The principles underlying contractual construction have been the subject of much debate between intermediate courts in Australia. The recent High Court decision of Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited [2015] HCA 37 (Mount Bruce Mining) is arguably a progression towards the High Court's conclusive ruling on the principles of contractual construction in Australia.

The landmark decision of Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (Codelfa) is authority for the proposition that evidence of surrounding circumstances is only admissible to assist in the interpretation of contracts in circumstances where the language in a provision is ambiguous. However, intermediate courts have grappled with the precise scope of the holding in Codelfa and, in the absence of High Court clarification, have applied the Codelfa decision inconsistently. In particular, there have been conflicting views on how a court can establish whether an ambiguity in a provision of a contract exists, and whether evidence of surrounding circumstances should be admitted to resolve that preliminary, or 'gateway', question. While some courts have been willing to admit extrinsic evidence in the absence of overt ambiguity, others have only done so in certain narrow circumstances, or not at all.

In the recent decision of Mount Bruce Mining, the High Court has freed up intermediate courts to admit evidence of surrounding circumstances for the purpose of identifying ambiguity. While the High Court did not rule definitively on the point, the decision is arguably a progression towards the High Court's conclusive ruling on the principles of contractual construction in Australia.

The issue before the High Court

The case before the High Court concerned whether Wright Prospecting Pty Limited (WPPL) was entitled to payments of mining royalties from Mount Bruce Mining Pty Ltd under an agreement between the parties. It was accepted by the parties (and the Court) that provisions relating to the payment of royalties contained in the agreement were ambiguous.

 WPPL's claim turned upon the construction of these ambiguous provisions.

Principles of contractual interpretation

The observations on principles of contractual construction made by the High Court in reaching its decision are significant.

As the provisions in question posed a "constructional choice" (or ambiguity), the Court was permitted to consider surrounding circumstances to assist the determination of the correct construction. Accordingly, it was not necessary for the High Court to settle the question of when and how surrounding circumstances may be used to interpret a contract. In these circumstances the case does not conclude the Codelfa controversy; however, the High Court recognised that uncertainty remains regarding the admissibility of extrinsic material in the construction of contracts.

The majority judgment of French CJ, Nettle and Gordon JJ reaffirmed Mason J's classic proposition in Codelfa, stating that "if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances … cannot be adduced to contradict its plain meaning". However, their Honours declined to rule on whether such evidence can be used to identify the existence of ambiguity.

Prior to this decision, many had considered that the High Court was adopting a more liberal approach to admitting extrinsic evidence, citing in particular the High Court decision in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 (Woodside) . In Woodside, the High Court stated that contracts should be construed with reference to extrinsic material, but was silent on whether, and to what extent, ambiguity in the relevant provisions was first required.

Some courts inferred from this decision that surrounding circumstances could be taken into account even in the absence of ambiguity.

Mount Bruce Mining appears to cast doubt on the validity of such an inference; however, in declining to articulate the relevant principles, the High Court has left the door open for intermediate courts to admit evidence of surrounding circumstances to identify whether an ambiguity exists, before determining whether that evidence is admissible to support a particular contractual construction. This is demonstrated by the explicit statement of all seven judges that the special leave disposition of Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1 (in which the bench indicated that evidence of surrounding circumstances was not admissible to identify an ambiguity) is not binding on any Australian courts.

It is becoming increasingly clear that the High Court recognises the uncertainty surrounding the precise scope of the principles articulated in Codelfa. It is only a matter of time until an appropriate case requires the High Court to make a definitive ruling on the principles dictating when and to what extent surrounding circumstances can be considered in contractual construction.

Take-home points

  • It is clear the High Court acknowledges the uncertainty surrounding the Codelfa rule, but will await an appropriate case to definitively articulate its precise formulation.
  • Without definitively ruling on the point, the High Court raised and left open the possibility of admitting surrounding circumstances not only to resolve ambiguity in a provision, but also to demonstrate or identify ambiguity.
  • The High Court unanimously and explicitly noted that the special leave disposition of Jireh is not binding authority on any Australian courts. The High Court may adopt a more liberal approach to the admissibility of surrounding circumstances in the future.