The recent case

In Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 the High Court suggested that evidence of surrounding circumstances was admissible only if the language is ambiguous or susceptible of more than one meaning but not admissible to contradict the language of a contract that has plain meaning.  This statement of the "true rule" was generally understood as requiring ambiguity to be found in the text of a contract before the surrounding circumstances of the contract could be taken into account.   

However, later decisions of the High Court and intermediate courts suggested that it was unnecessary to find ambiguity before it is permissible to have regard to surrounding circumstances. Over a number of years, those decisions appeared to represent the settled position. However, in 2011 the High Court refused special leave to appeal in the case of Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604 and found that courts were bound by Codelfa, unless and until the High Court reconsidered and disapproved or revised the "true rule".

In a 2014 case, Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, the High Court appeared to depart from the decision in Codelfa and seemed to suggest that ambiguity was not required before a court could consider surrounding circumstances. The decision in Woodside led to conflicting decisions in the Courts. The New South Wales Court of Appeal in Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113 formed the view that Woodside had revised the rule in Codelfa.

An application for special leave to appeal a Western Australia Court of Appeal decision in the case Technomin Australia Pty Ltd v Xstrata Nickel Australia Operations [2014] AWSCA 164 was refused by the High Court in March 2015.  The Western Australian Court of Appeal decided in September 2014 that the "true rule" remained and that ambiguity was required before a Court could consider external evidence. In Technomin, the Court of Appeal found that there was nothing in the decisions since Codelfa which was inconsistent with ambiguity being required prior to external evidence being examined.

In Technomin, the case turned on the definition of "tenements".  The Court found that the definition of tenements in a Royalty Deed was ambiguous, and that all the relevant contextual factors pointed clearly to a particular conclusion. While the position appears to have been clarified in Western Australia, there is now a divergence between the Western Australian and New South Wales Court. There remains uncertainty and different approaches depending on which state proceedings are issued in.

The point at which surrounding circumstances can be considered has a number of practical implications. Technomin illustrates that where there is ambiguity, it is likely that surrounding circumstances, including pre-contractual negotiations, will be used in resolving conflicting interpretations of a contract. In this regard, it is critical to keep records of pre-contractual negotiations and discussions regarding critical terms of contracts. Regard should also be had that inferences might be drawn from those notes, making the accuracy of any correspondence critical.