Contractural Interpretation and Controlling Liability Through Contract by taslawsociety

Contractual interpretation and controlling liability through contract

The opinions are those of the authors only and generally relate to Australian law unless otherwise indicated, and do not represent the opinions of the partners of Norton Rose Fulbright

Grant Bonner BA (Hons) LLM (Sydney) Partner Norton Rose Fulbright Australia Grosvenor Place, 225 George Street Sydney NSW 2000 Tel: +61 2 9330 8328

Jack Pembroke-Birss BSc LLM (Sydney) Special Counsel Norton Rose Fulbright Australia Grosvenor Place, 225 George Street Sydney NSW 2000 Tel +61 2 9330 8160

Contents Part 1: Contractual interpretation ........................................................................ 3 1

Principles of contractual interpretation ......................................................................3

How have the parties expressed their agreement? ...................................................3

How would a reasonable person understand the language? ....................................7

The ‘ambiguity gateway’ debate ..............................................................................12

What are surrounding circumstances? ....................................................................16

Can evidence of surrounding circumstances be admitted without the need for ambiguity? ...............................................................................................................21

Part 2: Controlling liability through contract .................................................... 35 1

Releases ..................................................................................................................35

Accord and satisfaction............................................................................................36

How courts approach exclusion of liability and indemnity clauses ..........................39

Liability for misleading and deceptive conduct ........................................................52

Annexure A : Example clauses .......................................................................... 56 1

Release ....................................................................................................................56

Indemnity .................................................................................................................56

Acknowledgment .....................................................................................................56

Choosing the right device – some examples ...........................................................57

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Part 1: Contractual interpretation 1

Principles of contractual interpretation

1.1

The purpose of contractual interpretation is to establish the objective intention of the parties to the contract and the rights and obligations to which they have committed themselves. “The ordinary approach to construction insists on reading the contract as a whole and doing so harmoniously, so as to resolve or minimise internal inconsistency”.1

1.2

It is the process of understanding a contract by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction.2 As Lord Hoffman pithily said: “No one has ever made an acontextual statement. There is always some context to any utterance, however meagre”.3

1.3

This paper will explore these elements, and in particular: (1)

What is meant by reading a contract in the context of the surrounding facts?

(2)

Is ambiguity necessary before an Australian court may have regard to the background circumstances and how are issues of ambiguity resolved?

How have the parties expressed their agreement?

2.1

While this would appear to be a relatively straightforward issue it may be a matter of contention between the parties as to how and in what form their agreement was recorded. Ultimately what form the contract takes will be a matter for the parties and therefore a contract may be recorded in writing, orally or both.

2.2

Whether a written contract records all of the terms of the contract will be a question of the parties’ intentions. Often the nature and content of the document will indicate whether it is intended to record the entire contract, but this will not always be the case. 4 The most obvious way to achieve that result is to include a clause stating that the written document comprises the entire agreement between the parties on the subject matter and expressly

1 2 3 4

Perpetual Custodians Ltd v IOOF Investment Management Ltd [2013] NSWCA 231 [86] (Leeming JA). Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 [84] (Bathurst CJ). Kirin-Amgen Inc v Hoechst Marion Roussel Limited [2004] UKHL 46 [64]. LG Thorne & Co Pty Ltd v Thomas Borthwick & Sons (Australasia) Ltd (1956) SR (NSW) 81 at 94 per Herron J.

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exclude prior negotiations, representations and other concluded agreements from being incorporated or relied on.5

Written contracts 2.3

By their nature, oral contracts are less certain and more susceptible to disagreements between the parties as to what has actually been agreed. Where the parties have agreed to record their contract exclusively in writing, and thereby create greater certainty as to the terms, the courts, where possible, will not depart from the written instrument. The rationale behind relying only on the written instrument was described by Lord Blackburn in Inglis v John Buttery & Co:6 “[W]here parties agree to embody, and do actually embody, their contract in a formal written deed, then in determining what the contract really was and really meant, a court must look to the formal deed and to that deed alone. That is only carrying out the will of the parties.”

2.4

When the parties have recorded their agreement wholly in writing, the “parol evidence rule” applies so that they cannot alter or vary it, by additional evidence. The parties “put on paper what is to bind them, and so make the written document conclusive evidence between them”.7

2.5

Under that rule, parol evidence is not admissible to contradict or vary the terms of a written agreement. However, the rule has no operation until it is first determined that the terms of the agreement are wholly contained in writing. 8 Therefore oral evidence to prove a contractual term cannot be excluded until it is determined that any terms in writing record the whole of the parties’ agreement.9

2.6

A court is able to consider extrinsic evidence, including evidence of conversations, to determine whether a document was intended to express the entire agreement between the parties, including cases where the document appears on its face to be a complete record of the contract.10

7 8 9

Such a clause does not necessarily protect against a finding of the existence of a collateral contract, the operation of an estoppel or contravention of the statutory norms of conduct such as the prohibition on engaging in misleading or deceptive conduct (for example section 18 of the Australian Consumer Law). Inglis v John Buttery & Co (1878) 3 App Cas 552, 577. See also Gordon v Macgregor (1909) 8 CLR 316 at 323 per Isaacs J. Wake v Harrop (1862) 1 H & C 202; (1862) 158 ER 859 (Bramwell B). State Rail Authority of NSW v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, 191 (McHugh JA). State Rail Authority of NSW v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, 191 (McHugh JA) citing Corbin on Contracts (1960) vol 3 at 385; Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 337. Gordon v Macgregor (1909) 8 CLR 316 at 320, 323-4; State Rail Authority of NSW v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, 191-2 (McHugh JA).

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2.7

The High Court of Australia has indicated the importance courts give to formal written agreements over agreements recorded in other forms in Equuscorp Pty Ltd v Glengallan Investments:11 “Having executed the agreement, each respondent is bound by it … there are reasons why the law adopts this position. First, it accords with the ‘‘general test of objectivity [that] is of pervasive influence in the law of contract’’. The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions. Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, timeconsuming, expensive and problematic. Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case.” [Emphasis added]

2.8

The Court also observed the commercial benefit of recording contracts in writing: 12 “In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules. They are not unbending. They allow for exceptions. But the exceptions must be proved according to established categories. The obligations of written agreements between parties cannot simply be ignored or brushed aside.”

2.9

Where the terms of the contract are wholly or in part oral then the court will, obviously, need to have regard to extrinsic evidence to determine the terms of the contract. 13

12 13

(2004) 218 CLR 471, 483-4 [35]. Equuscorp Pty Ltd v Glengallan Investments (2004) 218 CLR 471, 483-4 [35]. Hospital Products v United States Surgical (1984) 156 CLR 41, 61, 89-90 and 120.

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Partly written and party oral contracts 2.10

In Masterton Homes Pty Ltd v Palm Assets Pty Ltd,14 Campbell JA explained that where a contract is partly written and partly oral, the terms of the contract are to be ascertained from the whole of the circumstances, as a matter of fact.

2.11

In determining what are the terms of a contract that is partly written and partly oral, surrounding circumstances may be used as an aid to finding what the terms of the contract are. If it is possible to make a finding about what the words were that the parties said to each other, the meaning of those words is ascertained in the light of the surrounding circumstances. If it is not possible to make a finding about the particular words that were used (as sometimes happens when a contract is partly written, partly oral and partly inferred from conduct), the surrounding circumstances can be looked at to find what in substance the parties agreed.

2.12

In cases where the contract is both oral and written and there is a contradiction between an oral agreement and a later written agreement, the written agreement will prevail. This is on the basis that the written agreement discharges the oral agreement and the parties have recorded their agreement in the written document they have executed. 15

2.13

However, this does not mean that prior oral agreements will be disregarded. A prior oral agreement cannot vary a later written agreement but it can be used to supplement or add to a written contract.16

2.14

Prior oral terms that do not conflict with the written agreement may be regarded as a collateral agreement (made in consideration of the parties later executing the written agreement),17 or it may leave open the possibility that the contract is partly oral and partly in writing.

Where pro-forma contract amended 2.15

Where a standard or pro-forma contract has been used but the parties have amended it or added special conditions, then, unless it provides otherwise, greater weight will be given to the amendments or special conditions.18

14 15 16 17 18

(2009) 261 ALR 382, 401-403 [90]. Ibid. N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot Law of Contract (10th edition) 2012, 416. Ibid. Rivat Pty Ltd v Brian & Neill Elomar Engineering Pty Ltd [2007] NSWSC 638 [43], Homburg Houtimport BV v Agrosin Ltd [2004] 1 AC 735 [11].

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2.16

In Homburg Houtimport BV v Agrosin Ltd, Lord Bingham of Cornhill said:19 “[I]t is common sense that greater weight should attach to terms which the particular contracting parties have chosen to include in the contract than to pre-printed terms probably devised to cover very many situations to which the particular contracting parties have never addressed their minds.”

How would a reasonable person understand the language?

3.1

While contracts are inherently about what the parties have agreed, it needs to be kept in mind that contracts are interpreted objectively – “the law is concerned, not with the real intentions of the parties, but with the outward manifestations of those intentions”. 20

3.2

The theory of searching for the objective intention of the parties by reference to a hypothetical reasonable person raises two questions: (1)

when, or in what circumstances, is the hypothetical reasonable person permitted to have regard to matters beyond the text of the contract when forming an understanding of the meaning of its terms (such as the surrounding circumstances at the time of the contract)?

