A decision of the NSW Court of Appeal handed down on 25 February 2013 is an intriguing development in the story of Australian courts' approach to the admissibility of extrinsic material in the construction of commercial contracts.1
In the case of Codelfa in 1982,2 Justice Mason stated that: '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.'3 This 'true rule' was considered the authoritative statement on the point for years to come.
In late 2011, the High Court refused special leave in the case of Western Export,4 and affirmed that the 'true rule' expounded in Codelfa remains binding authority in Australia, saying that 'until this court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.'
The High Court's 'edict' in Western Export was significant because, despite a degree of uncertainty in the law in Australia existing since Codelfa and prior to Western Export, it made it clear that extrinsic evidence may only be adduced in aid of the interpretation of the words of a contract where those words were ambiguous. In 2012, lower courts seemed to be heeding the High Court's 'edict' (notwithstanding that it may not be binding as precedent) and adopted a careful approach to the admissibility of extrinsic evidence in interpreting contracts.5 However, a recent decision of the NSW Court of Appeal seems to have enlivened the issue again.
OneSteel v BlueScope
BlueScope and OneSteel entered into a deed in 2004 concerning the purchase and delivery of iron ore from OneSteel to BlueScope by commercial freighter. When the Global Financial Crisis began to take hold in late 2008 and BlueScope's need for iron ore declined, BlueScope informed OneSteel that it did not want to take delivery of the following seven shipments of iron ore and therefore considered that it need only pay OneSteel the cost of the freight (which was substantially less than the cost of the freight and the iron ore). In advising OneSteel of its decision to refuse delivery of the iron ore, BlueScope sought to rely upon a term of the 2004 deed.
In the leading judgment, Allsop JA reversed the decision of the trial judge, finding that BlueScope could not rely on the term in order to refuse taking delivery of (and paying for) the iron ore.
Justice Allsop on the Construction of Commercial Contracts
- In relation to the construction of commercial contracts, Allsop JA stated that one should adopt the approach his Honour took in Franklins,6 and that:
- it is essential to understand the 'genesis of the transaction, the background, the context, the market in which the parties are operating';
- considerations of commercial convenience are relevant to construction and objective meaning; and
- one should approach construction in a way that is not prone to defeat the evident commercial purpose.
- Allsop JA stated that interpretation of the words chosen by the parties involves determining what a reasonable person would have understood by the words, which normally requires consideration of not only the text but also of the surrounding circumstances known to the parties and the purpose and object of the transaction. Regarding that determination:
- that is an objective analysis which can produce only one true meaning;
- even if there is one true meaning, it is a 'pervasive reality' that:
- contracts will often potentially have more than one meaning;
- the words are inherently contextual in their meaning; and
- reasonable minds often differ about what is the true meaning;
- the construction 'involves the weighing of different considerations, partly logical and partly intuitive (though rational) leading to a choice.'7
- His Honour also noted that 'recitals can assist in interpretation of operative provisions, though they do not control the latter's operation when clear and unambiguous'.8
- At no point in the judgment does Allsop JA explicitly contradict the 'true rule' in Codelfa or the 'edict' from Western Export by asserting that a court may have recourse to evidence of matters beyond the words of the contract even where there is no ambiguity in those words (which is what his Honour did, however, conclude in Franklins). However, the absence of any reference to the very recent and prominent remarks of the High Court in Western Export is conspicuous, given that those remarks implicitly casted doubt on Allsop JA's approach in Franklins – the same approach which Allsop JA adopts with approval in this case.
- In the Franklins case, before Allsop JA set out the preferred approach to the construction of commercial contracts, his Honour stated that there was no need to find 'ambiguity in the words of the document before any resort can be made to such evidence of surrounding circumstances'.9 Although Allsop JA asserted in Franklins that this view did not necessarily conflict with the 'true rule' from Codelfa, the High Court's comments in Western Export indicates that the Judges sitting for the special leave application thought otherwise.
- Notwithstanding that Allsop JA did not refer to the High Court's remarks in Western Export, there are two reasons why Allsop JA's judgment may not have contradicted the 'true rule' in Codelfa:
- On one view, though it was not expressed in the judgment, Allsop JA did not contradict the 'true rule' from Codelfa since there was ambiguity in the operation of the term in question (though Allsop JA also said that the '2004 deed overall reveals a careful, straightforward and consistent use of language').10
- Furthermore, while Allsop JA does construe the terms of the contract by referring to and relying upon the 'apparent commercial purpose of the arrangement', Allsop JA explicitly states that the commercial purpose upon which he bases his construction of the term in question is one which is 'derived from the structure and text of the deed'. In fact, at one point, his Honour rejected a submission by BlueScope which would endorse an approach on one issue which 'overlays external commercial assumptions upon agreed contractual arrangements.'11 Allsop JA did not analyse extrinsic evidence to inform the commercial context within which the deed was construed (save for one reference to evidence regarding the emergence of a spot market for iron ore,12 however, this evidence was not explicitly relied upon in his Honour's final conclusion).
- While Allsop JA's comments are intriguing, it is also interesting that Macfarlan JA agreed with Allsop JA's judgment since it was Macfarlan JA who wrote the leading judgment in the NSW Court of Appeal decision in Western Export and it was Macfarlan JA's judgment that the High Court refused special leave to appeal.
If BlueScope seeks leave to appeal to the High Court, the High Court may have the opportunity to resolve the issue with a detailed consideration of the law on this question. However, given that construction of the term in dispute was resolved by reference to internal considerations in the deed, it is arguable that the High Court may again decline to address the issue if special leave to appeal is sought. In addition, if the High Court did proceed to hear any appeal, it would be interesting to see whether the recent changes in composition of the High Court will have any impact. It is worth noting that two of the three High Court judges who refused special leave in Western Export are no longer on the High Court (ie Gummow and Heydon JJ).
1 OneSteel Manufacturing Pty Limited v BlueScope Steel (AIS) Pty Limited  NSWCA 27 (OneSteel v BlueScope)
2 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales  HCA 24 ('Codelfa')
3 Codelfa, 352.
4 Western Export Services Inc v Jireh International Pty Ltd  HCA 45 ('Western Export').
5 See, eg, McCourt v Cranston  WASCA 60; Fuji Xerox Finance Ltd v Csg Limited and Ors  NSWSC 890; Casama Group Pty Ltd v Four Sisters Pty Ltd  VSC 376.
6 Franklins Pty Ltd v Metcash Trading Ltd  NSWCA 407 ('Franklins').
7 OneSteel v BlueScope, .
8 Ibid .
9 Franklins, .
10 OneSteel v BlueScope, .
11 Ibid .
12 Ibid .
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