Somewhat surprisingly, even today there is uncertainty around the application of some of the fundamental principles of contractual construction. One area that is the subject of recent judicial consideration is the admissibility of evidence of surrounding circumstances to assist in the construction of a contract.

Background

Until 2011, appellate courts held that evidence of surrounding circumstances was always admissible to assist in the construction of a contract, whether or not the contractual language was ambiguous or susceptible of more than one meaning.

This view changed in the High Court special leave application in Western Export Services Inc v Jireh International Pty Ltd (Western Export Services), where three members of the High Court stated that this view was inconsistent with the "true rule" as stated by Mason J in Codelfa:

The true rule 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.

While this statement encompassing the law on the area was controversial and the binding status of a special leave application was questioned, most, if not all courts took the view that the guidance in Western Export Services should be followed until further direction from the High Court. Accordingly, it was hoped that certainty would be restored in this area.

However, the recent High Court decision in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (Woodside) has created further uncertainty.

In Woodside, the majority of the High Court took into account surrounding circumstances known to both parties in the construction of the gas supply agreement without any express consideration of whether the language of the agreement was ambiguous. Unfortunately, Western Export Services was not directly addressed by the High Court in coming to its decision.

This has led to the view that Woodside has restored the pre-Western Export Services position adopted by the appellate courts; that is, there is no longer a need for ambiguity before evidence of surrounding circumstances could be used to assist in the construction of a contract.

However, the countervailing view is that the High Court would not impliedly overrule the authority of Western Export Services.

With the lack of guidance from the High Court's decision and little appellate court direction, contract lawyers and courts are struggling to deal with the uncertainty.

The current approaches

At Court of Appeal level, several decisions have grappled with this uncertainty.

For example, the Western Australian Court of Appeal, in Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd, held that the true rule permits regard to be had to some surrounding circumstances for construction purposes without having to satisfy the gateway requirement.

This reasoning was applied in the recent Western Australian Court of Appeal case of Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [No 3] by McLure P (Newnes JA agreeing).

Interestingly, the third member of the Court of Appeal, Murphy JA, did not follow Hancock Prospecting and made reference to the New South Wales Court of Appeal case of Mainteck Services Pty Ltd v Stein Heurtey SA where it was stated:

"...that Woodside endorses and requires a contextual approach to the construction of commercial contracts."

Murphy JA, then went on to state:

"...a contextual approach to construction does not always import the reception of evidence of surrounding circumstances",

before stating that it was unnecessary to decide the matter as the case involved construing an ambiguous clause of the deed.

Where are we now?

Unfortunately, until the High Court expressly states its position on the matter, it will continue to be unclear whether evidence of surrounding circumstances will always be admissible to assist in the construction of a contract, whether or not the contractual language was ambiguous or susceptible of more than one meaning. However, until the High Court decides the matter, there appears to be growing appellate court authority (at least in WA and NSW) that evidence of surrounding circumstances is required to determine the "context" of the contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.