The Legalities of Interpreting Contracts

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Tuesday, March 8th, 2016
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Construction contracts are often difficult to interpret because of the influence of the surrounding facts and circumstances.

The High Court decision Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37 sheds light on when surrounding circumstances are relevant, but uncertainty persists.

The background to Mount Bruce Mining – the true rule

In Australia, the “true rule” about whether courts can have regard to surrounding circumstances was set out by Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 49 CLR 337:

“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.  But it is not admissible to contradict the language of the contract when it has a plain meaning.”

So there needs to be ambiguity in the words of a contract before a court can take into account surrounding circumstances.

After Codelfa, intermediate appellate courts in Australia took a mixed approach to the issue. Some continued to follow the true rule. Others made decisions on the basis that it is not necessary to identify ambiguity in the words of a contract before examining evidence of surrounding circumstances.

In 2011, when considering an application for special leave in Western Expert Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604, the High Court took the opportunity to criticise the appellant courts, which had departed from the true rule in Codelfa. As a result, some of the appellate courts adjusted their approach and applied the true rule, but others did not.

In 2014, in Electricity Generation Corporation v Woodside Energy (2014) 251 CLR 640, a majority of the High Court said that:

“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…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.”

By referring to the surrounding circumstances, this Woodside decision seemed to suggest that the High Court was departing from the true rule in Codelfa, and that it was no longer necessary to find ambiguity in the words of a contract before considering evidence of surrounding circumstances. As a result, intermediate appellate courts began to deliver even more inconsistent decisions on this issue – some following the true rule in Codelfa, and others following the more “contextual approach” suggested by Woodside.

This brings us to the 2015 High Court decision in Mount Bruce Mining. The provisions of the mining contract in question were ambiguous.

French CJ, Nettle and Gordon JJ

In a joint judgment, French CJ, Nettle and Gordon JJ said that ordinarily the process of construction is possible by reference to the contract alone. If an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning. This is consistent with the true rule in Codelfa.

The judges identified two situations where sometimes recourse to events, circumstances and things external to the contract is necessary:

  • To identify 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
  • To determine the proper construction where there is a constructional choice (this means where the contract is ambiguous).

The second of these situations is consistent with the true rule in Codelfa, but arguably the first permits reference to surrounding circumstances where there is no ambiguity in the words of the contract, at least to identify the purpose of the contract.

The judges also flagged as an issue but declined to express a view on whether surrounding circumstances may also be considered in order to identify the existence of a constructional choice (ambiguity).

Kiefel and Keane JJ

In a joint judgment, Kiefel and Keane JJ also flagged the question whether an ambiguity in the meaning of terms of a commercial contract may be identified by reference to matters external to the contract. They also declined to express a view. Some of their other comments seem more consistent with the “contextual approach” in Woodside. They said that Codelfa deals with how an ambiguity might be resolved, but does not address how such an ambiguity might be identified.

Bell and Gageler JJ

In a joint judgment Bell and Gageler JJ found that, because the relevant terms in this contract are ambiguous, their proper interpretation is to be determined by reference to what reasonable businesspersons having all the background knowledge then reasonably available to the parties would have understood those terms to have meant at the date of the contract.

The judges declined to comment on whether ambiguity must be shown before a court interpreting a written contract can have regard to background circumstances. They noted that intermediate courts of appeal are currently divided on this question and, until the question is determined by the High Court, other Australian courts should determine the question on the basis that Codelfa Construction remains binding authority.

In light of Mount Bruce Mining, it appears clear that the true rule in Codelfa remains good law in Australia. However, uncertainty will persist until the High Court considers a case whether the terms of a contract are apparently capable of only one construction, until surrounding circumstances are considered.

As ever, parties to a contract should ensure at the outset that their contract contains clear drafting and reflects the intentions of the parties.

By Rob Buchanan and Kylie Lightman
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