(2)

assuming that surrounding circumstances that existed at the time of formation can be taken into account, what exactly is the content of that expression, “surrounding circumstances” (for example, would it include evidence of the parties’ negotiations)?

3.3

We address each of these questions in the following sections. Before doing so, it is important to briefly review how courts interpret written contracts in Australia.

3.4

In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd, the High Court of Australia confirmed the objective approach to contractual interpretation:21 “It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the

19 20

[2004] 1 AC 735 [11]. Taylor v Johnson (1983) 151 CLR 422 at 429 per Mason ACJ, Murphy and Deane JJ. Cited with approval by Gummow and Hayne JJ in Byrnes v Kendle (2011) 243 CLR 253 at [59]. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179-181 (Toll). See also Martin Byrnes v Clifford Kendle (2011) 243 CLR 253 at [52], Cypayne Pty Limited v Babcock & Brown International Pty Ltd [2011] NSWCA 173 at [66], Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 at [35] and Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at [15].

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common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement … That normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.” [Emphasis added] 3.5

The words of a contract, like all written instruments, should be construed in their grammatical and ordinary sense, unless that would lead to some absurdity, or some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid that absurdity and inconsistency.22

3.6

In a recent statement on the topic in Mount Bruce Mining Pty Ltd v Wright Prospective Pty Limited, the High Court of Australia said:23 “The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.”

Purves v Smith [1944] VLR 186; [1944] ALR 269 per Starke J. See also Grey v Pearson, (1857) 6 H.LC 61 at 106, Australian Paper Manufacturers Ltd v American International Underwriters (Australia) Pty Ltd [1994] 1 VR 685, per Fullagar, Smith and JD Phillips JJ at 689–692; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, per Mason J at 352. (2015) 256 CLR 104; [2015] HCA 37 [46]-[48] (citations omitted) (Mount Bruce Mining).

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Consideration of the commercial context 3.7

Understanding the context in which the contract was made, or the position of the person to whom the words are addressed, is critical to giving effect to the objective intention of the parties. In a commercial setting this would generally indicate that it should be construed in a way that avoids it making commercial nonsense or causing commercial inconvenience.24

3.8

Gleeson CJ in International Air Transport Association v Ansett Australia Holdings Ltd stated:25 “In giving a commercial contract a businesslike interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract, and the objects which it is intended to secure. An appreciation of the commercial purpose of a contract calls for an understanding of the genesis of the transaction, the background, and the market.

This is a case in which the Court’s general understanding of

background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes its meaning.” 3.9

The importance of commercial context when giving effect to the objective intention of the parties was highlighted by the High Court in Mount Bruce Mining quoted in paragraph 3.6 above.26 Further, the Court noted that unless the contract suggests a contrary intention, a court is able to approach the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result. 27

3.10

The application of a contract’s commercial context can be seen in Royal Botanic Gardens and Domain Trust v South Sydney City Council.28 There the High Court of Australia placed considerable importance on the fact that both parties to the contract were public bodies and the purpose of the contract was to provide a public facility. The absence of a commercial purpose, in turn caused the Court to conclude that the contract should not be read in a way that would maximise the profits of the City of Sydney. The payments required to be made under the contract were so as to ensure that the lessor did not incur a financial disadvantage from the transaction rather than commercial concepts of rental and opportunity costs to the parties.

24 25 26 27 28

Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310, 313–314 (Kirby P). (2008) 234 CLR 151 at [8]. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 [47]. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 [51]. Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 (Royal Botanic Gardens).

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3.11

However, applying a commercial context and business common sense will not necessarily lead to a straightforward interpretation. Reasonable minds may differ on how commercial concepts should be applied.29 In essence the parties are assumed not to have agreed to something that would not make business sense. In circumstances where a clause is capable of two meanings, it is possible that both will give a sensible commercial outcome. In such circumstances, it is the task of the court to adopt the more, rather than the less, commercial construction.30

3.12

But that principle only extends so far. It is secondary consideration and is subservient to the overriding principles to give effect to the plain meaning of the contract.

3.13

The Supreme Court of the United Kingdom, in Arnold v Britton,31 considered the operation of a provision in a number of 99 year leases for the payment of rates by tenants for the repair and maintenance of holiday chalets.

3.14

The provision was expressed in the following terms: “To pay to the lessors without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the lessors in the repair maintenance renewal and the provision of services hereafter set out the yearly sum of £90… for the first three years of the term hereby granted increasing thereafter by [10%] for every subsequent three year period or part thereof”

3.15

In around 1974, when the leases were entered into, the rate was £90 per annum. By 2011, it had increased to £2,700 and by 2072, at the end of the lease terms, it would be over £550,000 per annum.

3.16

The tenants claimed that an interpretation of the clause resulting in such absurdly high annual service charges could not be right, and that the clause should be read as requiring them to pay a fair cost of the specified services with the compounding sum being no more than a cap. The landlord disagreed and commenced a claim seeking a declaration that the clause required payment of the fixed sum and not any lesser variable amount.

3.17

Lord Neuberger of Abbotsbury, who gave the lead judgment, found in favour of the landlord. The practical effect was, as the court recognised, extremely unfair and even absurd. So where does that leave the approach of giving “commercial common sense” to the words of a contract?

29 30 31

Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 [43]. Rainy Sky SA v Kookmin Bank [2012] All ER 1137. [2015] AC 1619; [2015] UKSC 36.

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3.18

There are three points to make: (1)

first, Lord Neuberger explained that the less clear the words are, the more ready the court will be to depart from their natural meaning. However, that does not justify a search for drafting errors in order to facilitate a departure from the natural meaning of the words used.

(2)

second, commercial common sense should not be invoked retrospectively: the concept is only relevant to the extent of how matters would have been perceived by reasonable people in the position of the parties at the date the contract was made.

(3)

third, Lord Neuberger emphasised: “The purpose of interpretation is to identify what the parties have agreed, not what the court thinks they should have agreed. When interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.” 32

3.19

The decision in Arnold v Britton appeared to be the high watermark on the approach to giving contracts a commercially sensible meaning. That was, however, until the recent High Court decision of Ecosse Property Holdings v Gee Dee Nominees,33 handed down in 2017.

3.20

The facts are very simple and the decision turned on the interpretation of two clauses. Gee Dee was the tenant under a 99-year lease concluded between an earlier landlord and tenant in 1981 over farmland now owned by Ecosse.

3.21

Clause 4 of the lease stated: “The Lessee 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”

3.22

Gageler J remarked that ‘[c]lause 4 can only be construed for what it is: a clumsily tailored variation of an ill-fitting off-the-shelf precedent’.34

3.23

The issue was whether Gee Dee was liable to pay only those amounts that were levied on the tenant or whether it was liable to pay all amounts levied on the property regardless of whether they were payable by the tenant or the landlord.

[2015] AC 1619; [2015] UKSC 36 [20]. (2017) 261 CLR 544 (Ecosse). 34 (2017) 261 CLR 544, 532 [51]. 33

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3.24

The uncertainty as to the meaning of clause 4 was compounded by clause 13 of the lease. This clause required the tenant to pay the entire 99-year rent in advance, which was more or less the market value of the land. It said this: “The parties acknowledge that it was the intention of the Lessor to sell and the Lessee to purchase the land and improvements hereby leased for the consideration of $70,000.00 and as a result thereof the parties have agreed to enter into this Lease for a term of ninety-nine years in respect of which the total rental thereof is the sum of $70,000.00 which sum is hereby acknowledged to have been paid in full”

3.25

This clause explains the existence of the lease. The reason the original parties had entered into a 99-year lease was because they could not effect a freehold sale under the planning laws existing in 1981. In other words, the original parties to the lease had intended to give the tenant an interest in the land which was as close to a freehold interest as a lease would permit.

3.26

It was this expressed intention in clause 13 which convinced four members of the High Court to conclude that the correct interpretation was that Gee Dee, the tenant, was liable to pay everything levied on the land which an owner of the land would be liable to pay. Such an approach required disregarding the literal meaning of clause 4 and focussing more on giving the contract a commercially sensible construction, which accorded more closely to the tenant being treated as the owner of the land.

3.27

With that in mind, it is Nettle J’s dissenting judgment which is the more interesting part for what his Honour has to say about commercial good sense. His Honour said that there comes a point at which the court should remind itself that the task is to discover what the parties meant from what they have actually said and not to force upon the words a meaning which they cannot fairly bear.

3.28

Justice Nettle was concerned that to place too much emphasis on deriving a commercial outcome was to substitute for the bargain actually made one which the court believes should have been made. This, he said, was an illegitimate role for a court.

3.29

In other words, it is all well and good to take a commercial approach but the court cannot simply disregard the words of the contract. That is what Lord Neuberger warned against in Arnold v Britton.

