High Court on contractual construction and surrounding circumstances

By 15/10/2015Contract
surrounding circumstances

The High Court has made some important statements of legal principle and observations, which add to the uncertainty regarding when recourse may be had to surrounding circumstances in the interpretation of a contract.

The case is Mount Bruce Mining Limited v Wright Prospecting Pty Limited; Wright Prospecting Pty Limited v Mount Bruce Mining Pty Limited [2015] HCA 37 (14 October 2015).

Background and result

Under an agreement made in 1970 Mount Bruce Mining (MBM) acquired from Wright Prospecting and Hancock Prospecting (together “Hanwright”), the entire rights in relation to the “MBM area” subject to the payment of a royalty to Hanwright on “ore won by MBM from the MBM area”.

The MBM area was a term defined by reference to “temporary reserves” (the tenements) granted under the WA Mining Act.

A dispute arose as to whether Hanwright’s entitlement to royalties was confined to iron ore won by the exercise of rights under the tenements held by Hanwright at the time of the 1970 agreement, or whether the royalty entitlement related to any iron ore won from the area of land covered by those tenements. If the latter, a second question arose as to whether the ore mined in the MBM area was mined by entities “deriving title through or under” MBM.

The High Court held, on the proper construction of the agreement, that Hanwright was entitled to royalties of $130 million.

However the case is important for the statements of legal principle and observations concerning contractual construction made by various members of the Court, as reproduced below.

Legal principles and observations (citations omitted)

French CJ, Nettle and Gordon JJ (at [46] – [51])

  • “The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
  • In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
  • Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, 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.
  • However, 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”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
  • Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
  • Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties … intended to produce a commercial result”. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.
  • These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 and Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640. We agree with the observations of Kiefel and Keane JJ [below] with respect to Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45.”

Kiefel and Keane JJ (at [109] – [113]

  • “In Electricity Generation Corporation v Woodside Energy Ltd, French CJ, Hayne, Crennan and Kiefel JJ explained that a commercial contract should be construed by reference to the surrounding circumstances known to the parties and the commercial purpose or objects to be secured by the contract in order to avoid a result that could not have been intended.
  • The “ambiguity” which Mason J said [in Codelfa] 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.
  • In reasons for the refusal of special leave to appeal given in Western Export Services Inc v Jireh International Pty Ltd, reference was made to a requirement that it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and the object of the transaction. There may be differences of views about whether this requirement arises from what was said in Codelfa. This is not the occasion to resolve that question.
  • 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.
  • The question whether an ambiguity in the meaning of terms in a commercial contract may be identified by reference to matters external to the contract does not arise in this case and the issue identified in Jireh has not been the subject of submissions before this Court.”

Bell and Gageler JJ (at [118] – [121]

  • “These appeals do not raise an important question on which intermediate courts of appeal are currently divided. That question is whether ambiguity must be shown before a court interpreting a written contract can have regard to background circumstances.
  • Until that question is squarely raised in and determined by this Court, the question remains for other Australian courts to determine on the basis that Codelfa Construction Pty Ltd v State Rail Authority of New South Wales remains binding authority. That point, which of itself says nothing about the scope of the holding in Codelfa, was made in the joint reasons for judgment in Royal Botanic Gardens and Domain Trust v South Sydney City Council. The point was reiterated, but taken no further, in the joint reasons for refusing special leave to appeal in Western Export Services Inc v Jireh International Pty Ltd. It should go without saying that reasons for refusing special leave to appeal in a civil proceeding are not themselves binding authority.
  • The question whether ambiguity must be shown before a court interpreting a written contract may have regard to background circumstances does not arise for determination in these appeals because the parties agree that the terms “MBM area” in cl 2.2 and “through or under” in cl 3.1 of the 1970 Agreement are ambiguous. The parties also agree, consistently with numerous recent statements of principle in this Court, that the proper interpretation of each of those terms is to be determined by reference to what reasonable businesspersons having all the background knowledge then reasonably available to the parties would have understood those terms to have meant as at 5 May 1970.“

Comment

The High Court has clarified that it is yet to resolve the following questions:

  1. whether ambiguity must be shown before a court interpreting a written contract can have regard to surrounding circumstances;
  2. whether ambiguity may be identified by reference to matters external to the contract.

Only 2 things appear certain from this decision:

  1. uncertainty will remain as to the above questions until they are squarely addressed by the High Court;
  2. the decision in the special leave application – Western Export Services Inc v Jireh International Pty Ltd – should not be regarded as binding or persuasive authority.

For earlier articles on surrounding circumstances please see:

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

NSW Court of Appeal elucidates High Court’s contextual approach to contractual interpretation