Since 2011, when the High Court refused an application for special leave in Western Export Services Inc v Jireh International,[1] there has been dispute among Australian courts as to the correct approach the courts should take when receiving evidence for the purpose of interpreting commercial contracts. The dispute relates to whether or not, when interpreting a contract, a court needs to find ambiguity in the text of the contract before it can consider the surrounding circumstances known at the time of entry into the contract. The High Court’s refusal, in March 2015, to grant special leave to appeal from the Western Australia Court of Appeal’s decision in Technomin v Xstrata Nickel suggests that we will have no resolution on this issue for a while yet.

Certainty in the interpretation of written contracts is something which is fundamentally desirable for all businesses. Despite that, in recent years certain aspects of this part of Australian law have been described by some commentators as being in a state of disarray. One of the principal controversies has been whether it is necessary to find ambiguity in the text of a contract, before a court is permitted to take into account, for the purpose of construction of the contract’s terms, the surrounding circumstances known to the parties at the time of entry into the contract.

In 1982, in Codelfa Construction Pty Ltd v State Rail Authority (NSW), Mason J of the High Court stated that the true rule is that:[2]

“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 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.[3]

As time passed, those later decisions appeared to settle the legal principles that governed the approach to interpretation of contracts in Australia.

However, that situation changed in 2011, when the High Court refused special leave to appeal in the case of Western Export Services Inc v Jireh International Pty Ltd.[4] The High Court took the unusual step of publishing written reasons for the refusal to grant special leave. In those reasons, Gummow, Heydon and Bell JJ stated that intermediate (appellate) courts were bound to follow the precedent in Codelfa, unless and until the High Court reconsidered the ‘true rule’, and disapproved or revised what was said in Codelfa.

The decision in Jireh created what McLure P called a ‘heated controversy’.[5] One of the reasons it created such controversy is that, until special leave is granted, there is no proceeding before the High Court.[6] Given Jireh was a refusal of special leave, there was a real question as to its precedential authority because the decision was not the ratio decidendi of a final decision in a proceeding.[7]

In 2014, the High Court had an opportunity to resolve this controversy when it heard an appeal dealing with a commercial contract in Electricity Generation Corporation v Woodside Energy Ltd.[8]Unfortunately the decision in that case has been the subject of strident criticism,[9] and did not provide a resolution at all.

In Woodside, the majority stated that:[10]

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 stating that the surrounding circumstances must be considered, the majority of the Court in Woodside seemed to be suggesting that it is not necessary to find an ambiguity in the text of a contract before a court can consider the surrounding circumstances. However, when making the statement, the majority did not refer either to Codelfa or Jireh. Unfortunately this has left it unclear whether the Court was intending to disapprove or revise the ‘true rule’.

In turn this has led to conflicting decisions of intermediate courts on that question.

The New South Wales Court of Appeal, in its decision in Mainteck Services Pty Ltd v Stein Heurtey SA, expressed the view that the High Court in Woodside:[11]

“confirms that not only will the language used "require consideration" but so too will the surrounding circumstances and the commercial purpose or objects. ... It cannot be that the mandatory words “will require consideration” used by four Justices of the High Court were chosen lightly, or should be "understood as being some incautious or inaccurate use of language”.

In other words, the Court formed the view that Woodside had revised the true rule set down in Codelfa. The decision in Mainteck has been followed by the Full Court of the Federal Court[12] and in another decision of the New South Wales Court of Appeal.[13]

However, the Western Australian Court of Appeal has formed a different view. In Technomin Australia Pty Ltd v Xstrata Nickel Australia Operations[14]the respondents argued before that court that Woodside confirmed the abandonment of any requirement that the language of the contract be ambiguous before regard could be had to surrounding circumstances.

The Court rejected that argument. It pointed to the fact that the majority in Woodside had not addressed Jireh, and had not identified whether the relevant contract was ambiguous. Accordingly, McLure P found that, until the High Court expressly held differently, ambiguity remains a gateway requirement before surrounding circumstances can be considered.

In a separate judgment, Murphy JA considered it unnecessary to resolve this issue because there was an ambiguity in the contract. Despite that, his Honour went on to consider the principles of construction. His Honour expressed the view that there was nothing in the decisions of the High Court since Codelfa which was inconsistent with ambiguity being a gateway requirement before surrounding circumstances could be used as an aid to interpretation.

In his judgment, Murphy JA referred to the decision in Mainteck but noted that submissions on it were not received because the decision was handed down after the hearing of the appeal in Technomin. Having said that, his Honour doubted the correctness of the decision in Mainteck stating that:[15]

  • the ‘true rule’ passage in Codelfa had not been expressly considered by the High Court since 2002;[16]
  • the authorities up to the time of Woodside are not necessarily inconsistent with a requirement of ambiguity, which is significant given that the majority in Woodside stated they were reaffirming earlier decisions;
  • a case as significant as Codelfa is unlikely to have been impliedly overruled; and
  • the question of whether evidence of surrounding circumstances is inadmissible in the absence of ambiguity did not appear to have been canvassed in argument in Woodside, nor isolated for determination.

The Victorian Court of Appeal has, to date, only briefly considered the implications of the decision in Woodside. The decision of that court in State of Victoria v Tatts Group Ltd[17]suggests that Victorian courts will require ambiguity to be found in the meaning of the written text before consideration may be given to surrounding circumstances to interpret the contract.

The conflicting decisions regarding the effect of the High Court’s decision in Woodside have left this issue in a state of confusion. That the law in Australia is in such a position, particularly in an area as critical to business as contractual construction, is most unfortunate.

In March 2015, the High Court had another chance to provide some much needed clarity, when Technomin Australia Pty Ltd sought special leave to appeal from the decision of the Western Australian Court of Appeal. One of the grounds on which special leave was sought was that an appeal would provide an opportunity for the High Court to resolve the dispute between the intermediate courts as to the correct approach to contractual construction. But the High Court refused the application for special leave.

Where this leaves us is that similar factual scenarios in Australia could result in different decisions, depending on the jurisdiction in which litigation takes place. While clarity can only be brought to this issue by the High Court, it does not presently look like that clarity will be provided in a hurry.