Australia: Careless legal drafting can land you in the High Court

Last Updated: 14 December 2016
Article by Bill Burrough
Services: Property & Projects
Industry Focus: Property

What you need to know

  • When parties fall out, the drafting of contractual documents can come under the microscope and be open to different approaches in interpretation when referred to a court.
  • This is demonstrated in a case involving a long-term farm lease which was decided one way at first instance and the other way on appeal, and which is now set to be heard by the High Court of Australia tomorrow, 14 December 2016.
  • The case is a reminder that all contractual documents should be clearly, fully and precisely drafted to reflect the commercial terms agreed by the parties.

As lawyers, we are forever expounding the importance of careful legal drafting. We are after all in the risk management business. However, this can sometimes be seen as unnecessary or at worst, pedantic and obstructive. There may be times when this is a valid criticism. The goal should always be not to hold up a commercial transaction but to ensure that it is recorded accurately and in plain language.

Of course, there are times when the blow torch is to the belly. It is midnight and the deal has to be done. Some compromise wording is reached after tough negotiation which gets the deal across the line. Each party may feel that it has some wiggle room while regarding the other party as tightly bound. Neither party entertains the thought that at some stage in the future, a bevy of highly paid lawyers and judges will spend hours, perhaps days, scrutinising the meaning of words that were agreed in a matter of minutes.

In other situations, it may be thought that a transaction is not worth spending much time on. This may be especially true where the transaction is one of a large volume of similar deals. The face value of each such transaction may mean that it is only profitable if administrative costs are kept to a bare minimum. In most cases, there will be no problem but now and then an issue will arise and the agreement will need to be examined in detail.

Under the microscope

Once a written contract does come under the microscope, issues are raised which the parties may never even have considered. This is the inherent danger when a third party is asked to determine what the original parties had in mind when they entered into the agreement. Sometimes that third party may mean the judges of various courts and appellate courts listening to the highly reasoned arguments of skilled senior and junior counsel.

The position is further complicated because the judges themselves are not fully agreed on the approach to be taken in such cases.

Generally, the test is what the terms of the contract would mean to a reasonable person without reference to what may have been the actual intentions of the parties. However, the words may have been so poorly drafted that there is no clear meaning that a reasonable person can understand. In such situations, the question arises as to whether the court can look at contextual matters outside the contract itself.

The 'true rule'

Sir Anthony Mason's much-quoted statement in Codelfa Construction Pty Ltd v State Rail Authority back in 1982 is often referred to as the 'true rule': "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".1

However, it is argued (and lawyers love to argue) that no language has a 'plain meaning' and words can only be interpreted in the context in which they are used.

There have been a number of decisions in intermediate appellate courts in which it has been held that ambiguity does not need to be identified before regard can be had to surrounding circumstances in construing a contract.

A liberal approach

An even more liberal approach has been taken in England where Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society, in rejecting any notion of an ambiguity threshold, stated that, subject to certain exceptions, the background knowledge which can be considered by the court "includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man".2

Given the differences in approach, various judges of the High Court of Australia have taken the opportunity at different times3 to point out that until the High Court has decided on whether there are differences between the arguably more liberal British approach and Codelfa, and if so which should be preferred, Codelfa should be followed in Australia. However, some High Court judges have acknowledged that while Codelfa refers to ambiguity, it does not actually say how an ambiguity might be identified.

Certain legal authors have suggested that there should be no exclusionary rules at all in relation to the admissibility of extrinsic evidence in construing the meaning of a contact. I particularly like Bond J's reaction (in a paper delivered for the Current Legal Issues Seminar Series 2016): "I recoil with horror from the breadth of these suggested reforms of the law". Bond J continues by expressing his concern that "the pursuit of theoretical purity can sometimes occur with insufficient attention to feasibility and practical consequences". From this viewpoint, Bond J argues that the question of admissibility of extrinsic evidence in aid of construction must be managed in "such a way as will permit of its occurrence only where it is of real utility and must hold the evidence out if it is not".4

The Gee Dee case

All of this leads us to the Victorian Court of Appeal case of Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd5 which concerns a long-term farm lease and the payment of outgoings. The outgoings clause principally in issue is as follows:

AND also will pay all rates taxes assessments and outgoings whatsoever excepting land tax which during the said term shall be payable by the Landlord or tenant in respect of the said premises (but a proportionate part to be adjusted between Landlord and Tenant if the case so requires).

