Australia: Interpreting commercial contracts using surrounding circumstances: Do you need ambiguity?

This week's TGIF considers the decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, which emphasises how important it is for parties entering into a contract to keep in mind not just the words of the contract, but also its background, context and the market in which the parties are operating.  

Background

A fundamental issue that arises when interpreting contracts is ascertaining what information a Court can consider in deciding what the contractual terms mean. 

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, Mason J set down the 'true rule' in this respect, finding that a Court can only consider the circumstances surrounding the inclusion of a term into a contract where the term that the Court is interpreting is ambiguous. If it is not, then the Court can only use the contract itself and the purpose for the contract to interpret the term in question. 

Since 1982, however, intermediate appellate courts have moved away from an ambiguity requirement, and considered the surrounding circumstances without ambiguity.

In 2011, the High Court emphasised that ambiguity was still required while refusing to hear an appeal. Since then, the approach of the Courts around the country has remained mixed, with some maintaining a requirement for ambiguity while others are considering surrounding circumstances by default. 

What happened?

It was hoped that the High Court would provide some clarity on the proper approach in MBM v Wright. 

That case dealt with the interpretation of an agreement entered into in 1970 between Mount Bruce Mining Pty Ltd (MBM), Wright Prospecting Pty Ltd (Wright), Hancock Prospecting Pty Limited (Hancock) and Hammersley Iron Pty Limited (1970 Agreement) under which MBM was to pay Hancock and Wright royalties in relation to "ore won by MBM from the MBM area". The Court was asked to consider whether areas known as "Eastern Range" and "Channar" formed part of the MBM area under the 1970 Agreement, and found that the proper interpretation of MBM Area included the Eastern Range and Channar areas. 

In coming to that decision, each of the judgments noted that the question of whether ambiguity was required did not arise directly in this matter. Chief Justice French, together with Justices Nettle and Gordon provided some guidance though, holding that:

• recourse to 'events, circumstances and things' external to the contract may be necessary to ascertain the commercial purpose or objectives of the contract, or where a choice between different interpretations is available; and
• those things could include the history of the contract, its background, context and the market in which the parties were operating, but not parties' statements and actions reflecting their actual intentions.

Comment

While on one view this issue is just another quirk of contract law, it has real significance to the banking and finance industry because it demonstrates that Courts are trending towards broadening the information that they will consider when interpreting the contracts we use every day.

What this means is that when negotiating those contracts (whether they are financing agreements or supply or settlement agreements during a formal appointment), you need to keep in mind that a Court might look past the contract itself and into events and circumstances surrounding the contact in order to decide what it means. 

You may also want to consider including a purpose clause, which could limit the need for a Court to go outside of the contract if you end up in a dispute about what it means.

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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