WA Court of Appeal caution on the admissibility of evidence of surrounding circumstances

By 06/10/2014Contract
surrounding circumstances

The WA Court of Appeal has, without deciding the question, cast doubt on whether the High Court in Woodside Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7 (Woodside) finally resolved the question of the admissibility of evidence of surrounding circumstances in the construction of contracts.

The case is Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 (3 September 2014) (Technomin), in which the Court of Appeal found that the relevant contractual language was susceptible of more than one meaning, and so received evidence of certain surrounding circumstances.

In Technomin McClure JA (with whom Buss JA agreed) observed that:

1.  Although the majority in Woodside took into account surrounding circumstances known to both parties in the construction of the gas supply agreement, the majority did not give express consideration to whether, and did not find that, the language of that agreement was ambiguous or susceptible of more than one meaning (at [41]).

2.  “The aridity of this debate [regarding the admissibility of surrounding circumstances] at the intermediate appellate court level is manifest. Until the High Court expressly states its position on the subject, I propose to continue to apply the ‘true rule’ as explained in Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216 at [9], [74]-[81]). In that case this court concluded that the true rule permits regard to be had to some surrounding circumstances for construction purposes without having to satisfy the gateway requirement [81]. See also Chemeq Ltd v Shepherd Investments International Ltd [2007] WASCA 117 [154]” (at [45]). (emphasis added)

3.  “… the gateway requirement [that evidence of surrounding circumstances is not admissible unless the language of the contract is ambiguous or susceptible of more than one meaning] can have no application to background facts forming part of the factual matrix that enlivens the issue of contractual construction for determination” (at [48]).

4.  “For the purpose of the gateway requirement, ‘ambiguity’ means any situation in which the scope or applicability of a contract is, for whatever reason, doubtful: Bowtell v Goldsbrough, Mort & Co Ltd (1905) 3 CLR 444, 456 ‑ 457. It is not confined to lexical, grammatical or syntactical ambiguity: Hancock Prospecting [77]” (at [73]).

5.  “The fact that adversaries can formulate and advance materially different constructions of the language of a contract does not itself satisfy the gateway requirement. Having regard to the language of the contract as a whole and what can be gleaned from that source as to the contractual purpose, competing constructions must be reasonably arguable” (at [74]).

In Technomin Murphy JA gave extensive (obiter) consideration to these questions at [171] – [217] and concluded that:

1.  “… a contextual approach to construction does not always import the reception of evidence of surrounding circumstances” (at [214]).

2.  “First, the passage in Codelfa (352) does not appear to have been subject of express consideration in the High Court since Royal Botanic [39]. Secondly, it might be thought that the authorities up to the time of Woodside are not necessarily inconsistent with a requirement of ambiguity. Thirdly, 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. Fourthly, in Woodside, French CJ, Hayne, Crennan and Kiefel JJ ‘reaffirmed’ the High Court’s earlier decisions. Woodside does not appear to provide a departure from them. Fifthly, the question of whether evidence of surrounding circumstances is inadmissible in the absence of ambiguity does not appear to have been canvassed in argument in Woodside, nor isolated for determination” (at [215]).

3.  “[Accordingly] 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 [Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45]”(at [216]).

Comment

Unfortunately none of the appeal justices in Technomin considered Mainteck Services Pty Ltd v Stein Heurtley SA [2014] NSWCA 184 (6 June 2014), a NSW Court of Appeal decision handed down after the hearing of the appeal in Technomin.

In Mainteck (the subject of an earlier article: NSW Court of Appeal elucidates High Court’s contextual approach to contractual interpretation) Leeming JA (Ward & Emmett JJA agreeing) said:

“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 [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 or objects.  Although the High Court in Woodside did not expressly identify a divergence of approach, Jireh was notoriously controversial in precisely this respect.  In Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66; 298 ALR 666 at [107] McLure P referred to the ‘heated controversy’ created by Jireh; see further Kevin Lindgren’s analysis in ‘The ambiguity of “ambiguity” in the construction of contracts’ (2014) 38 Aust Bar Rev 153 at 161 ‑ 167.  It cannot be that the mandatory words ‘will require consideration’ used by four Justices of the High Court were chosen lightly, or should be ‘understood as being some incautious or inaccurate use of language’: cf Fejo v Northern Territory [1998] HCA 58; 195 CLR 96 at [45] …

Accordingly, I agree with Mainteck’s submission that Woodside endorses and requires a contextual approach to the construction of commercial contracts.” at [71], [86].