The ‘ambiguity gateway’ debate

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4.1

In 2011, the High Court of Australia’s refusal of an application for special leave in Western Export Services Inc v Jireh International triggered debate in the legal sphere35 over the role of extrinsic evidence in contractual interpretation. 36 Since that time, there has been inconsistency in the approaches adopted by New South Wales and Western Australian courts as to whether ambiguity is a necessary prerequisite for the admission of evidence as to surrounding circumstances.

4.2

The debate was deliberately not resolved by the High Court of Australia in the 2015 case of Mount Bruce Mining Pty Ltd.37 As will be discussed, the High Court of Australia confirmed that if a term in a written contract is not susceptible to more than one meaning, evidence of surrounding circumstances is not admissible to contradict its plain meaning. 38

4.3

But that is not the end of matter. Other questions arise such as: (1)

Can evidence be admitted to assist in the interpretation of the contract (but not so as to contradict the plain meaning of the contract) even if the language is not ambiguous or susceptible of more than one meaning?

(2)

Can evidence of surrounding circumstances be admitted to determine whether a contract has a “plain meaning”? In other words, can evidence of surrounding circumstances be admitted to create ambiguity despite the contract having a “plain meaning” were recourse not had to surrounding circumstances?

4.4

If the answer to any of the above questions is “yes”, to what use can such evidence be put? Justice McDougall, in a paper prepared for the Commercial Law Association Judges’ Series in June 2015, surveyed all of the High Court’s decisions since 2000 regarding contractual interpretation. His Honour makes the observation that, in his view, the “statement of the ‘true rule’ appears to conflate two concepts. One is the admissibility of evidence, the other the use to which that evidence may be put” and goes on to conclude that:39 “… Codelfa shows that extrinsic evidence is always admissible in the evidentiary sense; that is, courts may always allow its reception. It is then admissible in the usage sense for the first three of the five Purposes I have

37 38 39

Notably, the position in the United Kingdom has been settled since at least 1998: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-13 (Lord Hoffman). Western Export Services Inc v Jireh International [2011] HCA 45. In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 [112] the High Court confirmed that reasons for refusing special leave “create no precedent and are binding on no one”. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 [48]. R McDougall, ‘Construction of Contracts: The High Court’s Approach’ (Paper prepared for the Commercial Law Association Judges’ Series, Sydney, NSW, 26 June 2015) available: http://www.supremecourt.justice.nsw.gov.au/Documents/Publications/Speeches/2015%20Speeches/McDo ugall_20150626.pdf (last accessed 19 March 2019).

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mentioned (that is, (1) to define a descriptive term, (2) to explain the genesis of a transaction, or (3) to resolve ambiguity), but is inadmissible in the usage sense for the other two Purposes (that is, (4) to contradict plain language, or (5) to prove subjective intentions).” 4.5

A discussion of each of those conclusions and the distinction between admissibility and use are beyond the scope of this paper but consideration of those themes and the answers to the questions in paragraph 4.3 are discussed below.

What does ambiguity mean? 4.6

Ambiguity is not a binary concept. It has been said that ambiguity is “itself an ambiguous term, whose perception ‘differs from one judicial eye to the other.’” 40

4.7

The Australian position on when courts can go beyond the text of the contract was explained by Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW). There his Honour said:41 “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.” 4.8

But as Beach J has recently pointed out in Todd v Alterra at Lloyds Ltd:42 “But “plain meaning” is a conclusion. How is such a conclusion to be reached? Mason J’s approach would not deny the proposition that before reaching such a conclusion you can consider context. By first considering context, you may conclude that there is no one plain meaning. Context can therefore be used to perform two functions. It can enable you to assess whether there is a plain meaning. And if one concludes that there is no plain meaning, it can assist in resolving the latent textual imprecision.”

40 41 42

Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 at [83] (citations omitted). Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352 (Codelfa). (2016) 239 FCR 12; [2016] FCAFC 15 [75]; Leeming JA makes a similar point in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 [79].

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Mason J went on to say:43

4.9

“Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.” 4.10

Because the words used are closely linked to the background, context and purpose of a contract, the meaning of the language used needs to be considered on a case by case basis.

4.11

Before we consider whether surrounding circumstances are admissible in the process of interpreting a contract it is important to understand what is meant by ambiguity. There may be two types of ambiguity, patent and latent ambiguity.

4.12

Patent ambiguity arises from the language on the face of the document. For example, the language is self-contradictory, where two different interpretations are possible, or where the instrument lacks an essential definition or description (such as of a person who is a party to the agreement, or of the specific product which is the subject of the agreement). The case of Royal Botanic Gardens44 is an example of this type of ambiguity.

4.13

The other type of ambiguity, latent ambiguity, becomes apparent when the language is applied to the factual circumstances. For example, in Great Western Railway v Bristol Corp, Lord Wrenbury stated:45 “The words of the instrument may be perfectly plain and unambiguous for the example ‘My nephew, Joseph Grant’ or ‘fair market price’ but if, from the surrounding circumstances, when you come to apply the instrument, you find that there are two persons who will satisfy the words ‘my nephew Joseph Grant’, or two markets to which the parties may have been referring, there is a latent ambiguity…”

44 45

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352. Mason J also said “[c]onsequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.” Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45. Great Western Railway v Bristol Corp (1918) LJ 87 Ch 414, 429. See also Hope v RCA Photophone of Australia Pty Limited (1937) 59 CLR 348, 356-7 (Latham CJ).

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4.14

McHugh JA in Burns Philip Hardware v Howard Chia Pty Ltd, commented in relation to ambiguity:46 “Few, if any, English words are unambiguous or not susceptible of more than one meaning or have a plain meaning. Until a word, phrase or sentence is understood in the light of the surrounding circumstances, it is rarely possible to know what it means.” [Emphasis added]

What are surrounding circumstances?

5.1

In Australia, the surrounding circumstances must be matters within the actual knowledge of the parties, or ones which are notorious, so that it is proper to treat them as being part of the objective factual background.

5.2

In Maggbury Pty Ltd v Hafele Australia Pty Ltd, Gleeson CJ, Gummow and Hayne JJ having referred to Mason J’s statement in Codelfa, that the words in issue must be ambiguous or susceptible of more than one meaning before evidence can be admitted to assist in interpretation of the contract, said: 47 “Interpretation of a written contract involves, as Lord Hoffman has put it: ‘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.’” [Emphasis added]

5.3

In contrast to Maggbury, it is important to note that in the quote extracted in paragraph 3.4 above from Toll, the High Court did not refer to any requirement for ambiguity in the words used by the parties. The Court did say that the process of construction under discussion “normally” requires consideration of surrounding circumstances. Did that mean the court needs to find ambiguity in the text before it may have regard to the background circumstances?

5.4

As Codelfa has been confirmed by the High Court of Australia several times (and on several occasions subsequent to Toll), why have some commentators suggested that the Australian position has moved away from the requirement of ambiguity, before the court

Burns Philip Hardware v Howard Chia Pty Ltd (1987) 8 NSWLR 642 at 645; Manufacturers’ Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cases 60-853, 75,343 (McHugh JA) cited with approval by Leeming JA in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 at [73]. Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 10 CLR 181 at [11] (Maggbury). See also Toll (FGCT) v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40].

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may have regard to the background circumstances?48 Is that because they do not regard Mason J as requiring ambiguity to be found first, or because Mason J was speaking only of ambiguity on the face of the document? 5.5

We consider the answer to that question and the history of the matter leading to the current day position in the following section. It is first necessary to understand that is meant by the “surrounding circumstances”.

5.6

As a matter of terminology, ‘context’, ‘background’, ‘setting’, ‘factual matrix’ and ‘surrounding circumstances’ are interchangeable and describe the same thing.49

5.7

It is timely to consider an important English authority, Investors Compensation Scheme v West Bromwich Building Society,50 and how the High Court of Australia has referred to it, in Toll and Pacific Carriers Ltd v BNP Paribas.51 It is worth noting that there appears to be some inconsistency between the Australian authorities and what we may call the broader view expressed in Investors Compensation.52

5.8

In Investors Compensation the House of Lords expressed the view that surrounding circumstances can include 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 and this may include matters of law. Another way of describing this method is a contextual approach.

5.9

Under the English position as stated in Investors Compensation the idea seems to be an emphasis on the commercial purpose of the transaction “discerned not from what the parties then intended but from an objective inference drawn from the facts within their knowledge from the market in which they dealt or from the document itself”. 53

51 52

MBF Investments v Damien Nolan [2011] VSCA 114 at [197] where Neave, Redlich and Weinberg JJA said “In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, Mason J, as his Honour then was, said that evidence of surrounding circumstances could only be used to assist in the interpretation of a contract if the language in dispute was ambiguous or susceptible of more than one meaning (as we explain below, that view has now been rejected). Even then, such evidence could only be received as bearing upon the objective framework of facts within which the contract came into existence, and the parties’ presumed intention in that setting. It could not be used to discern actual intentions or expectations, these being irrelevant”. J W Carter, W Courtney and G Tolhurst, ‘‘‘Reasonable Endeavours’ in Contract Construction’ (2014) 32 Journal of Contract Law 36 at 50. Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98 (Investors Compensation). (2004) 218 CLR 451 (Paribas). Compare the critical analysis which suggests that in Royal Botanic the High Court (inadvertently) took into account evidence that is prohibited by both Codelfa and Investors Compensation in D McLauchlan and M Lees, ‘More construction controversy’ (2012) 29 Journal of Contract Law 97 at 108. Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98 at 114-115. See also Byrnes & Anor v Kendle (2011) 243 CLR 253 at [98] and footnote 135 per Heydon and Crennan JJ (to the effect the High Court is yet to rule on any inconsistency between the English and Australian positions).

