In this recent decision, the Court of Appeal held that deleted words appearing on the face of an executed contract may not be used to interpret a clause unless the clause in question (excluding the deleted words) is ambiguous. If it is, the deleted words may be used, only, to assist in choosing between alternative constructions.

Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2016] VSCA 23

Background

Gee Dee Nominees Pty Ltd (“Gee Dee”) was a lessee under a lease with Ecosse Property Holdings (“Ecosse”). Clause 13 stated that it was the parties’ intention prior to entering into the lease to enter into a sale of the freehold. However, that was not possible. Accordingly, the parties entered into a 99-year lease for prepaid rental of $70,000 (the market value of the land). The question at trial and on appeal was whether clause 4 of the lease had the effect that Gee Dee as lessee was liable to pay the costs of rates, taxes, assessments and outgoings (Imposts) levied on Ecosse as landlord. Clause 4 provided: “AND also will pay all rates taxes assessments and outgoings whatsoever which during the said term shall be payable by the tenant in respect of the said premises.”

In Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2014] VSC 479, Croft J made declarations that clause 4 of the lease, on its proper construction, provided that the lessee had to pay all Imposts whatsoever in respect of the leased land, including land tax. Gee Dee appealed.

On 4 March 2016, the Court of Appeal (Santamaria and McLeish JJA) allowed the appeal (Kyrou JA dissenting).

First to Fourth Grounds: Proper Construction of Clause 4

The first to fourth grounds of appeal concerned the construction of clause 4 of the lease. It was common ground between the parties that the clause was ambiguous. The clause could be read as imposing on the lessee an obligation to pay Imposts legally payable by both the lessee and the lessor in respect of the leased land; or it could also be read as confining that obligation to those that are payable by the lessee only.

The lease was executed in a form containing alterations in tracked changes. Clause 4 was one clause that showed deleted words. Gee Dee placed reliance on the deletion of words, arguing that those deletions showed that the parties considered certain matters and, by deleting those words, deliberately excluded them. Of significance was the deletion of the words “Landlord or” (previously reading “…payable by the Landlord or tenant”).

The Court of Appeal (at [10], [88]) reaffirmed the principle that contracts are to be construed objectively, by reference to what a reasonable person in the position of the parties would have understood by the language used. In doing so, the language used is generally to be given its natural and ordinary meaning, read in light of the document as a whole and the surrounding circumstances known to the parties at the time of the transaction.

Citing Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352-3, the Court recognised (at [4], [15], [92]) the one situation in which pre-contractual negotiations may be considered, namely where evidence of the parties’ ‘mutual concurrence’ may be admitted to ‘negative an inference sought to be drawn from surrounding circumstances’.

Accordingly, the Court of Appeal held (at [98]) that deleted words could be referred to as an aid to construing ambiguous words or clauses. McLeish JA held (at [94]) that consideration of deleted words is explicable as a departure from the general rule prohibiting recourse to pre-contractual negotiations, and (at [97]) that deleted words may be considered as an aid in construction (to negative an alternative construction) without forming part of the language being construed.

McLeish JA noted (at [114]) that the instrument in question was a lease (and not a sale of freehold) and that it would be wrong in the circumstances to assume that the parties intended, so far as possible, to replicate a transfer of the freehold title, and to construe the lease on that basis. It was on this point in particular that McLeish JA and Kyrou JA (in dissent) differed.

McLeish JA (with whom Santamaria JA agreed) held (at [120]) that, read alone, Gee Dee’s preferred construction was the more natural reading. That conclusion did not change when regard was had to the deleted words: [121]. In particular, McLeish JA agreed with Gee Dee (at [124]) that the striking of the words “Landlord or” clearly operated to reduce the ambit of the clause as originally drafted. In so finding, His Honour held (at [125]) that the striking out of words which would clearly produce a particular result is a strong basis for construing the contract so as not to produce that result.

Kyrou JA agreed with McLeish JA (at [20]-[24]) that, when considering deleted words, they supported Gee Dee’s case.

Kyrou JA reached the opposite conclusion on the construction of the clause in question, placing strong reliance on the purpose for the lease. However, Kyrou JA applied the same construction principles. That is, because the clause in question was ambiguous, the deleted words could be used as an aid in weighing competing constructions of the relevant clause.

Discussion

The Court of Appeal has clarified the limited circumstances where a court will consider deleted words on the face of an executed agreement. First, deleted words on the face of a concluded agreement are only relevant if the clause is ambiguous or capable of more than one meaning. Second, if the clause is ambiguous, then the deleted words may be used (only) to “negative an inference sought to be drawn from surrounding circumstances” (Mason J in Codelfa) or to “exclude a possibility open as a matter of construction” (Santamaria JA at [4]).

However, as noted by McLeish JA at [92], with whom Santamaria JA agreed:

“…it is important to keep in mind that it is not the deleted words, but those forming the contract agreed between the parties, which are being construed. The deleted words are nothing more than an aid in that process of construction, to the extent (if any) to which they might assist. Resort to deleted words does not transform the process of construction so as to require the deletions and the contractual words to be understood together as one harmonious whole. If the words deleted do not assist in resolving the ambiguity in question, then they must, like other extrinsic aids to construction, be put to one side.”

The judgment is important because it clarifies how a court will approach deleted words on the face of a concluded agreement, and demonstrates the use which can be made of deleted words in the face of conflicting interpretations.