The question first considered by the trial judge and then by the Court of Appeal is whether or not the tenant is liable under the lease to pay the cost of rates, taxes, assessments and outgoings levied on the landlord. The clause has been held to be ambiguous because it can be read in two ways. On one reading, it imposes on the tenant an obligation to pay all rates, taxes, assessments and outgoings. On another, the obligation to pay is confined only to those amounts payable by the tenant.

In resolving the issue, much has turned on the significance to be attached to the wording which had been struck out by the parties but which remained legible in the executed document. In the Victorian Court of Appeal, McLeish and Santamaria JJA held that the striking out of the words "Landlord or" was an indication that, by mutual concurrence, the parties rejected the possibility that the tenant should pay the rates, taxes, assessments and outgoings levied on the landlord. Although the deleted words did not (by virtue of their deletion) form part of the contract, they were admitted as extrinsic evidence.

This was in fact a situation that had been identified by Mason J in Codelfa where pre-contractual negotiations of the parties could be considered if they provided evidence of the parties' "mutual concurrence" which negatived "an inference sought to be drawn from surrounding circumstances". In the Gee Dee case, Santamaria JA held that "the deleted words may be referred to in order to negative an alternative possible construction".6

The trial judge's view

This is important because the alternative possible construction found by the trial judge was that the lease document was intended to be, in effect, a conveyance of freehold title which had been prevented at the time by planning restrictions on subdivision. The original landlord had received, as the payment of rent, the sum of $70,000 at the commencement of the lease, being more or less the freehold value. As such, the trial judge took the view that the clause should not be construed as imposing an obligation on the landlord to pay the rates, taxes, assessments and outgoings for nearly a century as this would be wholly at odds with the result that would have been produced had the parties been able to give effect to their intention of transacting a freehold conveyance by way of sale.

In the Court of Appeal, Kyrou JA, in a dissenting judgement, concluded that the trial judge did not err in his construction of the clause and that the appeal should be dismissed. As noted above, McLeish and Santamaria JJA thought otherwise and the appeal was allowed.

Headed for the High Court

There is now to be a further appeal. Special leave to appeal to the High Court in Canberra has been granted and a hearing has been set down for 14 December 2016. In applying to the High Court for special leave to appeal, the landlord's counsel argued that Justice McLeish had not given sufficient weight to the subjective intent of the parties as evidenced by a clause in the lease which acknowledged that the parties had intended a sale and purchase of the freehold. Justice McLeish noted that the acknowledgement set out what the parties had intended and saw it merely as an explanation for the length of the term and the advance payment of rent.

The landlord's counsel argued that the relevant wording was much more than mere background and was "intended to have operative effect as a statement of present intention and as an explanation of the whole deal".7 In applying to the High Court for special leave to appeal, the landlord's counsel submitted that the case provided an opportunity for the court to review the way in which statements of subjective intent might be used in the course of interpretation.

Whichever way the final decision goes, the Gee Dee case illustrates the difficulties (and resulting time and expense) that can arise from a poorly drafted document. In the application for special leave, Chief Justice French noted to the landord's counsel as follows: "You have got pointers in all directions, as various of the judgments have indicated. You have got what amounts to a two/two split. One could be forgiven for forming the view that any assertion of a correct construction is making a sort of silk purse out of a sow's ear and why should the Court get involved in untangling that kind of mess or having another go".8

Once again, the key takeout is to ensure that all contractual documents, including leases, state fully, clearly and precisely the commercial terms agreed by the parties.

Footnotes

1 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352

2 Investors Compensation Scheme Ltd v West Bromwich Building Society (1998) 1 All ER 98 at 114-115

3 For example, see Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 240 CLR 45, Byrnes v Kendle (2011) 243 CLR 253 and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) HCA 37

4 Bond, The Honourable Justice John --- "'The use of extrinsic evidence in aid of construction: a plea for pragmatism', paper delivered for the Current Legal Issues Seminar Series 2016 (QSC)" [2016] QldJSchol 9 at [10] and [12]

5 Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd (2016) VSCA 23

6 Note 5 at [5]

7 HCA transcript, p 3, line 49

8 HCA transcript, p 4, line 133

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.