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5.10

The learned author of Cross on Evidence argues this is not inconsistent with what Mason J says in Codelfa, that evidence may be permissible to show not the intentions, aspirations or expectations of the negotiating parties but “the objective background facts which were known to both parties and the subject matter of the contract from which their intention may be inferred”.54

5.11

In Southern Cross Assurance Co Limited v Australian Provincial Assurance Association, where Rich, Dixon, Evatt and McTiernan JJ stated:55 “A contract must be interpreted like any other contract, and the natural meaning of the language used must receive its effect unless, upon a proper application of the rules of construction, a contrary intention is found to be contained within the instrument.”

5.12

These comments seem to inform Gibbs J’s judgment in Australian Broadcasting Commission v Australasian Performing Right Association Limited, where his Honour said:56 “It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear

capricious

unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”. [Emphasis added] 5.13

As a rule, words in a contract must be given their plain, natural or common meaning. 57 It is interesting that Gibbs J makes no reference to the background circumstances being received where the words are “unambiguous”.

54 55

J D Heydon, Cross on Evidence (8th edition), 1459. Southern Cross Assurance Co Limited v Australian Provincial Assurance Association (1935) 52 CLR 618, 636. Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99, 109.

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5.14

Lord Hoffman in Investors Compensation stated that the “rule … reflects the common sense proposition that we do not easily report that people have made linguistic mistakes particularly in formal documents”.58

5.15

The extent to which the surrounding circumstances can be allowed to influence the interpretation of the words of a contract is a question of degree. This is an area where, until recently, there was a divergence of opinion between Australian and English courts, with the English courts being more liberal in their use of context and background information.

5.16

In Prenn v Simmonds, the House of Lords, correctly, stopped short of allowing evidence of pre-contractual negotiations, on the ground that they were not relevant in determining the intention of the parties.59 Lord Wilberforce emphasised the importance of placing words in their context in order to understand them, stating: “In order for the agreement of 6 July 1960 to be understood, it must be placed in its context. The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern, anti-literal, tendencies, for Lord Blackburn's well-known judgment in River Wear Comrs v Adamson ((1877) 2 A Cas 743 at 763, [1874–80] All ER Rep 1 at 11) provides ample warrant for a liberal approach. We must, as he said, enquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. Moreover, at any rate since 1859 (Macdonald v Longbottom) it has been clear enough that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term.”60

5.17

The position of the English courts as to what could be received by way of background circumstances was expanded in Investors Compensation where Lord Hoffman said:61

57 58

59 60 61

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347 per Mason J. Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at 913. See also Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2010] 4 All ER 1011, Rainy Sky SA SA v Kookmin Bank [2012] All ER 1137 and Arnold v Britton [2015] UKSC 36. Prenn v Simmonds [1971] 3 All ER 237 at 239. Prenn v Simmonds [1971] 3 All ER 237 at 239-40 (Lord Wilberforce). Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 144. See also Bank Credit and Commerce International SA v Munmar [2001] 1 All ER 961 at [39] where Lord Hoffman explains what he meant in Investors Compensation Scheme v West Bromwich Building Society. His Lordship said “I was merely saying there is no conceptual limit to what can be regarded as background”. See following Investors Capital in the Hong Kong High Court, Fok Chu Yue Benjamin v Fok

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“The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’ … it includes absolutely anything which would have [been regarded as relevant by, and therefore] affected the way in which the language of the document would have been understood by, a reasonable man. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. … The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammar, the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.

The

background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must for whatever reason, have used the wrong words of syntax …” [Emphasis added] 5.18

The use of “absolutely anything” which would have affected the way in which the language of the document would have been understood by a reasonable person, goes further than what the High Court of Australia has been willing to allow.

5.19

There are a number of key differences between these approaches.

On one view, in

Codelfa Mason J indicates that the language of the contract must be ambiguous or susceptible of more than one meaning, before background facts can be considered, whereas the English courts allow background facts to be considered throughout the process of interpretation. It is worth noting, however, that in Chartbrook v Persimmon Homes,62 Lord Hoffman said that “when the language used in an instrument gives rise to difficulties of construction … it is to decide what a reasonable person would have understood the parties’ to have meant by the language used”. 5.20

The English approach is that “the independent reasonable person is said to have all the background knowledge which would reasonably have been available to the parties.” 63 The

62 63

Chun Wan Ian [2014] HKCU 28 at [100-102], Pfeiffer GMBH v Cheng Hay Kit [2013] HKCU 2470 [60-62] and Konwall Constructions & Engineering Ltd v Strong Progress Limited [2010] HCA 1871. Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101. Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 144.

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Australian position is that relevant background must be known to both parties and not simply be “reasonably available”.64 5.21

In Royal Botanic Gardens, the High Court of Australia affirmed Codelfa in the face of the trend in English authority saying:65 “It is unnecessary to determine whether their Lordships there took a broader view of the admissible “background” than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court. Until that determination is made by this Court, other Australian courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa.”

5.22

Like much of this area of the law, the precise ambit of what is, and what is not, considered to fall within the “surrounding circumstances” remains undetermined.

Can evidence of surrounding circumstances be admitted without the need for ambiguity?

6.1

While the Australian position has remained fairly settled since Codelfa, there have been some suggestions that there was a move towards the more liberal English approach.

6.2

In Paribas, the Court stated that contracts were to be interpreted on the basis of: 66 “what a reasonable person in the position of [the party suing] would have understood them to mean. That 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.” [Emphasis added]

6.3

As referred to above, in Toll the majority said:67 “The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction: Investors Compensation Scheme Ltd v West Bromwich Building Society.” [Emphasis added]

JJ Spigelman AC QC, “Extrinsic material and the interpretation of insurance contracts” (2011) 22 ILJ 143 at 154. 65 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 at [39] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ. 66 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]. 67 Toll (FGCT) v Alphapharm Pty Ltd (2004) 219 CLR 165. 64

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6.4

Importantly in Codelfa Mason J set out, with approval, the statement by Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen:68 “In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating …”

6.5

While in both Paribas and Toll the Court did not seek to disturb Codelfa, the use of the words “surrounding circumstances” lead to the creation of some doubts as to whether the position in Codelfa had evolved, because the High Court of Australia did not refer to any requirement of ambiguity.

6.6

Recently, the High Court in Electricity Generation Corporation v Woodside Energy Ltd addressed the objective theory again.69

6.7

In this case, a buyer and a number of sellers entered into a gas supply agreement. Under the agreement, each seller was required to (i) make available to the buyer a specified daily quantity of gas, and (ii) use reasonable endeavours to make available a supplemental quantity, at a specified fixed price. The supply agreement provided that in determining whether sellers were able to supply a supplemental quantity, at a specified fixed price, the sellers were entitled to take into account all relevant commercial, economic and operational matters.

6.8

In June 2008, due to an explosion at a gas plant, only a reduced supply of natural gas was available in Western Australia. The sellers had capacity to continue to supply both the daily quantity and the supplemental quantity of natural gas to the buyer, but they advised the buyer that, for an unspecified period of time, they would nonetheless not be supplying the supplemental quantity for the contractually specified fixed price but they would be prepared to offer an equivalent quantity of gas at market price, which was higher. The buyer argued that this constituted a breach by the sellers of the “reasonable endeavours” obligation.

6.9

Among other things, the Court was required to determine the content of the obligation to use reasonable endeavours, that is, what that obligation entailed. That in turn raised a question of construction.

68 69

Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 995-7. Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 (Electricity Generation).

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6.10

The Court said:70 “[T]his Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. 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. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties … intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.”

6.11

Franklins Pty Ltd v Metcash Trading Ltd highlighted the uncertainty created by the language used by the High Court of Australia in Toll and Paribas before Electricity Generation. There Campbell JA (with whom Allsop P and Giles JA agreed) considered the recent Australian authorities dealing with considerations of “surrounding circumstances” as an aid to interpretation and noted a trend of the High Court of Australia resorting to use of context without first making a finding of ambiguity. 71

6.12

Campbell JA also observed that:72 “Courts lower in the hierarchy than the High Court have been less reticent than the High Court itself in making explicit that since Codelfa Construction there has been a change in the principles in accordance with which surrounding circumstances can be invoked in construction of a document”.

70 71

Electricity Generation Corporation v Woodside Energy (2014) 251 CLR 640 at [35]. Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 673-5 (Metcash). His Honour referred to the High Court authorities of Agricultural and Rural Finance v Gardiner (2008) 238 CLR 570 and Park v Brothers [2005] HCA 73; (2005) 80 ALJR 317; 222 ALR 421 at [39]; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at [8]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]; and International Air Transport Association v Ansett Australia Holdings (at [53]) reiterated the principle stated in Toll (FGCT) v Alphapharm (at [40]). Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at [298] (Campbell JA). See also Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2005] FCA 1812; (2005) 223 ALR 560; 56 ACSR 263; Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 (Weinberg, Kenny, Lander JJ); Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; (2009) 261 ALR 382; Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140. MBF Investments v Nolan [2011] VSCA 114 [195]-[204] similarly held that ambiguity was not required.

