The ongoing ambiguity in interpreting a contract: what is admissible?

All too often, parties to commercial contracts end up in a dispute as to the meaning of the document. For a number of reasons, from the way a document was drafted to a difference of understanding between the parties, it may become necessary to go to Court to clarify the meaning of a clause and the rights it creates. This begs the question: what evidence is admissible in resolving these disagreements? Is a court restrained to only consider the four corners of the document, or can it look more broadly to the circumstances surrounding the preparation of the contract?


An ambiguous answer

Unfortunately, there is dispute here too about what the correct principles are. The most famous statement on the issue comes from the decision of Mason J of the High Court of Australia in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337. Codelfa is the most frequently cited case on Australian contract law, and one of the key statements is found at 352:

"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."

This passage has been interpreted as meaning that there must be ambiguity in the contract before any reference to the surrounding factual circumstances can be relied upon for the interpretation exercise.

This is contrary to English authorities which have held that no such threshold is required. As stated by Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, the position in the United Kingdom is that interpreting a contract requires "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract".

That is, considering the surrounding circumstances is part of the interpretation exercise – whether the contract is ambiguous or not.

Inconsistent application

Notwithstanding what appears to be a clear statement from the High Court on the matter, since Codelfa there have been a number of High Court authorities that appear to have not insisted on the contract being ambiguous before surrounding circumstances can be considered. For example, in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 the plurality of Gleeson CJ, Gummow and Hayne JJ applied the words of Lord Hoffman extracted above.

Further, in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461 the unanimous High Court stated that interpretation "requires consideration, not only of the text of the documents, but also the surrounding circumstances known to [the parties], and the purpose and object of the transaction". The unanimous High Court made a nearly identical statement in Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd (2004) 219 CLR 165 at 179. These words appear to be more in line with the English standard as they do not demand the threshold of ambiguity that Mason J spoke of in Codelfa.

It may appear that the High Court is indicating that ambiguity is not actually required, however in the earlier case of Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 240 CLR 45 at 53 the High Court made an emphatic statement that Codelfa ought be followed.

This has led to inconsistent approaches in the various state supreme courts, with some strictly following Codelfa, whilst others not requiring that there be ambiguity.

The solution in New South Wales

Whilst the High Court did not expressly address the divergent approaches, there is useful guidance in the case of Electricity Generation Corporation v Woodside Energy (2014) 251 CLR 640 where the plurality of French CJ, Hayne, Crennan and Kiefel JJ stated at 656 the following on the construction of commercial contracts:

"The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract."

The use of the words "it will require" has been applied in New South Wales to mean that consideration of the surrounding circumstances is required regardless of whether there is an ambiguity (see, e.g. Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633).

It is critical to acknowledge that this does not mean that the door is open to look to the parties’ respective subjective intentions reflected in pre-contractual representations. That evidence remains inadmissible. What is permitted is using the circumstances surrounding the execution of the contract so as to assist in its interpretation.

In the NSW decision of Cherry v Steele-Park [2017] NSWCA 295, Leeming JA summarised the principles in New South Wales. His Honour, in finding that it was not necessary to pass through an "ambiguity gateway" held that "the starting point and the ending point" are the words of the document (there is no judicial licence to re-write the contract), however, in applying Woodside Energy, surrounding circumstances can be relied upon with or without ambiguity. Further, conduct after the execution of the contract is not to be taken into account in determining its meaning.

Where are we now?

These propositions were most recently applied, without controversy, in the case of Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2018] NSWSC 1273 by Ball J.

To date there remains disparity in approach throughout Australia, with Victorian and Western Australian courts continuing to require the ambiguity gateway. Until conclusive resolution is provided by the High Court, it appears that this disparity will continue. The result being that, at least for the time being, there will continue to be ambiguity in the role that ambiguity is to play in contractual interpretation.


Luke Dominish Lawyer