The Codelfa controversy continues – admissibility of evidence of surrounding circumstances in the construction of contracts

Since our most recent update on this issue, the question of whether evidence of surrounding circumstances is admissible for the purpose of interpreting the terms of a written contract, without the need to first satisfy the ‘gateway’ requirement of identifying ambiguity – described by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 as the ‘true rule’ – has received further appellate court attention.

The New South Wales Court of Appeal has again come down strongly in favour of there being no such gateway requirement,1 while Courts of Appeal in other jurisdictions have indicated (without deciding) that the ‘true rule’ as expressed in Codelfa continues to apply, such that ambiguity remains a prerequisite to the admissibility of evidence of surrounding circumstances, subject to limited exceptions.2

The approach of the New South Wales Court of Appeal

In a decision handed down on 11 September 2014 (Newey v Westpac Banking Corporation [2014] NSWCA 319), Gleeson JA (Meagher and Basten JJA agreeing) followed the decision of a differently constituted NSW Court of Appeal in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 rejecting the existence of a gateway requirement of ambiguity, deciding that

[Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7] endorses and requires a contextual approach to the construction of commercial contracts and "ambiguity" is to be evaluated having regard to surrounding circumstances and commercial purposes or objects. To the extent that what was said in the reasons of three members of the High Court when refusing special leave in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; 86 ALJR 1 supports the contrary proposition, Jireh should be regarded as inconsistent with what was said in Woodside at [35], for the reasons explained in Mainteck at [72]-[86].

While the Court of Appeal disagreed with the appellants’ contention that ambiguity was a precondition to considering surrounding circumstances, it nonetheless upheld the appeal on the basis that the trial judge had impermissibly relied on those surrounding circumstances in ‘rewriting’ the relevant deeds to give them a meaning other than their ordinary meaning (reading ‘Westpac’ as including its former related entity, St George Bank) when the relevant provision in each of those deeds operated ‘perfectly well’ if given its ordinary meaning.

In several other decisions, the NSW Court of Appeal has again suggested that ambiguity is not required to be established prior to consideration of surrounding circumstances. In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2014] NSWCA 323, despite the appeal ‘not [involving] any disputed reference by any of the parties to surrounding circumstances’, the Court nonetheless referred with apparent approval to the decision in Mainteck that ‘to determine whether a contractual expression is ambiguous, regard must be had to context (otherwise referred to as "surrounding circumstances")’, explaining that ‘[t]he essential point made by Codelfa is … that, once it has been determined that an expression is unambiguous, evidence of surrounding circumstances cannot be used to contradict its plain meaning’.

Recent decisions in the Western Australian and Victorian Courts of Appeal

The issue was also considered by the WA Court of Appeal earlier this month in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164. In that case, McLure P (with whom Newnes JA agreed) proceeded on the basis that the ‘true rule’ in Codelfa should continue to be followed until further direction is received from the High Court. Murphy JA, who also agreed with McLure P, considered in detail the authorities regarding admissibility of evidence of surrounding circumstances, ultimately stating that:

it could be open to conclude that it is not correct to say that in all cases where there is a contest as to the proper construction of a written contract, any evidence from the parties of surrounding circumstances is always admissible on the question of construction, irrespective of ambiguity in the absence of such evidence. Such a conclusion would not require any precedential effect to be assigned to the observations of the court in the leave application in Jireh.

However, as there was ambiguity in the terms of the disputed contract in that case, Murphy JA’s comments are, at best, persuasive dicta.

The Victorian Court of Appeal, in Mainieri & Anor v Cirillo [2014] VSCA 227, also appears to have been of the view that ambiguity remains a gateway requirement, citing Codelfa and Jireh in discussing the basis upon which the trial judge may have been entitled to consider surrounding circumstances. Again, however, this was not decisive in the Court’s final reasoning, and no other authorities on the point (including the recent decisions of the NSW Court of Appeal) were referred to.

Conclusion

The prevalence of recent cases at intermediate appellate court level in which the ‘true rule’ in Codelfa has been directly in issue or been otherwise discussed, and the clear divergence in views as to whether ambiguity remains a gateway requirement, indicates that a binding decision of the High Court is needed to resolve the controversy once and for all.

A number of judges sitting in the New South Wales Court of Appeal have seized on the High Court’s decision in Electricity Generation Corporation against there being any gateway requirement of ambiguity for the consideration of evidence of surrounding circumstances. However, as observed by Murphy JA in Technomin, ‘a case as significant as Codelfa in the operation of the commercial law in Australia for over 30 years is unlikely to have been impliedly overruled’.

Whatever approach is taken to the admissibility of extrinsic evidence, it nonetheless bears reminding that Courts are not permitted to disregard the clear meaning of the language of a contract unless its application would give rise to an absurd outcome (as distinct from an outcome that is, for example, commercially unreasonable or unfair). Even if evidence of surrounding circumstances is admissible on the question of construction, and that evidence supports a contention that the operation of the disputed contractual provision according to its clear meaning was not subjectively intended by the parties, or would otherwise result in inconvenience or injustice, this does not permit a Court to rewrite the contract to avoid that plain meaning. Other legal and equitable doctrines, such as rectification, still remain more appropriate vehicles to displace unambiguous contractual language.

Accordingly, to the extent that a litigant seeks to rely on the approach adopted by the NSW Court of Appeal in order to put evidence of surrounding circumstances before a court without having to first establish ambiguity, the absence of ambiguity in the language of the written instrument may in any event ultimately prove fatal to the litigant’s case.

¹Newey v Westpac Banking Corporation [2014] NSWCA 319 (11 September 2014); see also observations by the Court made in Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326 (17 September 2014), Barangaroo Delivery Authority v Lend Lease (Millers Point) Pty Ltd [2014] NSWCA 279 (21 August 2014) and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2014] NSWCA 323 (16 September 2014).

²Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 (3 September 2014); Mainieri & Anor v Cirillo [2014] VSCA 227 (17 September 2014).