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6.13

His Honour then concluded that the contract before the Court should be construed bearing in mind those facts that the parties knew, or that it can reasonably be assumed they knew, that can impact upon the meaning of the words of the contract. Further, he found that it was not necessary to find ambiguity in the words of a written contract, the meaning of which was disputed, before the court can look at surrounding circumstances as an aid to construction.73

6.14

Three members of the High Court of Australia rejected the view that the position in Codelfa had evolved in Western Expert Services Inc v Jireh International Pty Ltd.74 While Jireh was a special leave application, the Court (comprised of Gummow, Heydon and Bell JJ) gave reasons. One could ask the question, was that because their Honours do not read Mason J as saying one can only have regard to background circumstances where ambiguity is found, first? In other words, the court may not find the language ambiguous having regard to the background circumstances, as opposed to only where there is ambiguity on the face of the contract. McLure P in Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd explained after Jireh Australian law was left with a “heated controversy” as to when regard could be had to “surrounding circumstances”.75

6.15

In Jireh, the New South Wales Court of Appeal (Macfarlan JA, Young JA and Tobias AJA agreeing) held that if a court, after considering the contract as a whole and the background circumstances known to both parties concluded that the language was clear and unambiguous then it was bound to apply to language of the contract without reference to the surrounding circumstances.76 This is a more likely reason, it is submitted, for the Australian High Court’s comments on special leave and the comments in Cross on Evidence.

6.16

The three members of the High Court of Australia in refusing special leave in Jireh stated:77 “The primary judge had referred to what he described as “the summary of principles” in Franklins Pty Ltd v Metcash Trading Ltd. The applicant in this court refers to that decision and to MBF Investments Pty Ltd v Nolan as authority rejecting the requirement that it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and object of the transaction.

73 74

75 76 77

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 678 [305] (Campbell JA). Western Expert Services Inc v Jireh International Pty Ltd [2011] HCA 45 (Jireh). It is important to note this was a special leave application and therefore of no precedential value. Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 60 [106]. Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 [54]-[55]. Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 [1]-[3].

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… Acceptance

the

applicant’s

submission,

clearly

would

require

reconsideration by this court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by Mason J, with the concurrence of Stephen J and Wilson J, to be the “true rule” as to the admission of evidence of surrounding circumstances. 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.” (Emphasis added) 6.17

The special leave Court further noted that the High Court of Australia had affirmed Codelfa in Royal Botanic Gardens and that Paribas, Toll, Wilkie v Gordian Runoff Ltd and International Air Transport Association v Ansett Australia Holdings Ltd did not operate inconsistently with Codelfa.78

6.18

Their Honours refused special leave, agreed with the result reached by Justice Macfarlan, and gave published written reasons for the refusal, which is unusual. Their Honours’ reasons consisted of just six paragraphs, and have been published in the Australian Law Reports and the Australian Law Journal Reports, and have subsequently been cited in at least 130 published judgments of Supreme and intermediate appellate courts, and have been the subject of at least a dozen academic articles.

6.19

After the publication of those reasons, and despite their clarity, courts in Australia, at all levels and jurisdictions, expressed confusion as to what the correct principle was which governed the construction of commercial contracts. That confusion arose mainly because it was unclear what precedential authority or weight attached to the reasons of three Judges of the High Court in refusing an application for special leave. 79

6.20

It was difficult to know precisely what was the place of “surrounding circumstances” in light of Jireh, and whether ambiguity must be found first, until Electricity Generation.80 Certainly, before Electricity Generation, surrounding circumstances can be considered when there is ambiguity, but given extrinsic evidence is admissible if it is “relevant to a fact in issue, probative of the surrounding circumstances known to the parties or of the purpose or object of the transaction, including its genesis, background context and the market in which the

78 79

Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 [4]-[5] In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [112] the High Court confirmed that reasons for refusing special leave “create no precedent and are binding on no one”. Wong, Derek and Michael, Brent ‘Western Export Services v Jireh International: Ambiguity as the gateway to surrounding circumstances?’ (2012) 86 ALJ 57, 64 and North Ganalanja Aboriginal Corporation v Queensland (1996) 185 CLR 595 at 643.

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parties are operating”81 such use of surrounding circumstances is unlikely to have ever been controversial. 6.21

The extract of Electricity Generation in paragraph 6.10 was frustrating, for a number of reasons. The High Court was no doubt aware of the controversy and uncertainty in this area of the law, but rather than addressing the point directly, the plurality said, twice in the same paragraph, that they were only “reaffirming” the position the High Court had adopted in earlier cases. The problem was that no one really knew what that position was.

6.22

Different views have been taken as to what the extracted paragraph means. On the one hand, there was no reference in that paragraph to any requirement for ambiguity before regard could be had to surrounding circumstances. On the other hand, at least as far as Gummow, Heydon and Bell JJ are concerned, the absence of an express statement to that effect does not mean that no ambiguity requirement exists, and such a requirement will continue to exist until the High Court overrules Mason J’s comments in Codelfa regarding the “true rule”. Of course, none of the Judges on the Jireh bench were on the Electricity Generation bench, Gummow and Heydon JJ had retired, and Bell J was not part of the Electricity Generation bench of five.

6.23

Since the High Court’s decision in Electricity Generation, Leeming JA in Mainteck Services Pty Ltd v Stein Heurtey SA considered the authorities and argued that:82 “To the extent what was said in Jireh supports the proposition that “ambiguity” can be evaluated without regard to surrounding circumstances and commercial purpose or objects, it is clear that is inconsistent with what was said in Woodside.”

6.24

His Honour explained that words do not have a natural meaning which can be understood otherwise than in context. 83 “[I]n some cases the notion of words having a natural meaning is not a very helpful one. Because the meaning of words is so sensitive to syntax and context, the natural meaning of words in one sentence may be quite unnatural in another.

Thus a statement that words have a particular

natural meaning may mean no more than that in many contexts they will have that meaning. In other contexts, their meaning will be different but no less natural.”

81 82 83

Velvet Glove Holdings Pty Ltd v Mount Isa Mines Ltd [2011] QCA 312 at [36]. Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 (Mainteck). Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 at [75], quoting from Lord Hoffman in Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 391. Lemming JA found that the available evidence of what took place at meetings way too general and too removed to play any role in constructions.

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6.25

Leeming JA (with whom Ward and Emmett JJA agreed) explained in Mainteck that by “context” the Courts are referring to “surrounding circumstances.” This contextual approach avoids the need to work out what is meant by the term ambiguity in the first place. As his Honour says the identification of what is an ambiguous term may differ from one judge to another. His Honour also expressed the view that “the Australian approach [now] mirrors that adopted in England”.84 In substance his Honour is saying ambiguity is not a precondition to the use of surrounding circumstances in the construction exercise.

6.26

In Newey v Westpac Banking Corporation 85 the New South Wales Court of Appeal again considered Electricity Generation. The case involved a law firm that acted for former employees of St George Bank, about claims arising from their employment. Westpac was the successor in title to St George Bank. The claims were settled on terms that the solicitors for the former employees were precluded from bringing claims on behalf of former employees of St George, against Westpac in the future. After the settlement, the solicitors acted for 2 further employees and the question was whether the restraint applied so that the solicitors could not act in the proceedings. Pembroke J, at first instance held (relevantly):86 (1)

that there was ambiguity in the deeds on the basis that there was an anomaly in the chosen language. This anomaly was said to arise from the fact that one of the listed “Prospective Applicants” (Mr Poulos) did not fall within the restraint in cl 1(c) or (d) of the deeds if the word “Westpac” was read literally; that unless “Westpac” was read broadly there was no reason to exclude him from this restraint; and

(2)

that the word “Westpac” in cl 1(d), having regard to its lexical, grammatical, and syntactical context, and the known objective fact of the status of Mr Poulos, should be construed to mean “Westpac or any of its related bodies corporate”.

6.27

In the Court of Appeal, Gleeson JA (with whom Basten and Meagher JJA agreed) in allowing the appeal held that Electricity Generation “endorses and requires a contextual approach to construction of commercial contracts and “ambiguity” is to be evaluated having regard to surrounding circumstances and commercial purposes or objects”. 87

85 86 87

[2014] NSWCA 184 at [84]. See also Stratton Finance Pty Ltd v Webb [2014] FCAFC 110 at [36]-[38], Hawes v Dean [2014] NSWCA 380 [2], [42] “The Dean parties emphasise the need to eschew a technical, narrow or pedantic approach to construction and to adopt a businesslike interpretation, having regard to the language used and the objects the contract is intended to secure as indicated by the context in which it was made, the genesis of the contract and the background to it. They rely on observations to this effect by Gleeson CJ in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; 234 CLR 151 at [8]”, and Newey v Westpac [2014] NSWCA 319 and Carlow Castle v Aztec [2014] NSWCA 12. Newey v Westpac Banking Corporation [2014] NSWCA 319. Newey v Westpac Banking Corporation [2014] NSWCA 319. Newey v Westpac Banking Corporation [2014] NSWCA 319 [89].

