In this case, the NSW Court of Appeal expressed the view that Codelfa does not impose any ‘ambiguity gateway’ before evidence of surrounding circumstances will be considered in contract construction questions (and rather, ambiguity is a conclusion that can only be reached after consideration of surrounding circumstances).  However, surrounding circumstances will rarely detract from the language used in the contract.

Bathurst Central Pty Ltd (Bathurst Central) contracted to purchase property from Mr and Mrs Steele-Park (Vendors).  The contract was subsequently varied to extend the completion date and immediately before the second variation, Mr Cherry and Mr Sharpe (as directors of Bathurst Central) (Guarantors) signed a guarantee in respect of all monies owing by Bathurst Central under “the Agreement”.  The sale contract was never completed and the Vendors subsequently terminated the contract and sold the property to a third party.

The issue for the Court was whether the guarantee:

  • extended to damages resulting from the failure of Bathurst Central to complete the purchase as agreed in the original sale contract, being almost $150,000 (the difference between the purchase price and the price for which the Vendors subsequently sold the property), or
  • was limited to the amount promised by Bathurst Central to the Vendors in consideration for the Vendors subsequently extending the contract’s completion date, being just over $30,000.

The Guarantors argued that various emails between the parties’ solicitors about the extension of the completion date and the guarantee were admissible on the question of construction of the guarantee, and demonstrated that Bathurst Central’s solicitors had understood that the guarantee would only cover the price of the completion date extension, and not damages for failing to complete.

Leeming JA explained that:

  • it is not necessary to find ambiguity before a court can consider surrounding circumstances;
  • ambiguity in a contract is a conclusion that can only be reached after surrounding circumstances are considered; and
  • it will, however, be rare for any contextual material to override the language used in the contract, as there cannot be any judicial re-writing of a contract (even if the court considers the operation of the contract inconvenient or unjust).

In finding that the emails were relevant to the process of construction of the guarantee (and that the trial judge was not correct to exclude evidence of them), Leeming JA (with whom Gleeson JA agreed) found that the emails:

  • contained objective facts known to both parties and represented the communicated negotiating position of the parties; and
  • gave some evidence of the commercial purpose of the guarantee (namely that the purpose of the guarantee was to be limited to the price for the completion date extension).

However, the Court ultimately dismissed the appeal because even where evidence of surrounding circumstances was considered, that evidence could not override the clear and expansive language which indicated that “Guaranteed Money” included damages for failure to complete, including:

  • the definition expressly included damages; and
  • the definition was broadly expressed and used expansive general words; and
  • the phrase “under or in connection with the Agreement” encompassed both the original sale contract and the second variation.