’s observations in Woodside is drawn out of phrases and footnotes, primarily found in one or two sentences ALL within the same paragraph, namely paragraph 35 of the reasons, under the heading: ‘The Construction Issue’.

In particular, two crucial phrases used by their Honours in that paragraph appear to have reignited a post Jireh debate over the ‘true rule’ and regrettably has led to a division between Australian courts. The division is over whether paragraph 35 of the decision has delivered the result of actually ending the application of the true rule of construction in Australia or not.[10]

The High Court said at paragraph 35:

.. .The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean.As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties… intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience (emphasis added).

It is unclear from the above passage whether the High Court was intending to disapprove or revise the ‘true rule’,[11] which in turn has led to a strong divergence of views – with WA,[12] Queensland[13] and Victoria[14] remaining on the status quo side of the debate, but NSW[15] and the Full Federal Court[16] seemingly aligned against that position. Moreover, by affirming that the surrounding circumstances must be considered, the High Court in Woodside added to the confusion by suggesting that it is not necessary to make a finding of ambiguity in the text of the agreement before a court can admit surrounding circumstances.

[1]   [2012] WASCA 60.

[2]  McCourt [2012] WASCA 60, [22]-[23].

[3]  McCourt [2012] WASCA 60, [24].

[4]  The Hon Lindgren, above n 40, 156.

[5]  Hancock Prospecting [2012] WASCA 216, [77], [78].

[6]   See eg. Chu Underwriting Agencies Pty Ltd v Wise [2012] WASCA 123.

[7]  The Hon Justice Martin, above n 39. See also Brent Michael and Derek Wong, ‘Recourse to Contractual Context Reaffirmed’ (2015) 89 ALJ 181.

[8]  John Carter, Wayne Courtney and Gregory Tolhurst, ‘Reasonable endeavours in contract construction’ (2014) 32 JCL 36.

[9]   See eg. MainteckServices Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113 at [71] discussed below in the paper; see also Stratton Finance Pty Ltd v Webb (2014) 314 ALR 166; Newey v Westpac Banking Corporation [2014] NSWCA 319.

[10] Mainteck Services (2014) 310 ALR 113 at [71] discussed below in the paper; see also Stratton Finance (2014) 314 ALR 166; Newey [2014] NSWCA 319.

[11] This is particularly so because the High Court did not refer to either Codelfa or Jireh.

[12] See eg. Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd & Anor [2014] WASCA 164.

[13] See eg. Jakeman Constructions Pty Ltd v Boshoff [2014] QCA 354 per Fraser JA (with whom Mullins and Henry JJ agreed); Watson v Scott [2015] QCA 267.

[14] See eg. State of Victoria v R [2014] VSCA 311 at [92] per Nettle, Osborn, Whelan JJA; Leon Mancini & Sons Pty Ltd v Tallowate Pty Ltd [2014] VSCA 306.

[15] Mainteck Services (2014) 310 ALR 113; see also Stratton Finance (2014) 314 ALR 166; Newey [2014] NSWCA 319 at [86] to [90].

[16] Stratton Finance (2014) 314 ALR 166 at [36] to [40].