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6.28

His Honour explained:88 “Here that knowledge would include (a) that some employees of St George had been terminated by St George prior to March 2010 and some had transferred to Westpac on that date; and (b) at least one matter of law, namely, that St George had ceased to exist as a legal entity at the time the parties had negotiated and entered into the deeds.”

6.29

It is also important to remember the extent to which context and legitimate surrounding circumstances can be used. Gleeson JA referred to McGrath v Sturesteps where Bathurst CJ said:89 “… Whilst it is correct in my opinion that context and the surrounding circumstances known to both parties can be taken into account even in cases where there is an absence of apparent ambiguity that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust. This does not mean that there are not exceptional cases where, to use the words of Lord Hoffmann, something has clearly gone wrong with the language so as to interpret it in accordance with the ordinary rules of syntax makes no commercial sense. In such a case, in my opinion, a court is entitled to depart from the ordinary meaning to give effect to what objectively speaking the parties intended …” [Citations omitted]

6.30

Up until the High Court’s decision of Mount Bruce Mining, in a string of cases90 which were decided by the New South Wales Court of Appeal, it seemed that most and maybe all of the Judges in the Court of Appeal had taken the view that Electricity Generation reinstated the position expressed in Metcash. Macfarlan JA was a possible exception.

6.31

In the Federal Court of Australia, Allsop CJ, who sat on the Metcash bench as President of the New South Wales Court of Appeal, took the same view as expressed in Mainteck.91

6.32

In Victoria, it seems the Court of Appeal had not before Mount Bruce Mining in the High Court expressed a view, however there are decisions by single judges of the Supreme Court where the debate has been recognised, but again no view expressed. 92

88 89

Newey v Westpac Banking Corporation [2014] NSWCA 319 [85]. McGrath v Sturesteps [2011] NSWCA 315 [17]-[18], cited in Newey v Westpac Banking Corporation [2014] NSWCA 319 [90]. In addition to those referred to elsewhere in this paper, see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2014] NSWCA 323 and Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326. Stratton Finance Pty Limited v Webb [2014] FCAFC 110.

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6.33

Unfortunately, there seems to be a divergence between the approaches adopted by the courts in Western Australia and New South Wales. In Western Australia, the Court of Appeal appears hesitant to accept that Electricity Generation went that far. It would appear that at least the McLure P, and Murphy JA, have taken the view that Electricity Generation did not resolve the controversy, and the President has indicated that she proposes to continue to apply the “true rule”, as explained by the Western Australian Court of Appeal before Electricity Generation, until the High Court provides clarification.

6.34

In Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations 93 Murphy JA doubted the correctness of the decision of the New South Wales Supreme Court in Mainteck, and noted that contextual approach to construction does not always import the reception of evidence of surrounding circumstances.94 Further, his Honour noted that it could be incorrect to say that in all cases where there is a contest as to the proper construction of a written contract, any evidence from the parties of surrounding circumstances is always admissible on the question of construction, irrespective of ambiguity in the absence of such evidence.95

6.35

It was hoped that the High Court would give clarity to the debate in Mount Bruce Mining.96 French CJ , Nettle and Gordon JJ confirmed that if a term in a written contract is unambiguous, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning.97 In this respect, the High Court was careful not to depart from established principles, stating:98 “These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales and Electricity Generation Corporation v Woodside Energy.”

6.36

What the High Court did not go on to decide – and expressly decided not to do so – was whether ambiguity must be shown before a court interpreting a written contract can have regard to surrounding circumstances.99 Bell and Gageler JJ said that “the question remains for other Australian courts to determine on the basis that [Codelfa] remains binding authority.”100

92 93 94 95 96 97 98 99

100

Tatts Group Limited v The State of Victoria [2014] VSC 302. Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations (2014) 48 WAR 261. Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations (2014) 48 WAR 261 at [214]. Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations (2014) 48 WAR 261 at [216]. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 [48]. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 [52]. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 [49] (per French CJ, Nettle and Gordon JJ), [113] (per Kiefel and Keane JJ), [119] (per Bell and Gageler JJ). Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 at [119].

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6.37

That invitation was enthusiastically taken up by the New South Wales Court of Appeal following the decision of the High Court in Victoria v Tatts Group Ltd.101 The facts of Victoria v Tatts Group Ltd are not of interest but how the High Court went about the approach to contractual interpretation is. According to Leeming JA in Zhang v ROC Services (NSW) Pty Limited, since Victoria v Tatts Group Ltd, “[t]he position has now been clarified by the High Court.”102

6.38

His Honour referred to what Barrett AJA said WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd:103

“[T]he notion that it may first be necessary to consider context when construing a contract is not inconsistent with Mason J’s ‘true rule’. On this footing, it does not follow that the task of assessing whether a phrase or expression is ambiguous or susceptible of more than one meaning must be undertaken without regard to evidence of surrounding circumstances. This position corresponds with the approach of the High Court in Victoria v Tatts Group Ltd where the relevant contract was construed by reference to its text, context and purpose without any anterior finding of ambiguity as a precondition to a consideration of surrounding circumstances as an aid to discovering or elucidating context and purpose.” (Emphasis added) 6.39

Leeming JA continued by noting that the same point had been made in other decisions of the New South Wales Court of Appeal104 and by the Full Court of the Federal Court of Australia105 and went on to say:106 “Of course, on no view does it follow that the evidence of surrounding circumstances will be of assistance and therefore ultimately relevant: evidence of surrounding circumstances did not assist in Mainteck and in WIN Corporation. It is true that this may in some cases lead to an expansion of the evidence tendered on an issue of construction, although ordinarily it may be expected that parties will confine their tender to material which will bear on the meaning of the contract. Indeed, a party seeking to tender a document as evidence of surrounding circumstances and for no other purpose ought to be able, readily and precisely, to identify

101 102 103 104

105 106

[2016] HCA 5; 90 ALJR 392. Zhang v ROC Services (NSW) Pty Limited [2016] NSWCA 370 [79]. [2016] NSWCA 297 [59]. Calvo v Ellimark Pty Ltd [2016] NSWCA 136 [55] (notably his Honour’s reasons with whom Ward and Gleeson JJA agreed). Todd v Alterra at Lloyds Ltd (2016) 239 FCR 12; [2016] FCAFC 15 [73]-[75]. Zhang v ROC Services (NSW) Pty Limited [2016] NSWCA 370 [80].

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how it is said that its reception will bear on the process of ascertaining the legal meaning.” 6.40

In Cherry v Steele-Park,107 the NSW Court of Appeal found that ambiguity is not required before regard may be had to surrounding circumstances when construing a contract.

6.41

The facts are these: (1)

Mr & Mrs Steele-Park agreed to sell land to Bathurst Central.

(2)

The contract provided that if the Steele-Parks validly terminated the contract and resold the property for a lower price, they could recover the difference from Bathurst Central.

(3)

Completion was due to occur by late March.

(4)

Prior to completion, the parties agreed to vary the contract by extending the completion date to October. That variation also provided that Bathurst Central agreed to pay an additional $30,250 in consideration for the extension of time.

(5)

Prior to executing the variation, Mr Cherry and Mr Sharpe, as directors of Bathurst Central, signed a guarantee in which they guaranteed the payment by Bathurst Central of “all amounts (including damages)… under or in connection with the Agreement”.

(6)

Completion never occurred and the Steele-Parks terminated the contract and later sold the land to a third party for less than what they had agreed with Bathurst Central.

(7)

Proceedings were subsequently commenced against Mr Cherry and Mr Sharpe as guarantors seeking damages for the difference in the price as well as the $30,250.

(8)

Mr Cherry and Mr Sharpe argued that the guarantee was limited to $30,250 and did not extend to the difference in price between the two contracts.

(9)

In support of their argument, Mr Cherry and Mr Sharpe relied on various emails exchanged between the parties’ solicitors in the lead up to the execution of the Variation. The emails were said to demonstrate an understanding by Bathurst Central’s solicitors that the guarantee would only relate to the completion date extension payment of $30,250, and not any damages for failing to complete.

107

(2017) 96 NSWLR 548; [2017] NSWCA 295.

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6.42

In the District Court, the primary judge held that, in the absence of ambiguity, the emails were inadmissible as to the meaning of the wording of the guarantee.

6.43

On appeal, Leeming JA gave consideration to whether there was a need to first identify ambiguity before regard may be had to surrounding circumstances.

6.44

In concluding that ambiguity is not required before regard may be had to surrounding circumstances, Leeming JA said that: (1)

regard may be had to surrounding circumstances without passing through an “ambiguity gateway”; and

(2)

ambiguity is a conclusion, rather than a precondition to the admissibility of evidence of surrounding circumstances.

6.45

His Honour held that: (1)

the emails were objective facts known to both sides of the transaction and represented the communicated negotiating position of the parties; and

(2)

the emails were the immediate objective context in which the contractual document was drafted and executed.

6.46

Although his Honour concluded that the emails were admissible as to the construction of the guarantee, his Honour acknowledged the importance of the primacy of the text of the guarantee.

