The divergent approach of contract interpretation in Australia: Victorian Supreme Court weighs in on an ambiguous question

An ongoing area of debate in contract law has been the examination of what the "true rule" is arising out of the High Court's decision in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. That is, when you are looking at a contract, when can you go beyond the four corners of the document and look at the surrounding circumstances? There has been recent divergence in the authorities as to whether this exercise requires there to first be an ambiguity in the words of the contract before you look at the surrounding circumstances, or whether you can go straight to these external factors without an ambiguity. The Victorian Supreme Court has recently weighed in.

 

The key principle arising out of the case of Codelfa is 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"

In a previous article (available here), we explored the disparity in approach to this passage amongst courts in Australia. Notably, the trend from the Supreme Court of New South Wales that an "ambiguity gateway" or threshold is not required before surrounding circumstances can be relied on. This is best seen in the case of Cherry v Steele-Park [2017] NSWCA 295. On the other hand, the approach in Victoria has been to uphold the requirement of an ambiguity gateway (see Pepe v Platypus Asset Management Pty Ltd (2013) 46 VR 694).

The Victorian Supreme Court was presented with this question again in Siemans Gamesa Renewable Energy Pty Limited v Bulgana Wind Farm Pty Ltd [2020] VSC 126 and, perhaps unsurprisingly, has reaffirmed the approach in Victoria of requiring an "ambiguity gateway".

Facts of the case

In Siemans, the case centred around payment of "delay liquidated damages" under a construction contract. Delay liquidated damages are a liquidated sum of damages for late performance of work. Siemans Gamesa Renewable Energy Pty Limited and Bulgana Wind Farm Pty Ltd had entered into the construction contract in relation to the construction of a wind farm facility with a battery energy storage system facility.

After executing the construction contract, the parties then entered into another agreement. The second agreement provided that the Bulgana agreed to offset any delay liquidated damages that may be payable to them against payments they were to pay to the Siemans, and in turn to not exercise any rights to draw on their security (being bank guarantees).

However, Siemans failed to reach practical completion of the building works by the due date. Bulgana threatened to call on the bank guarantees in order to satisfy their entitlement under the first contract for delay liquidated damages Siemans commenced the proceedings before the Supreme Court of Victoria to seek a permanent injunction to restrain Bulgana from making a demand on the bank guarantees.

The issues to consider

The question for the Riordan J of the Supreme Court of Victoria was one of contractual interpretation. The Court had to consider whether the terms of the second agreement prevented the defendant from calling on the bank guarantees.

In order to decide whether surrounding circumstances were admissible in considering the terms of the second agreement, his Honour provided a summary of what the court will consider:


  • The words of the contract itself, by considering the text and its ordinary meaning together with the context and the purpose of the contract.
  • The court will not consider the intentions or expectations of the parties, but will try to interpret the contract in such a way as to avoid a commercial nonsense.
  • If, after the above, the language used in the contract ‘is ambiguous or susceptible of more than one meaning’, then evidence of surrounding circumstances outside the contract is admissible to assist with interpretation of the contract. This includes history, background, context, and the market in which the parties were operating.
  • Post-contractual conduct is generally inadmissible to construe the terms of the contract.

What of the ambiguity gateway?

His Honour acknowledged the judicial dispute over the requirement of an ambiguity gateway, but confirmed that the position, at least in Victoria is:
  1. Surrounding circumstances cannot be considered to contradict an unambiguous expression in the contract; and
  2. Surrounding circumstances can be considered if there is a ‘constructional choice’, namely, an ambiguity.
His Honour went on to say that the true rule does not permit evidence of surrounding circumstances to even identify ambiguity, his reasons being that:
  1. That it forms part of Codelfa as Mason J's judgment incorporates the following from the English case of Great Western Railway (1918) 87 LJ Ch 414: "that evidence of surrounding circumstances was not admissible to raise an ambiguity for in their opinion that would be to contradict or vary the words of the written document".
  2. If evidence of surrounding circumstances was admissible to identify ambiguity, it would undermine the purpose of the parol evidence rule.
  3. Evidence of surrounding circumstances cannot be used to only contradict the plain meaning of the words in a contract: Codelfa.

The status of the "true rule"

On the dispute as to the ambiguity gateway, his Honour observed that subsequent decisions since Codelfa in other states have taken the approach that the true rule has been "restated, clarified or possibly ‘abandoned". In His Honour's opinion, the High Court has not overruled implicitly, or otherwise, the true rule in Codelfa, for the following reasons:
  1. There is nothing to suggest from decisions subsequent to Codelfa that the High Court intended to abolish or clarify the rule.
  2. That a case as significant as Codelfa is unlikely to have been impliedly overruled.
  3. The Victorian Court of Appeal has stated that the Court must continue to apply the law as stated by Mason J in Codelfa until otherwise directed by the High Court.

Conclusion

As for the dispute between Siemans and Bulgana? His Honour concluded that the second agreement was enforceable and that its terms were not ambiguous. Therefore, the ambiguity gateway threshold was not crossed and it was not permissible to consider the surrounding circumstances of the contract. Siemans was entitled to the injunction it sought.

This decision highlights the difference of approach in relation to the ambiguity gateway, with the Victorian Supreme Court holding fast to the ambiguity gateway where other courts, such as the Supreme Court of NSW are increasingly deviating. The difference in approaches will likely continue until the High Court weighs in again.

Regardless, the decision also emphasises the significance of carefully drafted contracts, as courts will pay close attention to how it is drafted, regardless of whether external circumstances are taken into account.

McCabe Curwood has a wealth of experience on drafting and litigating on commercial contracts. Get in contact with us today.

Contributors

Luke Dominish Associate
Jennifer Bradley Lawyer