Is it time to revisit the ‘true rule’ in Codelfa?

In previous updates we have observed the ongoing judicial controversy regarding whether evidence of surrounding circumstances is admissible on a question of construction of a contractual provision that is on its face ‘unambiguous or susceptible of only one meaning’. A recent High Court decision adds further intrigue (although without resolving the controversy) and indicates that it is only a matter of time before the issue will be reconsidered by the High Court, subject to an appropriate case being presented.

Recap: the controversy

The traditional approach, following Mason J’s exposition in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, which his Honour described as the ‘true rule’, prevents extrinsic evidence being admitted to contradict what would otherwise be the plain meaning of a contractual provision, and effectively imposes a ‘gateway requirement’ of establishing ambiguity before such extrinsic evidence may be admitted in aid of the construction of the contract.

However, the application of the ‘true rule’ has given rise to significant uncertainty, and some intermediate appellate court decisions – notably in the New South Wales Court of Appeal – have cast doubt on whether a strict exclusionary approach is correct, given the modern, contextual approach to the construction of contracts, and the perceived need to evaluate the issue of ambiguity in the context of the surrounding circumstances and commercial purposes or objects of the contract.

In Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604, three judges of the High Court, in determining a special leave application, sought to temporarily quell the controversy on the basis that the true rule requires ambiguity to be identified prior to having regard to surrounding circumstances and, until the High Court reconsiders what was said in Codelfa by Mason J, primary judges and intermediate appellate courts are ‘bound to follow that precedent’.

While some judges have proceeded to follow Jireh and Codelfa in refusing to admit extrinsic evidence on a question of construction where there is a plain meaning to the provision to be construed, others have pointed to more recent statements by the High Court in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 in support of there being no gateway requirement of ambiguity. One such decision in which doubt was expressed regarding the existence of an ambiguity gateway requirement was the New South Wales Court of Appeal decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2014] NSWCA 323.

(See further our previous case update: The Codelfa controversy continues)

High Court’s ruling in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd

The High Court recently handed down its decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, and in doing so made some interesting observations regarding the ‘true rule’ and the ambiguity gateway requirement. While the decision did not ultimately turn on this point (the Court having made it clear that, as the parties agreed the relevant clause was ambiguous, it was unnecessary to decide the point in this case and it was not the subject of submissions by the parties) all seven judges commented on the issue to some extent.

Chief Justice French, Nettle and Gordon JJ, in a joint judgment, reiterated the ‘true rule’, stating:

if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning

Their Honours noted further that:

sometimes, recourse to events circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating” … [or] in determining the proper construction where there is a constructional choice.

Justices Kiefel and Keane, in their separate joint reasons, observed in relation to the ambiguity requirement in Codelfa:

The "ambiguity" which Mason J said may need to be resolved arises when the words are "susceptible of more than one meaning." His Honour did not say how such an ambiguity might be identified. His Honour's reasons in Codelfa are directed to how an ambiguity might be resolved.

This on one view accords with the position adopted in some of the intermediate appellate court decisions referred to in our previous case updates, to the effect that the ‘true rule’, properly understood, does not prevent extrinsic evidence being led for the purpose of determining whether ambiguity exists (including latent ambiguity).

Their Honours were also critical of lower court decisions which purported to apply Jireh as a binding authority (French CJ, Nettle and Gordon JJ agreeing):

It should, however, be observed that statements made in the course of reasons for refusing an application for special leave create no precedent and are binding on no one. An application for special leave is merely an application to commence proceedings in the Court. Until the grant of special leave there are no proceedings inter partes before the Court.

Justices Bell and Gageler, in separate joint reasons, noted that the issue of the scope of the ‘true rule’ is an ‘important question on which intermediate courts of appeal are currently divided’. Their Honours went on to state that, until the High Court determines the issue, other Australian courts should continue to apply Codelfa. However, they further noted that this point ‘says nothing about the scope of the holding in Codelfa’. Given that Bell J was one of the judges whose joint reasons in Jireh explicitly rejected the proposition that it is not essential to identify ambiguity prior to having regard to surrounding circumstances, this could on one view foreshadow a softening of the previous position that was so firmly (and briefly) stated in Jireh.

Conclusion

Much of the uncertainty concerning the true rule may be said to stem from  Mason J's use of the word ‘admissible’, which – as observed by Campbell JA in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 – is itself ambiguous. In one sense, if evidence of surrounding circumstances is ‘inadmissible’ it cannot be received or considered by a court. However, in another sense ‘inadmissible’ may simply refer to evidence that has been formally (or provisionally) admitted but is not permitted to be used by a court in a particular process of reasoning.

If extrinsic evidence is ‘admissible’ in the former sense, which would seem to accord with the modern, contextual approach to contractual construction, then the question arises as to whether that evidence can permissibly be used by a court to determine whether a provision is ambiguous notwithstanding that it has a plain meaning on its face. If so, any purported gateway requirement to establish ambiguity prior to admitting evidence of surrounding circumstances and commercial objects would be futile: if ambiguity cannot be established on the face of the provision or when regard is had to extrinsic material, it necessarily follows that no construction other than the plain meaning could possibly be available.

While the Mount Bruce decision invites renewed speculation as to how the current High Court judges might ultimately decide the issue, it is clear that the Court is waiting for an appropriate case – where ambiguity is only able to be established by recourse to evidence of surrounding circumstances – to clarify the ‘true rule’ and (one hopes) finally determine this important issue in Australian commercial and contractual law.