6.47

In discussing this issue, his Honour said that “the starting point and the ending point of the construction of a written contract is the language chosen by the parties to record their bargain.”

6.48

In this regard, Leeming JA concluded that: (1)

having considered the language of the guarantee against the context and purpose of the documents, it was not possible to construe the guarantee narrowly;

(2)

the language of the guarantee “makes it plain beyond argument” that the guarantee extends to both damages for failing to complete the purchase and the completion date extension payment;

(3)

primacy must be given to the text of the guarantee; and

(4)

the emails were incapable of defeating the wide words in the guarantee.

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6.49

Accordingly, the Court dismissed the appeal and held that the guarantee extended to Bathurst Central’s obligation to pay damages for failing to complete the purchase.

6.50

In Ecosse,108 the High Court confirmed that where a term is ambiguous, it is open to a court to take into account words crossed out as an aid to construction of the contract. As practitioners, we see terms struck through all the time and it is pleasing to have certainty around this point.

6.51

As we have just seen, the “true rule” has created much controversy amongst judges, practitioners and academics during its lifetime, especially so in the last five years with the High Court refusing to provide guidance and the superior State Courts taking different positions.

6.52

Sir Anthony Mason has sought to explain exactly what he meant in Codelfa, in his opening address delivered in 2009 at the 20th Anniversary Journal of Contract Law Conference.

6.53

He had this to say: The idea I was endeavouring to express in Codelfa, albeit imperfectly, was that extrinsic materials are receivable as an aid to construction, even if, as may well be the case, the extrinsic materials are not enough to displace the clear and strong words of the contract.109

6.54

Returning to the questions posed in paragraph 4.3 above, the answers now appear to be clear. Evidence of surrounding circumstances can be admitted to: (1)

assist in the interpretation of the contract (but not so as to contradict the plain meaning of the contract) even if the language is not ambiguous or susceptible of more than one meaning (which includes determining the commercial purpose or objects of the contract);

(2)

determine whether a contract has a “plain meaning” and to create ambiguity (despite the contract having a “plain meaning” were recourse not had to surrounding circumstances);

and to pick up McDougall J’s conclusions not covered by those above: (3)

to define a descriptive term;

but such evidence is inadmissible to:

108 109

(2017) 261 CLR 544. See paragraphs 3.19 to 3.29 above in which this case is discussed. A Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1 at 3.

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6.55

(4)

contradict the plain language of the contract (where there is no ambiguity); or

(5)

to prove subjective intentions.

It must be asked, what then is the practical use of a rule which, save for the position where evidence cannot be admitted to contradict the plain meaning of the contract or prove subjective intentions, is confined to those exceptions and beset with difficulty in is application?

6.56

In considering that question, it is noteworthy to end this review with the comments of Palmer J in Ray Brooks Pty Limited v NSW Grains Board:110 “[M]ay I say, with great respect to those who promote the literal approach to construction, that to a trial judge the rationale for that approach does not appear very compelling. Of course, it would be a good thing in terms of saving time, trouble and expense if a trial judge could reject the tender of extrinsic evidence on the basis that the words of the contract are clear and unambiguous. The difficulty is that, in real life, the judge is told by the plaintiff’s counsel in opening that the words of the contract clearly mean X, only to be told by the defendant’s counsel immediately afterwards that the words clearly mean Y. In all but a very few cases, the arguments of both counsel seem respectable. How can a judge confidently reject at the outset extrinsic evidence tendered in aid of construing words said to have at least two meanings on the ground that he or she has already formed the view that the words are clear and could not possibly mean what one or other counsel says they mean when seen in the context of surrounding circumstances? Willy-nilly, the judge has to admit the evidence, hear the disputation arising from it and, at the end of the day, work out whether any of it is of assistance. I suspect that approaching the construction of a contract is rather like approaching the eating of a boiled egg and that the controversy between the literalists and the contextualists has as much practical significance as the controversy between the Big-Endians and the Little-Endians recounted in Gulliver’s Travels: whichever end of the egg you start at, it all gets eaten up and it all tastes the same anyway.”

110

[2002] NSWSC 1049; [2002] Aust Contract Reports 90-155 [67], [68].

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Part 2: Controlling liability through contract 1

Releases

1.1

In the context of contract, a release discharges a party from performing their obligations under another agreement or relieves them of certain current or future liabilities which may arise from their conduct. In the context of litigation, they are often executed by parties if a matter is settled, discharging a party from a particular claim.

1.2

When considering an agreement for release, parties should be cautious of how broadly the agreement is phrased. Where the release is phrased in wide or general terms, it will be read down to only apply to matters contemplated by the parties at the time of the release.111 This accords with common law principles of construction to consider the surrounding circumstances. In Grant v John Grant,112 a dispute arose between different branches of an extended family in relation to a settlement deed. The deed acknowledged specific disputes between the parties but also included a general release. The plaintiff claimed that they were owed a debt. The defendant relied on the general release. The majority of the High Court limited the application of the general release to matters that were conceivable at the time of the release.

1.3

In addition, where a party seeks to rely on such a general release, equity will consider whether it would be unconscientious for a party to rely on the generality of the release in the circumstances:113 “[E]quity proceeded upon the principle that a releasee must not use the general words of a release as a means of escaping the fulfilment of obligations falling outside the true purpose of the transaction as ascertained from the nature of the instrument and the surrounding circumstances including the state of knowledge of the respective parties concerning the existence, character and extent of the liability in question and the actual intention of the releasor.”

1.4

See example clauses in Annexure A.

111

Grant v John Grant & Sons Pty Ltd [1954] HCA 23; 91 CLR 112 (Grant v John Grant). [1954] HCA 23; 91 CLR 112. 113 Grant v John Grant & Sons Pty Ltd [1954] HCA 23; 91 CLR 112, 129-130 (Dixon CJ, Fullagar, Kitto and Taylor JJ). 112

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Accord and satisfaction

2.1

The “essence of accord and satisfaction ‘is the acceptance by the plaintiff of something in place of his cause of action’, ... the accord is the agreement or consent to accept the satisfaction ... upon provision of the satisfaction, there is a discharge which extinguishes the cause of action”.114 An accord and satisfaction requires acceptance of something in place of the full remedy to which the recipient is entitled. There are thus two elements: accord and satisfaction.

2.2

Scrutton LJ in British Russian Gazette and Trade Outlook Ltd v Associated Newspapers Ltd said that: “Accord and satisfaction is the purchase of a release from an obligation whether arising under contract or tort by means of any valuable consideration, not being the actual performance of the obligation itself.” His Lordship added that the “accord is the agreement by which the obligation is discharged”, 115 and the “satisfaction is the consideration which makes the agreement operative”.

2.3

In the context of a dispute, the parties will often enter into terms of settlement in the form of a contract or a deed. By those terms of settlement, the action will be compromised, possibly along with any cross-action or potential cross-action. Usually the terms will be expressed with the phrase “in full and final settlement”.

2.4

Where there is an agreement to accept a promise in satisfaction of the cause of action, “the original cause of action is discharged from the date when the promise is made”. 116

2.5

In Osborn & Bernotti t/as G04 Productions v McDermott t/as RA McDermott & Co & Karmine Pty Ltd, Phillips JA said:117 “Where there is an accord and satisfaction, the agreement for compromise may be enforced, and indeed only that agreement may be enforced, because ex hypothesi the previous cause of action has gone; it has been ‘satisfied’ by the making of the new agreement constituted by abandonment of the earlier cause of action in return for the promise of other benefit.”

114

Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500; [1998] HCA 33 at [116] (Gummow J) citing McDermott v Black at 183 – 185 (Dixon J); see also British Russian Gazette & Trade Outlook Ltd v Associated Newspapers Ltd [1933] 2 KB 616 at 643 (Scrutton LJ). 115 British Russian Gazette and Trade Outlook Ltd v Associated Newspapers Ltd [1933] 2 KB 616, 643. 116 McDermott v Black (1940) 63 CLR 161, 176 (Starke J), 183-5 (Dixon J). 117 Osborn & Bernotti t/as G04 Productions v McDermott t/as RA McDermott & Co & Karmine Pty Ltd [1998] 3 VR 1, 8 (Osborn v McDermott). Referred to with apparent approval in Baxter v Obacelo Pty Ltd [2001] HCA 66; (2001) 205 CLR 635 at [56] (Gummow and Hayne JJ). APAC-#81976459-v1

2.6

In other words, the role of an accord is to replace the former contract with a new one. Accord and satisfaction provides the means whereby a cause of action which a plaintiff has can be rendered unenforceable.118

2.7

As Professor Nicholas Seddon sets out in his monograph Seddon on Deeds at [6.5]:119 A compromise, settlement or release agreement falls into three classes: (1)

An “accord executory” is in the form of a unilateral contract whereby the claimant promises to abandon a claim or release the other party in exchange for that party doing something (usually paying money).

(2)

An “accord and satisfaction” under which the claimant promises to abandon the claim or release the other party in exchange for that party promising to do something.

(3)

An accord and satisfaction subject to a condition subsequent.

