In this decision, the Supreme Court of NSW considered the circumstances in which evidence about surrounding circumstances should be considered when constructing the meaning of a contract.

Key learning

This case emphasises the importance of ensuring a contract, particularly between commercial parties, is clear and unambiguous. It explores the High Court authorities on contractual construction and serves as a reminder that when interpreting a contract, courts will look to the objective intention of the parties and only consider evidence of ‘surrounding circumstances’ to aid in the interpretation of language that is a) ambiguous or b) susceptible of more than one meaning.

Case note

CSG entered into a finance agreement under which it would purchase copying equipment from Fuji Xerox Australia and sell the equipment to the plaintiff, Fuji Xerox Finance Limited (FXF), who would then rent the equipment to a customer under a “Docu/mation Agreement”. Simultaneously, the customer entered into an agreement with CSG and agreed to pay a monthly amount based on the number of copies made, subject to a ‘minimum monthly impression amount’. From the money received by CSG, a portion was paid to FXF as monthly rent. Where a customer exceeded the minimum monthly impression amount, they were billed by CSG for these excess payments, called “overs”.

CSG always dealt with the overs as part of its own revenue. However, FXF asserted that CSG was obliged to hold the overs on trust for them under two clauses in the agreement which provided that money received by CSG “under or in connection with any lease proposal…”, is held on trust together with “all finance amounts” under any lease agreements with customers.

The Court reiterated that in constructing a contract, it looks to the ‘objective intention’ of the parties, namely, “the intention that a reasonable person with the knowledge of the words and actions of the parties communicated to each other, and the knowledge that the parties had of the surrounding circumstances, would conclude that the parties had”. The issue in this case was whether, in the pursuit of the ‘objective intention’, the court could take into account the ‘surrounding circumstances’ the plaintiff relied upon, namely detailed evidence from its accounting manager and other information, in proving the rental overs were held on trust for it.

The Court applied the High Court’s ‘unequivocal’ statement in Western Export Services Inc v Jireh International Pty Ltd [2011] 86 ALJR that evidence of surrounding circumstances will only be admissible for interpreting language that is a) ambiguous or b) susceptible of more than one meaning. The court favoured CSG’s interpretation of the finance agreement finding that the parties did not objectively intend to include overs in the trust monies held for FXF. CSG highlighted the relevant words the clauses – "monies collected that pertain to the rental of the equipment" and “finance amounts”. The court found that the overs could not “pertain to rent”, as FXF's only interest in the transaction was that of a financier receiving the monthly rental. That interest did not extend to the number of excess impressions made. Further, the “finance amounts” could only be constructed as referring to “rentals”, not overs. It was also stated that because this was a commercial relationship, it would be expected that if overs were to be a trust asset, there would have been clear provisions dealing with their holding.

Although the court favoured CSG’s construction of the finance agreement, because alternative meanings were arguably open, evidence of surrounding circumstances was admissible. Nonetheless, despite the subjective evidence of the accounting manager which claimed entitlement to the overs, practices such as FXF never requesting or invoicing CSG for the payment of overs and never accounting for them as an asset, together with the fact that FXF was content with CSG using portions of the overs for their own purpose, demonstrated that the parties did not treat overs as trust property. As such, the court’s findings in relation to the surrounding circumstances “fortifie[d]” their view that the terms of the finance agreement should be construed as excluding overs from the trust described in the agreement and thus denied the plaintiff relief.

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