In this decision, the Victorian Court of Appeal considered the extent to which extrinsic evidence, such as evidence of parties’ intentions and pre and post-contractual conduct, can be used to interpret a contract.


Key Learnings

This case emphasises the importance of ensuring written contracts are clear and embody the entire agreement. It reminds us that the general rule is that extrinsic evidence, such as evidence of negotiation prior to a contract, “is not admissible for the construction of the contract”, unless it is evidence of surrounding circumstances or in cases of latent ambiguity, and that “the parties intentions must be ascertained… from the words they have used”. It also reminds us that the most ‘objective’ evidence of intention is that contained in the words of the contract.

Case Note

In January 2001, Retirement Services Australia Pty Ltd (RSA) and a member of the ‘Darnley Group’ entered into a joint venture agreement and a management agreement for the development and management of a “first class retirement village” which was to be developed by Darnley and managed by RSA. Darnley claimed that agreements made during pre-contractual negotiations in relation to the provision of a full time employed registered nurse and the provision of respite accommodation should be used to interpret the contractual obligations set out in the agreements since neither the respite units nor the nature of the nursing services were referred to in the agreements. Darnley argued that pre-contractual statements, such as statements of intention from key players and evidence of submissions to council, formed evidence of “the surrounding circumstances known to the parties, and the purpose and object of the transaction” so it was permissible to resort to them when construing the agreements. Alternatively, it argued that RSA was estopped from denying the binding effect of the representations.

At first instance, the trial judge found for Darnley holding that it “did not seek to rely upon the facts and circumstances outside of the contract ‘to contradict the language of the contract’…but, rather, sought to rely upon evidence of surrounding circumstances ‘to assist in the interpretation of the contract’.” RSA appealed, arguing that his Honour ought to have come to the opposite conclusion as the judge did not construe the contracts by objective circumstances - by reference to the words used by the parties in their written documents.

The Court of Appeal upheld RSA’s appeal, finding that the trial judge should have ruled that the evidence of intention and pre and post-contractual conduct were “irrelevant”.

The Court referred back to the reasoning of the High Court in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 where the broad purpose of the parol evidence rule was set out, stating that it is “to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument.” The parties were not in disagreement about the rules of construction, yet Darnley argued that the evidence it relied upon was evidence of the objective ‘surrounding circumstances’ which the court must place itself when construing a contract.

The Court disagreed and found that the conversations and conduct relied upon clearly fell within the parol evidence rule and could not be used to aid construction of the agreement. The Court distinguished between the parties’ subjective view of the terms of their agreement and the ‘principle of objectivity’. In doing so, it applied the High Court’s decision in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd stating that “it is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations” but rather, “the meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean”. The Court highlighted that the principal point of initial focus must be the directly relevant written words as “the writing itself stands out as the quintessentially objective means of discovering what the intentions of the contracting parties were”.

Applying these principles, the Court considered that the obligation on RSA to provide a ‘first class retirement village’ was expressly limited by the JV agreement which made clear that the village was not to equate to a ‘first class health establishment’ (which would include a nurse). It also emphasised the inclusion of an ‘entire contract’ clause which stated that “all the agreements and understandings between the parties…are embodied in this agreement.” The Court applied Hope v RCA Photophone of Australia Pty Ltd (1937) CLR 348 where the High Court held that an ‘entire contract’ clause “left no room for a submission that the terms of the contract were not fully embraced within its four walls.” It was overall found that the management agreement itself identified and defined the management services which RSA must provide. That agreement did not include the provision for a full time on-site nurse nor respite care so RSA was not obliged to provide these services. Also, the Court affirmed that the parol evidence rule operates to exclude evidence of an estoppel by convention alleged to arise from pre-contractual negotiations, also dismissing Darnley’s estoppel argument.

In conclusion, the judgement emphasises that because only objective evidence of ‘surrounding circumstances’ is admissible to aid interpretation of a contract, it is important to ensure that written contracts embody the complete agreement clearly, particularly if there is an ‘entire contract’ clause involved.

To see the full judgment in this case, please click here.