Contract Construction in the High Court of Australia Redux

A year ago this week I wrote about the High Court's approach to contract construction.

Accurately construing a written contract is one of the most fundamental responsibilities of a commercial lawyer. It is a specialised process, requiring application of legal skills and knowledge.

The common law of contract is mostly well settled and largely uniform across the common law world, reflecting a general acceptance of the objective theory of contract (whereby meaning is determined by the views of a “reasonable person” in the position of the person to whom the words were addressed). Thus, most Australian and English decisions can usually be relied upon interchangeably.

[That said, practitioners should remain mindful of the Chief Justice's parting words this week when delivering his reasons in the ANZ late fees penalty case:

[10] Differences have emerged from time to time between the common law of Australia and that of the United Kingdom in a number of areas. Those differences have not heralded the coming of winters of mutual exceptionalism. All of the common law jurisdictions are rich sources of comparative law whose traditions are worthy of the highest respect, particularly those of the United Kingdom as the first source. No doubt in a global economy convergence, particularly in commercial law, is preferable to divergence even if harmonisation is beyond reach. The common law process will not always be the best way of achieving convergence between common law jurisdictions. […] It may be that in this country statutory law reform offers more promise than debates about the true reading of English legal history.]

The foundational principles of commercial construction are clear, and indeed most contracts can be satisfactorily interpreted on the basis of the contract alone. In so doing, it will be helpful to bear in mind that the object is to construe the contract, not just a document.

It is generally accepted that there are three, conceptually distinct, stages in the construction of a contract:

(1)   the identification of context (and terms);

(2)   the determination of the meaning and legal effect of the contract; and

(3)   the application of the contract to the factual circumstances which have arisen.

Even so, a legal debate has emerged regarding the use of extrinsic material, or in other words, material outside the contract, in the process of construction.

Late last year the High Court was ready to traverse the matter again in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37. The High Court of Australia has now considered the use of extrinsic materials in 10 cases since the year 2000.

The judgment of French CJ, Nettle and Gordon JJ used the opportunity to confirm at a high level the applicable legal principles to a question of construction of a commercial contract [footnotes omitted]: 

Applicable legal principles in these appeals

46            The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

47            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.

48            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.

49            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.

50            Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.

51            Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".

52            These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales 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.

That statement of principle was subsequently cited with approval by a unanimous High Court in Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392 at [51] fn 23.

In Codelfa Construction v State Rail Authority (1982) 149 CLR 337, Justice Anthony Mason (with whom Justices Stephen and Wilson agreed) remarked (at 352):

"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."

This passage and the subsequent High Court authorities arguably make clear that extrinsic material may be used:

·       where the language of the contract is ambiguous or unclear;

·       to identify the meaning of a descriptive term; or

·       to explain the genesis or aim of a contract.

They also confirm extrinsic material cannot be used to:

·       contradict the plain language of the contract; or

·       prove the parties’ subjective intention or understanding of contractual terms.

The "ambiguity" which Mason J said may need to be resolved arises when the words are "susceptible of more than one meaning." However, his Honour did not say how such an ambiguity might be identified. Rather, His Honour's reasons in Codelfa were directed to how any ambiguity might be resolved.

At the heart of the persisting legal controversy is thus whether ambiguity is a mandatory requirement before the court may look to extrinsic material.

If ambiguity is not required, a court could identify descriptive terms and explain the genesis of a contract with extrinsic material even though there is no ambiguity. Further, a court could look to extrinsic material to identify whether or not a term is ambiguous in the first place.

That assessment is not possible under an “ambiguity gateway” analysis, which requires ambiguity on the face of the contract before any recourse to extrinsic material is permitted. 

In reasons for the refusal of special leave to appeal given in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1 language was used by Gummow, Heydon and Bell JJ that suggested it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and the object of the transaction.

There are differences of views about whether or not this requirement arises from what was said in Codelfa (consider for example the analysis in Mainteck Services Pty Limited v Stein Heurtey [2014] NSWCA 184; (2014) 310 ALR 113).

Doctrinal consistency is not the sole reason for endorsing a restrictive approach that requires ambiguity as pre-condition. There are also practical arguments favouring cost minimisation and efficient resolution of disputes, given the costs associated with the reception of extrinsic evidence of surrounding circumstances.

The Mount Bruce Mining Case had been billed as the High Court’s opportunity to definitively resolve the question whether an ambiguity in the meaning of terms in a commercial contract may be identified by reference to matters external to the contract including the issue whether Jireh was binding precedent, despite being judgment on a special leave application.

Unfortunately, although the issue was raised on the special leave application ([2015] HCATrans 108), the parties ultimately agreed before the Full Court that the terms in dispute were ambiguous ([2015] HCATrans 188). Accordingly, the Court expressly declined to decide the issue.

Needs must. The question did not arise to decide and so the issue identified in Jireh must await another day.

Still, practitioners can take solace from the Court’s clarification of some related issues:

·       Codelfa was (again) confirmed as the bedrock principle for determining whether the use of extrinsic evidence is permissible;

·       Any notion that a special leave judgment is authoritative precedent was disavowed;

·       Five judges maintained a distinction between the admissibility and use of extrinsic evidence. Additional restrictions on the admission of extrinsic evidence at trial are not to be imposed, but how that evidence is used will be restricted (eg. extrinsic evidence can be admitted to show context but it cannot be used to prove the parties’ subjective intentions).

30 July 2016

Dominique Hogan-Doran SC is Senior Counsel of the New South Wales Bar.

Liability limited pursuant to a scheme approved under professional standards legislation.