High Court reinforces approach to construction of commercial contracts - Contracts and Commercial Law

The High Court recently considered the construction of commercial agreements and took the opportunity to restate the legal principles governing the interpretation of commercial contracts, including in particular, when it is necessary to look beyond the terms of the contract to assist with interpretation.

In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37 a dispute arose between the parties in respect of the proper construction of an agreement concerning payment of royalties by the Mount Bruce Mining Pty Limited (MBM) in relation to iron ores mined in two temporary reserves.

In arriving at its decision the High Court clarified that there was no departure from the existing legal principles governing the interpretation of legal agreements, as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24 (Codelfa).

Key Principles governing construction of commercial contracts

The key principles governing the construction of commercial contracts, as restated by the High Court, are as follows:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable business person would have understood those terms to mean.
The process of construction of a contract is possible by reference to its terms alone. If an expression in a contract or susceptible to only one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning.
Recourse to events and circumstances external to the contract may be necessary in determining the proper construction where there is a constructional choice. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding of the genesis of the transaction, the background, the context and the market in which the parties are operating.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things which are known to the parties or which assist in identifying the purpose or object of the transaction (e.g. background and context). What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation based on the assumption that the parties intended to produce a commercial result. A commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".

Background on the case

Wright Prospecting Pty Limited, Hancock Prospecting (together Hanwright) and MBM entered into a series of agreements in the 1960s and 1970s in connection with mining iron ore in Western Australia, including an agreement (the 1970 Agreement) which provided, amongst other things, that:

MBM acquired from Hanwright the entire rights to the "MBM area", which was defined by reference to temporary reserves granted under the Mining Act 1904 (WA);
royalties were payable to Hanwright on ore won by MBM from the "MBM area";
the royalties were payable by "all persons or corporations deriving title through or under" MBM to the "MBM area".

A dispute arose between the parties in relation to the interpretation of the terms "MBM area" and "deriving title through or under" MBM.

Hanwright commenced proceedings in the NSW Supreme Court, claiming that royalties were payable by MBM in respect of iron ore won from two temporary reserves. The trial judge found in favour of Hanwright in the amount of $130 million. The NSW Court of Appeal partially allowed an appeal from MBM, finding that Hanwright was not entitled to payment of royalties in the second temporary reserve.

Both parties appealed the decision.

Decision

The two main issues considered by the High Court were:

whether the two reserves were within the "MBM area" and, in particular, whether the term "MBM area" as defined in the 1970 Agreement referred to an area of land to which rights of occupancy had been transferred to MBM or whether it referred to the rights themselves; and
whether the ore mined in the "MBM area" was mined by entities "deriving title through or under" MBM.

The High Court unanimously upheld the appeal by Hanwright and held that MBM was liable to pay royalties to Hanwright on the basis that Hanwright derived title "through or under" the 1970 Agreement in respect of the iron ore extracted in the temporary reserves. The High Court found that there was nothing in the text of the 1970 Agreement or the purpose or object of the transaction which would suggest that the parties had intended that Hanwright's entitlement to royalties would be conditional upon the iron ores being won from the exercise of rights which Hanwright held at the time of the 1970 Agreement.

Salient points of the Court's findings in relation to the ambiguous terms are as follows:

The meaning of "MBM Area"

The Court considered the text, context and purpose of the 1970 Agreement and, as a starting point, applied the ordinary and unambiguous meanings of the relevant words of the definition of "MBM area".
The construction of the "MBM area" by reference to identified temporary reserves was consistent with a (if not the) principal purpose or object of the 1970 Agreement and was supported by other clauses which treated the "MBM" area as a physical area.

The meaning of "deriving title through or under"

The text of the 1970 Agreement indicated that the phrase "through or under" was a broad concept. This construction was supported by the surrounding circumstances of the transaction, was consistent with the purpose or object of the transaction and accorded with commercial reality.
The Court acknowledged the flexible quality of the phrase "through or under" and considered that the nature and extent of the connection between things contemplated by a phrase of this kind depend on the context in which, and the purpose for which, the phrase is used.
The Court had regard to matters that were taken to be known by the parties and which formed part of the circumstances in which the 1970 Agreement was made, including in particular the likelihood of changes to particular rights of exploration and exploitation conferred by mining tenements granted by the State.

Must ambiguity be established before considering context?

This case did not raise an important question on which intermediate courts of appeal are currently divided – whether ambiguity in a contract must be demonstrated before a Court can have regard to background circumstances to assist in interpreting the contract. As there was agreement between the parties that the terms "MBM area" and "through or under" were ambiguous, the High Court did not resolve this question. It did however indicate that, although this case was not the right occasion to do so, there was a need for this matter to be resolved by the Courts.

Until that question is expressly raised and determined by the High Court, the Courts must construe commercial contracts on the basis that Codelfa remains binding authority and that it is not necessary to establish ambiguity before having regard to matters external to an agreement.

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