The significance of these distinctions arises when the defendant fails to do what is required and the effect this has on the original cause of action or complaint that is being settled. In the case of an accord executory which is in the form of a unilateral contract, if the defendant fails to perform the requested act, the claimant's original rights continue and can be pursued and no settlement agreement has eventuated. 120 In the case of an accord and satisfaction, the claimant has foregone his or her original claim and can only enforce the settlement agreement. Thus, in the case of accord and satisfaction, the claimant replaces the original claim (which may or may not have succeeded) with an enforceable agreement.121 In the case of a conditional accord and satisfaction, the claimant only abandons his or her original claim so long as the defendant carries out her or his promise but, failing that, the claimant's original claim can still be pursued. 122

118

Illawong Village Pty Ltd v State Bank of New South Wales [2004] NSWSC 18 [262]-[263] (Campbell J). Professor Nicholas Seddon, Seddon on Deeds (Federation Press, 2015). 120 If the agreement is embodied in a deed, this would be an escrow the condition of which is that the counterparty must perform the stipulated obligation (usually payment) failing which the counter-party is not released and the dispute is not settled. The advantage (or possibly disadvantage) of using a deed in this case is that the claimant would not be able to withdrawn pending satisfaction of the condition, whereas an offer for a unilateral contract can be withdrawn before the other party has performed the requested act. 121 An accord and satisfaction embodied in a deed has dispositive effect: once executed, the original claim is destroyed. It also has contractual effect because the party claimed against is obliged to pay the money or whatever is required for settlement of the dispute. If embodied in a deed, the settlement agreement has a limitation period twice that of a contract of settlement. 122 If a contract is used, the difference between this and category 1 is that category 3 is a bilateral contract subject to a condition subsequent whereas category 1 is a potential unilateral contract. If a deed is used, as noted above, an accord executory is an escrow where the abandonment of the claim only occurs on 119

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The question whether there has been an accord and satisfaction is one of fact. 123 It turns upon determining the parties’ intentions, which may be discerned from the terms of any document said to constitute all or part of the agreement or in the surrounding circumstances.124 2.8

The seminal High Court authority is McDermott v Black,125 which demonstrates the relevant considerations.

2.9

In McDermott v Black,126 a purchaser claimed to have been induced to enter into a contract of sale of shares by fraudulent misrepresentations made by the vendor. Prior to the date of completion, the purchaser by letter complained of the misrepresentations, but in a later letter he withdrew all allegations imputing anything improper to the vendor conditionally upon the vendor granting him an extension of time to complete the contract. This extension of time was granted.

2.10

The High Court held that the withdrawal of the allegations in consideration of an extension of time for completion was not too vague to constitute a contract of accord and satisfaction. “The ‘withdrawal of all allegations imputing anything improper to’ the defendant conditionally upon the latter’s agreeing to three-weeks’ further time for payment of the balance of purchase money clearly amounts to an election to affirm the contract. It does, I think, imply a promise not to revive the allegations. ... [T]he purpose was to settle or compromise a very definite dispute ... The withdrawal of the allegations of improper conduct meant, in my opinion, that he would make no claim based upon misrepresentation but would accept the promise of further time instead ... [T]he agreement to withdraw in consideration of a grant of time can be regarded as an accord and satisfaction.”

2.11

Ballantyne v Phillott127 considered whether an accord and satisfaction could be inferred from a statutory declaration which stated that “any action or proceeding in any court heretofore commenced by the said (respondent) against the said (appellant) shall be

satisfaction of the condition and so category 3 as a deed is no different from category 1 embodied in a deed. It is obviously important when drafting a settlement agreement to give serious consideration to which type is best suited to the occasion. The question whether there has been an accord and satisfaction (or another category of settlement) is one of fact. The difference between these three possibilities depends on the drafting of the agreement and, ideally, as Phillips JA pointed out in Osborn v McDermott, the agreement should specify the consequence of the defendant failing to perform or satisfy the condition. 123 Day v McLea (1889) 22 QBD 610 at 613 (Lord Esher MR); Bagnall v National Tobacco Corporation of Australia Ltd [1934] NSWStRp 30; (1934) 34 SR (NSW) 421, 427 (Jordan CJ); see also Neuchatel Ashphalte Co Ltd v Barnett [1957] 1 WLR 356. 124 Ballantyne v Phillott [1961] HCA 17; (1961) 105 CLR 379, 398 (Menzies J). 125 (1940) 63 CLR 161. 126 (1940) 63 CLR 161. 127 [1961] HCA 17; (1961) 105 CLR 379. APAC-#81976459-v1

discontinued and that such action or proceeding shall not again be commenced by or on behalf of the said (respondent) against the said (appellant)”, that “...the said (respondent) waives all and any rights or claims whatsoever which he has or may have had against the said (appellant) by virtue of such action or proceeding or otherwise howsoever” and that “...the said (appellant) has no right or claim against the said (respondent) in respect of or arising out of any such action or otherwise howsoever”. The High Court was divided on whether that amounted to accord and satisfaction. 2.12

Menzies and Windeyer JJ held that it was not an accord and satisfaction because there was no consideration for the respondent’s agreement to discontinue the proceedings.

2.13

Dixon CJ (in dissent) held that the appellant’s statement “that she had no right or claim” against the respondent amounted to consideration for the appellant's promise, even though it was not a “claim which a judge would enforce”. According to his Honour, it should “be deemed enough” as “[i]t is a result that accords with their mutual intentions and I think that it is authorized by this peculiar branch of law”.

How courts approach exclusion of liability and indemnity clauses

3.1

What are exclusion clauses, limitation of liability clauses and agreed damages clauses? 

An exclusion clause operates to exclude the rights of a party to a contract for breach of a duty. It is only for the benefit of one party.



A limitation of liability clause restricts a party’s liability arising from a breach of contract. It operates only in certain circumstances and can limit damages to a specified sum or to a maximum amount.



An agreed damages clause is a provision which fixes the sum payable as damage in the event of breach without the requirement that the plaintiff prove loss or damage. -

The clause must be certain and be a genuine pre estimate of loss that is expected to flow from a breach of contract.

If it is not a genuine pre-estimate, then it is a penalty and unenforceable. This is discussed further below.

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3.2

The purpose and function of exclusion clauses Limitation and exclusion clauses are drafted for the purpose of providing a defence (or partial defence) in answer to common law claims. Accordingly, when drafting indemnity or exclusion clauses, a number of factors must be considered, including the intention of the parties, the impact of the law of negligence, fraud and misrepresentation, the position of third parties and public policy. The function of the exclusion clause was explained by Windeyer J (in dissent) in Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd,128 where his Honour said that the relevant question is, whether the effect of an exclusion clause is to absolve a party from liability for consequences of a breach of duty, or whether its effect is to define substantively the limits of the duty by negativing obligations that the law would otherwise impose. However, in the leading English case of Photo Production Ltd v Securicor Transport Ltd,129 Lord Wilberforce adopted a different approach, saying that the function of an exclusion clause is a defence to an action for breach, that is, once liability is established.

Assumption of liability Exclusion clause Excluding liability No Liability

Limiting liability Limited to dollar or equivalent

Qualifying liability Only liability if . . .

The function of an exclusion clause is set out below: Therefore an exclusion clause can exclude rights, restrict rights or qualify rights that would ordinarily accrue to a party under a contract, or a rule of law. To be exclusionary, the clause must operate for the benefit of one party. Thus, an agreed damages clause, is not considered to be an exclusion clause because it is meant to be a genuine pre-estimate of

(1966) 115 CLR 353 (Thomas National Transport). Windeyer J’s judgement was cited with approval in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510. 129 [1980] AC 827. The statements by the House of Lords in relation to exclusion and limitation clauses, as to the construction of such clauses, are in place of its previous approach based upon the doctrine of fundamental breach as stated in Harbutt’s Plasticine v Wayne Tank [1970] 1 QB 447 and explaining Suisse Atlantique v N.V. Rotterdamsche [1967] 1 AC 361. In Australia, the High Court had previously construed such clauses without reference to the doctrine of fundamental breach. 128

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the potential loss and therefore, act as a benefit to both parties by guaranteeing a sum to the party who suffers the loss and giving certainty to the person who creates the loss. 130 3.3

Interpretation of exclusion clauses Subject to statute, the primary rule of construction as stated in Darlington Futures Ltd v Delco Australia Pty Ltd is that the operation of an exclusionary clause depends on the intention of the parties.131 Exclusion and limitation clauses are construed according to their natural and ordinary meaning, rather than strictly. However, where a clause is open to several meanings, the clause will be construed contra proferentem. There are a number of secondary rules of construction that may apply, where an exclusion clause has not been drafted in a way that anticipates the circumstances of a particular breach.

However, these are generally regarded as aids to construction and merely

particular methods of deducing the intention of the parties. 132 For example, the secondary rules of construction may be useful in determining whether the parties intend the clause to apply to particular breaches of the contract and not others, based on the seriousness of the breach and the relative importance of the term that is breached. The traditional approach of the courts to exclusion clauses has been to read them strictly and not uphold them except in clear cases. However, in recent years with the development of statutory consumer protection laws, the courts have been adopting a somewhat different

130

J W Carter, Carter on Contract, