A decision of the New South Wales Court of Appeal handed down on 6 June 2014 is an intriguing development in the story of Australian courts’ approach to the admissibility of extrinsic material in the construction of commercial contracts.1

Background

In the case of Codelfa in 1982,2 Mason J stated that: ‘the true rule is that 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.’3 This ‘true rule’ was considered the authoritative statement on the point for years to come.

In late 2011, the High Court refused special leave in the case of Western Export,4 and affirmed that the ‘true rule’ expounded in Codelfa remains binding authority in Australia, saying that ‘until this court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.’

The High Court’s ‘edict’ in Western Export was significant because, despite a degree of uncertainty in the law in Australia existing since Codelfa and prior to Western Export, it made it clear that extrinsic evidence may only be adduced in aid of the interpretation of the words of a contract where those words were ambiguous. From 2012 to 2014, lower courts seemed to be heeding the High Court’s ‘edict’ (notwithstanding that it may not be binding as precedent) and adopted a careful approach to the admissibility of extrinsic evidence in interpreting contracts.5  Indeed, a number of first instance decisions were reversed on appeal.

However, a recent decision of the NSW Court of Appeal seems to have enlivened the issue again and has cast doubt on the status of Western Export.  The NSW Court of Appeal (comprising Ward, Emmett and Leeming JJA) decided not to follow Western Export because it is inconsistent with what the High Court said in the recent case of Electricity Generation Corporation v Woodside.6

The Mainteck Decision

In 2004, Mainteck entered into an agreement with Stein Heurtey in order that Mainteck perform some of Stein Heurtey’s obligations under a head contract it had with another party.  Disputes subsequently developed between Mainteck and Stein Heurtey as to whether Mainteck had performed its obligations under the contract.  Mainteck commenced proceedings against Stein Heurtey alleging breach of contract, misrepresentation and other claims.  The matter was referred to a referee for determination.  The Court ordered the referee’s reports be adopted in full.  Mainteck appealed those orders and challenged the trial judge’s findings on contractual construction.

The Court noted the contractual provision in question “exhibits considerable ambiguity”.  Therefore, under any view of Codelfa, the Court was entitled to have regard to evidence of surrounding circumstances to inform the construction of the contract.  However, the Court made some significant remarks about the status of the Western Export decision.  In the leading judgment, Leeming JA noted that Electricity Generation Corporation v Woodside endorses and requires a contextual approach to the construction of commercial contracts.  Emmett and Ward JJA agreed with Lemming JA’s reasons.  Leeming JA relied on the following passage from that High Court case:

[T]his court has affirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract.  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.  That approach is not unfamiliar.  As reaffirmed, 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.  Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.

Leeming JA then addressed the inconsistency between Western Export and Electricity Generation Corporation v Woodside as follows:

To the extent that what was said in Jireh supports a proposition that “ambiguity” can be evaluated without regard to surrounding circumstances and commercial purpose or objects, it is clear that it is inconsistent with what was said in Woodside at [35].  The judgment confirms that not only will the language used “require consideration” but so too will the surrounding circumstances and the commercial purpose of objects.  Although the High Court in Woodside did not expressly identify a divergence of approach, Jireh was notoriously controversial in precisely this respect…It cannot be that the mandatory words “will require consideration” used by four Justices of the High Court were chosen lightly…

Leeming JA then went on to say that the foregoing is not inconsistent with the 'true rule' passage of Mason J in Codelfa and that the decision of the NSW Court of Appeal in Franklins7 should be followed (there was some doubt as to the status of Franklins following the decision in Western Export).  His Honour also noted that this approach to construction of contracts accords with familiar passages in earlier High Court cases such as Pacific Carriers8, Toll9 and Wilkie10.

The Court was prepared to have regard to the evidence of surrounding circumstances to inform the construction of the contract.  However, the evidence was too general and did not end up being used for that purpose.  

Analysis

This decision is likely to have significant repercussions and may create some further confusion.  This is not the first time since Western Export that the NSW Court of Appeal has sought to uphold the Franklins case, and in so doing, set itself on a collision course with Western Export.  In 2013, the NSW Court of Appeal handed down the OneSteel11 case which seemed to attract very little attention.  In that case, Allsop JA (who wrote the leading judgment) stated that when construing contracts, one should adopt the approach Allsop JA himself took in Franklins, and that:

  • it is essential to understand the ‘genesis of the transaction, the background, the context, the market in which the parties are operating’;
  • considerations of commercial convenience are relevant to construction and objective meaning; and
  • one should approach construction in a way that is not prone to defeat the evident commercial purpose.

The position adopted by Allsop, Campbell and Giles JJA in Franklins and by Allsop, Meagher and Macfarlan JJA in OneSteel seems to be have been perpetuated by Leeming, Emmett and Ward JJA in Mainteck.  This means that there are eight Judges of the NSW Court of Appeal who, it would seem, agree with the proposition that a Court may have recourse to evidence of matters beyond the words of the contract even where there is no ambiguity in those words.  If this is so, then this is inconsistent with the position the other State Courts have reached.

It is also interesting that the basis for the NSW Court of Appeal’s decision in Mainteck seems to be the result of trying to reconcile the High Court decisions in Western Export and Electricity Generation Corporation v WoodsideIt is pertinent that the High Court did not consider Western Export when it handed down its decision in Electricity Generation Corporation v Woodside

Conclusion

If Mainteck seeks leave to appeal to the High Court, the High Court may have the opportunity to resolve the issue with a detailed consideration of the law on this question.  There will be an opportunity to resolve the tension between the current authorities.

However, given that construction of the term in dispute was not able to be resolved by reference to extrinsic evidence, it is arguable that the High Court may again decline to address the issue if special leave to appeal is sought.  In the meantime, unless other State Courts adopt a similar position to the NSW Court of Appeal and seek to reconcile Western Export and Electricity Generation Corporation v Woodside in the same way the NSW Court of Appeal has done, we may end up with a series of decisions based on different foundations. 

If the NSW Court of Appeal decision in Mainteck is upheld and followed, it would seem the pendulum has swung back to a more expansive position where extrinsic evidence can be considered when construing a contract even where there is no ambiguity.  Perhaps the need for express consideration of this issue by the High Court is needed more than ever before.