MAHA CHAAR
ix Current Position
Some 33 years on, in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,10 French CJ, Nettle and Gordon JJ agreed with the position in Codelfa stating “[t]he rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context … and purpose.”11
The High Court stated:
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.[1] [2] [3]
Reynolds suggests that the third paragraph affirms that there are multiple purposes for which external evidence can be used. The phrases “the commercial purpose of objects of the contract” and the “genesis of the transaction, the background, the context [and] the market in which the parties are operating” suggest that external evidence can be used to explain the aim of a transaction.[4] He further opines that in stating that external evidence can be used “in determining the proper construction where there is a constructional choice” the High Court has affirmed that external evidence can be used to assist in the interpretation of ambiguous language.[5]
Five of the judges in Mount Bruce Mining acknowledged that whether extrinsic evidence can be used to identify ambiguity, and whether it can be used to resolve ambiguity once found, are two distinct questions (which may or may not have different answers).[6] This is in line with uncontroversial propositions that the proper interpretation of a term of a contract is to be determined by reference to what reasonable businesspersons having all the background knowledge then reasonably available to the parties would have understood them to have meant.[7] [8] [9] In other words, the resolution of ambiguity, as distinct from the identification of ambiguity, is to be achieved by a consideration of all the background knowledge then reasonably available.
However, Kiefel and Keane JJ in Mount Bruce Mining upheld the position in Codelfa stating that:
Th[e] question is whether ambiguity must be shown before a court interpreting a written contract can have regard to background circumstances. Until that question is squarely raised in and determined by this Court, the question remains for other Australian courts to determine on the basis that Codelfa Construction Pty Ltd v State Rail Authority of New South Wales…remains binding authority.77
French CJ, Nettle and Gordon JJ also concluded that:
These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority (NSW) and Electricity Generation Corporation v Woodside Energy Ltd. We agree with the observations of Kiefel and Keane JJ with respect to Western Export Services Inc v Jireh International Pty Ltd.78
In summary, the High Court confirmed that where a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances cannot be adduced to contradict that plain ordinary meaning. However, the question of whether ambiguity must be identified in the language of a contract before a court may have regard to the circumstances surrounding the transaction has been left unanswered.
The conflicting opinions on the ramification of the High Court’s decisions in Woodside and Mount Bruce Mining have left this issue in a state of confusion. Regrettably, the law in Australia on an area as critical to business as contractual construction remains to be decided.
x Implications
The implications for litigants in Australia dealing with issues about whether ambiguity must first be identified before evidence of surrounding circumstances can be adduced are important and complex.
The controversy sparked by the decision of the three justices of the High Court in Jireh was necessitated by the cavalier approach to contract interpretation of some intermediate appellate courts including the Full Federal court, the Victorian Court of Appeal and the New South Wales Court of Appeal.
Even though reasons for refusal to grant special leave may not have been the best vehicle for the Court to use, the High Court deemed it necessary to remind lower courts that the true rule stated in Codelfa was still the law in Australia.
Despite the controversy about whether the decision in Jireh was binding or merely persuasive, it was followed by the Court of Appeal in Western Australia[10] and it was thought that it would only be a matter of time before the High Court put the position beyond argument.
The first opportunity the High Court had was in Woodside but that created more uncertainty with numerous decisions of strong courts in the Full Federal Court and the New South Wales Court of Appeal regarding Woodside as having abandoned the true rule in Codelfa. This was primarily due to the scant attention given to Codelfa in Woodside.
Unfortunately, the decision in Mount Bruce Mining does not appear to have clarified the position at least so far as New South Wales is concerned. The NSW Court of Appeal has not expressed a view by reference to Mount Bruce Mining as to whether ambiguity might be identified by reference to matters external to the contract.
In March 2017, the NSW Court of Appeal handed down its decision in Walker Group Constructions Pty Ltd v Tzaneros Pty Ltd [2017] NSWCA 27 in which the Court held:
The meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean, taking into account the language, surrounding circumstances and commercial purposes of the contract.
Although both Woodside and Mount Bruce Mining were cited as authority, these are nonetheless the words used in paragraph 35 of Woodside.
The Full Court of the Federal Court has confirmed in Todd v Alterra at Lloyds Ltd80 by reference to Mount Bruce Mining that ambiguity might be identified by reference to matters external to the contract. Beach J stated that Mount Bruce Mining recognised that Codelfa may not rule out an approach which first uses context to ascertain otherwise latent ambiguity in the text. His Honour went on to affirm the approaches taken by the court in Franklins,81 Mainteck,82 and Stratton Finance.83
The Court of Appeal of Victoria has not considered the question of whether ambiguity might be identified by reference to matters external to the contract post Mount Bruce Mining. Whilst the question has been touched on in a number of cases in Victoria, the Court of Appeal has either restated the Codelfa exclusionary proposition[11] [12] [13] [14] [15] or acknowledged the debate about the status of the true rule,[16] but otherwise did not take the matter or the debate further.[17]
The Courts of Appeal of WA[18] and Queensland[19] have maintained their position on the issue.
Uncertainty surrounding the operation and application of the true rule also has implications for the law relating to rectification.[20] If the principles of contract interpretation are stated more broadly there will be less opportunity to seek to rectify the words used in a contract. The parties may be held to an interpretation that is contrary to their intention. Rectification will only assist where there is mistake in expression, and that will be absent if the parties intended that the words in their contract should bear a particular meaning.[21]
One practical solution to the ongoing uncertainty regarding contract interpretation would be to follow the lead of some of Australia’s most important trading partners and codify the law relating to contracts. Countries with Civil Systems of law, such as China, Japan, Republic of Korea, India and the United States of America have all codified the laws relating to contracts. The closest comparison to Australia is the USA where the Uniform Commercial Code has application in all 50 states to commercial and sales transactions and is designed to provide a uniform set of laws regarding formation of contracts, contract interpretation, implication of terms, and termination of contracts.
