Admissibility of evidence of surrounding circumstances in interpreting contracts

The High Court has given unusually long reasons in rejecting an application for special leave to appeal in a case in which the Court was invited to reconsider its previous authority on the admissibility of evidence of surrounding circumstances as an aid in the interpretation of a contract.

The orthodox position, stated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352, is that "evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed."

That orthodox position was upheld by the NSW Court of Appeal in Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137, from which decision the application for special leave was brought.  In rejecting the application Gummow J (speaking also for Heydon and Bell JJ) said:

Justice Macfarlan gave the leading judgment in the Court of Appeal in this matter. In the passage in his reasons in which he found error in principle in the reasons of the primary judge, his Honour said:

A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted.

His Honour added that the trial judge appeared:

to have acted on the basis that the provision would make more sense from a commercial point of view –

if it were construed as the trial judge did construe that provision. These statements by Justice Macfarlan since have been applied by the New South Wales Court of Appeal in Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297 at paragraph 18.

The primary judge had referred to what he described as “the summary of principles” in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at paragraphs 19 and following. The applicant in this Court refers to that decision and to MBF Investments Pty Ltd v Nolan [2011] VSCA 114 at paragraphs 195 to 204 as authority rejecting the 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 object of the transaction. The applicant also refers to statements in England said to be to the same effect, including Westminster City Council v The National Asylum Support Services [2002] UKHL 38; (2002) 1 WLR 2956 at 2958.

Acceptance of the applicant’s submission clearly would require reconsideration by this Court of what was said in Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 352 by Justice Mason, with the concurrence of Justices Stephen and Wilson. Until this Court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.

The position in Codelfa as a binding authority was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 at pages 62 to 63, paragraph 39 and it should not have been necessary to reiterate the point here.

We do not read anything said in this Court in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 462, paragraph 22; Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165, 179 paragraph 40; Wilkie v Gordian Runoff Limited [2005] HCA 17; (2005) 221 CLR 522 at 528 to 529, paragraph 15 and IATA v Ansett Australia Holdings Limited [2008] HCA 3; (2008) 234 CLR 151 at 160, paragraph 8 and at 174, paragraph 53 as operating inconsistently with what was said by Justice Mason in the passage in Codelfa to which we have referred.