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
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
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
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
Murphy JA, then went on to state:
"...a contextual approach to construction does
not always import the reception of evidence of surrounding
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.
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