Whilst the parties in Technomin alerted the WA Court of Appeal to the Mainteck decision before judgment, neither party made any submissions in relation to it.

Further, on 2 September 2014, the day prior to delivery of the Technomin judgment, Allsop CJ, Siopis and Flick JJ said in Stratton Finance Pty Limited v Webb [2014] FCAFC 110 at [40]:

Recently, in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184, the New South Wales Court of Appeal (Leeming JA, with whom Ward JA and Emmett JA agreed) expressed the view (at [71]) that [35] of Woodside was inconsistent with Jireh. We agree with that conclusion, and with the reasons in elaboration at [72]-[86], and in particular with the comments concerning Codelfa at [78]-[80].”

Then on 11 September 2014 in Newey v Westpac Banking Corporation [2014] NSWCA 319 Gleeson JA (Basten and Meagher JJA agreeing) observed as follows:

“[89] As subsequently observed by Leeming JA (Ward and Emmett JJA agreeing) in Mainteck Services Pty Ltd v Stein Heurtey SA (Mainteck) [2014] NSWCA 184 at [71], Woodside 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 (Jireh) [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]. See also Stratton Finance Pty Ltd v Webb (Stratton Finance)[2014] FCAFC 110 at [41] where the Full Court of the Federal Court of Australia (Allsop CJ, Siopis and Flick JJ) agreed with the conclusion in Mainteck and with the reasons given there in elaboration at [72]-[86].

[90] Nonetheless it is also important to bear in mind the extent to which context and legitimate surrounding circumstances can be used as an aid in the construction of a written agreement. In McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) [2011] NSWCA 315; 81 NSWLR 690 at [17]-[18] Bathurst CJ (Macfarlan JA and Sackville AJA agreeing) said:

“[17] … Whilst it is correct in my opinion that context and the surrounding circumstances known to both parties can be taken into account (see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 350, 352) even in cases where there is an absence of apparent ambiguity (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [8]; Park v Brothers [2005] HCA 73; (2005) 80 ALJR 317 at [39]; Franklins Pty Ltd v Metcash Trading Ltd at [14], [63], [305]) that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.

 [18] This does not mean that there are not exceptional cases where, to use the words of Lord Hoffmann, something has clearly gone wrong with the language so as to interpret it in accordance with the ordinary rules of syntax makes no commercial sense: see Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 at [15]-[16]; Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 at [55], [60]. In such a case, in my opinion, a court is entitled to depart from the ordinary meaning to give effect to what objectively speaking the parties intended …”

[91] The reference in McGrath v Sturesteps at [17] to the well-known observation of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd at 109, is a strong reminder that there is no licence for “judicial rewriting” of an agreement: Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [27] (Basten JA; Giles and Tobias JJA agreeing); Franklins at [23] (Allsop P). The ability of courts to give commercial agreements a commercial and business-like interpretation is constrained by the language used by the parties. If, after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the Court must give effect to that language unless to do so would give the contract an absurd operation: Jireh International Pty Ltd v Western Exports Services Inc at [55] (Macfarlan JA; Young JA and Tobias AJA agreeing).”

More recently in Fitzgerald & Anor v CBL Insurance Ltd [2014] VSC 493 (2 October 2014) Sloss J observed that:

Following the High Court’s decision in Woodside Energy, intermediate appellate courts have generally regarded the High Court as having endorsed and required that a contextual approach to the construction of commercial contracts be adopted.” (at [84])

The footnote to the above paragraph reads as follows:

See Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113, 130-134 [69]-[86] (Leeming JA with whom Ward and Emmett JJA agreed). See also Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164, where the Court of Appeal adopted a cautious approach to the reception of evidence of surrounding circumstances.” (emphasis added)

It appears that uncertainty and “arid” debate concerning the admissibility of surrounding circumstances will continue until the High Court expressly addresses the question.

In the meantime at least in Western Australia, the door has not been opened to the reception of evidence of surrounding circumstances in all cases irrespective of ambiguity or susceptibility of more than one meaning.  In Western Australia such evidence will only be admissible in the absence of that gateway requirement in limited circumstances, as explained in Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216 at [9], [74]-[81]).  See also Technomin at [46]-[48] and [155]-[156], [176]-[179] et seq.

For a recent helpful discussion on contractual construction see Visy Paper Pty Ltd v Glass Granulates Pty Ltd [2014] NSWSC 1387 at [21] to [31] (10 October 2014) per Sackar J, where no mention is made of Technomin.

For a recent pronouncement (October 2015) from the High Court on surrounding circumstances please see my article: High Court on contractual construction and surrounding circumstances