Vic Court of Appeal on the construction of contracts which contain deleted words

By 30/03/2016Contract
deleted words

In what circumstances (if any) is a Court entitled to have regard to words the parties have rejected in the course of negotiating a contract? This question is examined in Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2016] VSCA 23 (4 March 2016).

Background

In a printed standard form “farm lease” for 99 years, amended by the parties, clause 4 provided that the lessee was required to:

pay all rates taxes assessments and outgoings whatsoever excepting land tax which during the said term shall be payable by the Landlord or tenant in respect of the said premises (but a proportionate part to be adjusted between Landlord and Tenant if the case so requires).”

Read without deletions the clause required the lessee to:

pay all rates taxes assessments and outgoings whatsoever which during the said term shall be payable by the tenant in respect of the said premises.”

It was common ground that clause 4 is ambiguous because, disregarding the deleted words, it can be read as requiring the lessee to pay all rates (etc), but it can also be read as confining that obligation to only those rates (etc) which are payable by the tenant (lessee).

It was also common ground that given its ambiguity, in determining the meaning of clause 4 regard could be had to the surrounding circumstances known to the original contracting parties at the time the lease was executed, as well as to the deletions from the pro forma printed document.

Dispute arose over the proper construction of clause 4, having regard to the surrounding circumstances and the deleted words.

As such the decision turns on the proper construction of clause 4, and not on whether, and in what circumstances the deletion of parts of a standard form contract may be referred to in the construction of a contract.

However the judgment contains a helpful examination of the existing authorities on the construction of contracts (standard form and otherwise) which contain deleted words.

Legal observations and authorities

1.     “The traditional approach of the common law was that deleted words, whether or not visible in the final contract, were not to be considered in interpreting the contract. The agreement itself is to be sharply distinguished from the negotiations which preceded it, and visible deletions from the contractual text amount to no more than inadmissible evidence of pre-contractual negotiations.” (at [93])

2.     “The preparedness of the courts to have regard, at least to some extent, to parts of a contract which have been struck out but which remain legible, for the purpose of construing the operative language of the instrument, is explicable as a departure from the general rule prohibiting recourse to pre-contractual negotiations. Words struck from the actual instrument may justifiably be seen as still forming part of that instrument, albeit not intended to have operative effect. Importantly, any third party dealing with the contracting parties, such as an assignee or security holder, is in as good a position as the court in having regard to the struck out words. In these ways, little violence, if any, is done to the objective theory [of contractual interpretation] by taking those words into account in interpreting the contract.” (at [94])

3.    “It is clear that the existing authorities do not allow immediate resort to be had, when construing a contract, to words struck out in a contract” (at [95]).

4.     Further there is uncertainty in the authorities as to whether draft clauses or words which have been rejected in the course of negotiations can properly be taken into account in the event of ambiguity in the final contract, as opposed to clauses or words which have appeared on, but which have been struck out of, a standard form contract. The distinction has been justified by saying that evidence of negotiations is always irrelevant to the process of construction, but that a deliberate and mutually agreed deletion of a standard form term may throw light on the parties’ intentions in cases of ambiguity (at [93] and [95]). In Louis Dreyfus & Cie v Parnaso Cia Naviera SA [1959] 1 QB 498, 513 Diplock J noted the “pleasant diversity of authority” on the law as to deleted words.

5.     The current state of appellate authority in Australia is that recourse may be had to words or clauses deleted from a standard or common form agreement for the purposes of construing ambiguous language in the agreement (at [96], citing Postle v Sengstock [1994] 2 Qd R 290, 298; Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187 [137]; 260 Oxford Street Pty Ltd v Premetis [2006] NSWCA 96 (‘260 Oxford’) [99]–[100], [127], [132]–[134]; A Goninan & Co Ltd v Direct Engineering Services Pty Ltd [No 2] [2008] WASCA 112 [37]–[40]).

6.     Part of the justification for doing so lies in the potential exception to the rule against admissibility of pre-contractual negotiations identified by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352-3:

There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal.  After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen.  But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting?  It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.” (at [96])

7.     “[I]t is plain that the authorities regard struck out language as secondary, even if not strictly extrinsic, material. As such, it is used as an aid to construction without forming part of the language being construed. So, the possible exception permitting evidence of actual intention, to which Mason J alluded in the passage above, operates only to rebut reliance on evidence of surrounding circumstances where admissible as an aid to construction.” (at [97]).

8.     “[I]t is important to keep in mind that it is not the deleted words, but those forming the contract agreed between the parties, which are being construed. The deleted words are nothing more than an aid in that process of construction, to the extent (if any) to which they might assist. Resort to deleted words does not transform the process of construction so as to require the deletions and the contractual words to be understood together as one harmonious whole. If the words deleted do not assist in resolving the ambiguity in question, then they must, like other extrinsic aids to construction, be put to one side.” (at [92])

9.     “The striking out of words which would clearly produce a particular result is a strong basis for construing a contract so as not to produce that result” (at [125]).

Result

In a 2-1 decision allowing the appeal, the Court held that the striking out of the words “Landlord or” from clause 4 was a strong indication that the parties considered, and rejected, the possibility that the lessee should pay rates (etc) payable by the landlord. The deleted words could be referred to in order to negative an alternative possible construction, in accordance with the exception to the rule against the use of pre-contractual negotiations referred to by Mason J in Codelfa (at [5], [125]).

For a more recent case involving the deletion of words in a printed standard form contract see this post: High Court On the Risk of Amending A Legal Template.