Contract construction-Uncertainty remains04 March 2016
The High Court has refused to answer the contractual construction question of whether ambiguity must be shown (the "ambiguity gateway") before a court can consider evidence of the surrounding circumstances when interpreting a written contract.
As discussed in our recent publication Surrounding circumstances and contract construction: Is there still an ambiguity gateway?, there is a great deal of uncertainty as to whether the ambiguity gateway applies.
It had been hoped that the High Court decision involving contractual construction in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited & Anor (Mount Bruce Mining) would settle this matter. However, as the case did not directly raise the issue, the High Court expressly refused to determine it.
Until 2011, appellate courts held that evidence of surrounding circumstances was always admissible to assist in the construction of a contract, whether or not the contractual language was ambiguous or susceptible of more than one meaning.
This view changed in the High Court special leave application in Western Export Services Inc v Jireh International Pty Ltd (Western Export Services), where three members of the High Court stated that this view was inconsistent with the "true rule" as stated by Mason J in Codelfa:
"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."
While this statement was controversial and the binding status of a special leave application was questioned, most, if not all courts took the view that the guidance in Western Export Services should be followed until further direction from the High Court. Accordingly, it was hoped that certainty would be restored in this area.
However, the recent High Court decision in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (Woodside) has created further uncertainty.
In Woodside, the majority of the High Court took into account surrounding circumstances known to both parties in the construction of the gas supply agreement without any express consideration of whether the language of the agreement was ambiguous. Unfortunately, Western Export Services was not directly addressed by the High Court in coming to its decision. This has led to the view that Woodside restored the pre-Western Export Services position adopted by the appellate courts, that is, there is no longer a need for ambiguity before evidence of surrounding circumstances could be used to assist in the construction of a contract.
However, there is a countervailing view that the High Court would not impliedly overrule the authority of Western Export Services. With the lack of guidance from the High Court's decision and little appellate court direction, contract lawyers and courts are struggling to deal with the uncertainty.
The High Court's decision
While the High Court refused to determine the issue in Mount Bruce Mining, they did provide some guidance on the authorities.
Chief Justice French and Justices Nettle and Gordon stated the current law set out in Codelfa and Woodside, without providing any guidance on the apparent inconsistency between them, before outlining the following guiding principles:
- A contract's provisions are to be determined objectively, by reference to their text, context and purpose.
- To determine the meaning of a commercial contract's terms, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. This requires consideration of the language used, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
- Ordinarily, this process can be done by reference to the contract alone. Further, if an expression in a contract is unambiguous or can only have one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning.
- However, sometimes recourse to events, circumstances and other factors external to the contract are necessary, for example
- to identify the commercial purpose or objects of the contract, and
- to determine the proper construction, where there is a constructional choice.
- What may be referred to are events, circumstances and other factors external to the contract, which are known to the parties or assist in identifying the purpose or object of the transaction. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
- Other principles are relevant in the construction of commercial contracts. For example, unless a contrary intention is indicated in the contract, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
Justices Kiefel and Keane stated:
- citing Codelfa, regard may be had to the mutual knowledge of the parties to an agreement in the process of construing it. There may be a need to regard the circumstances surrounding a commercial contract to construe its terms or to imply a further term, and
- citing Woodside, a commercial contract should be construed by reference to the surrounding circumstances known to the parties and the commercial purpose or objects to be secured by the contract to avoid a result that could not have been intended.
Justices Bell and Gageler stated that until the High Court decides the matter, courts should approach the question by applying Codelfa, which remains the binding authority.
Although the High Court refused to answer the ambiguity gateway question, they unanimously held that statements made by the High Court in the course of reasons for refusing a special leave application do not create precedent and are not binding.
Where are we now?
Based on the guidance provided by the High Court, the binding authority remains the decision in Codelfa, and while it appears there are circumstances where surrounding circumstances may be considered, it is unclear what they are. Unfortunately, until this matter is raised in, and determined by, the High Court, we are left with differing intermediate appeal court decisions.