This subject of possible codification of the law of contract in Australia has been the subject of several discussion papers by succeeding Federal Attorney Generals since 2012 and is bound to gain more traction in the short to medium term.[22]
Another way in which certainty to contractual interpretation may be carried out is simply by disregarding ambiguity as a threshold requirement, whilst maintaining the principle that the courts ought not to override the plain meaning of the terms of a contract even where ambiguity can be raised by extrinsic evidence.[23] [24]
xi Conclusion
For present purposes, and given the High Court’s remarks in Mount Bruce Minin,, Codelfa remains binding authority. The reasons for decision in Woodside93 should not be regarded as overruling Codelfa. However, the debate lies with the extent to which Codelfa is binding authority.
The High Court is yet to resolve the issue of whether an ambiguity in the meaning of a term in a commercial contract or the construction of the contract may be identified by the admissibility of evidence external to the contract. Decisions of intermediate courts of appeal that have been handed down since Mount Bruce Mining appear to yet resolve the application of the true rule of construction. It is arguable that similar factual scenarios in Australia could result in different decisions, depending on the jurisdiction in which litigation is commenced.
The divergence of views and the division in authority discussed above still exist. Such matters can only be resolved as part of the ratio decidendi of a High Court decision. That in itself poses practical problems. For the High Court to grant leave to hear such a case, the contract in question would need to be truly unambiguous and in respect of which courts below had disallowed the admissibility of extrinsic evidence due to the ambiguity gateway. The problem is exacerbated by reason of the fact that ambiguity carries a low threshold, and contracts which are truly unambiguous may not be worth litigating in the High Court.
[1] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104.
[2] Mount Bruce Mining (2015) 256 CLR 104, 116 [46].
[3] Mount Bruce Mining (2015) 256 CLR 104, 116-117 [47]-[49].
[4] Reynolds, above n 11, 200.
[5] Reynolds, above n 11, 200.
[6] Mount Bruce Mining (2015) 256 CLR 104, [49] (French CJ, Nettle and Gordon JJ), [110] (Kiefel and Keane JJ).
[7] Mount Bruce Mining (2015) 256 CLR 104. See also Tristan Lockwood and Hayden Dunnett, ‘High Court prospects a duffer: Mount Bruce Mining v Wright Prospecting’ (January 2016) Australian Property Law Bulletin 162.
[8] Mount Bruce Mining (2015) 256 CLR 104, 134 [118]-[119].
[9] Mount Bruce Mining (2015) 256 CLR 104, 117 [52].
[10] McCourt [2012] WASCA 60; Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216; Cape Lambert Resources Ltd (2013) 298 ALR 666.
[11] [2016] FCAFC 15
[12] Franklins (2009) 76 NSWLR 603 at [14] to [17].
[13] Mainteck Services (2014) 310 ALR 113.
[14] Stratton Finance (2014) 314 ALR 166 at 174 [40].
[15] Masters Home Improvement Pty Ltd (formerly Shellbelt Pty Ltd) v North East Solution Pty Ltd [2017] VSCA 88 in which Santamaria, Ferguson and Kaye JJA recited the relevant passage from Codelfa and the general proposition from Mount Bruce Mining, but took the matter no further. Schreuders v Grandiflora Nominees Pty Ltd [2015] VSCA 443 in which Kyrou, Ferguson and McLeish JJA discussed Codelfa and the relevant passages from Mount Bruce Mining, but also took the matter no further. See also Bisognin v Hera Project Pty Ltd [2016] VSCA 322.
[16] Regreen Asset Holdings Pty Ltd v Castricum Brothers Australia Pty Ltd [2015] VSCA 286 at [77] in which Warren CJ, Kyrou and McLeish JA acknowledged the debate about the true rule in Codelfa but did not discuss it in detail.
[17] See also Eureka Operations Pty Ltd v Viva Energy Australia Pty Ltd [2016] VSCA 95 at [48] in which Santamaria, Ferguson and McLeish JJA acknowledged that ambiguity may still have to be shown before extrinsic evidence can be admitted, but did not find it necessary to analyse the matter further.
[18] Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219; Mercanti v Mercanti [2016] WASCA 206.
[19] Kitchen v Vision Eye Institute Ltd & Anor [2016] QCA 226; Browning v ACN149 351 413 Pty Ltd (In Liq) (Formerly Known As Enviren Constructions Pty Ltd) [2016] QCA 169.
[20] Paul Davies, ‘Rectification Versus Interpretation: The Nature and Scope of The Equitable Jurisdiction’ (2016) 75(1) The Cambridge Law Journal 62.
[21] Donald Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review 577, 586.
[22] Attorney-General’s Department (Cth), ‘Improving Australia’s Law and Justice Framework: A discussion paper exploring the scope for reforming Australian contract law’ (22nd March 2012) http://www.ag.gov.au/Consultationsreformsandreviews/Pages/Review-of-Australian-Contract- Law.aspx>; Nicola Roxon, ‘Time for the great contract reform’, The Australian, 23 March 2012; see also Warren Swain, Codification of Contract Law: Some Lessons From History’ (2012) 40 University of Queensland Law Journal 39; cf Dan Svantesson, ‘Codifying Australia’s Contract Law – Time for a Stocktake in the Common Law Factory’ (2008) 20 Bond Law Review 1.
[23] See also Tiphanie Jane Acreman, ‘The Long Road to a Wide Ambiguity Gateway’ (2016) 42 Australian Bar Review 12, 30.
[24] Or for that matter, Pacific Carriers Ltd or Toll.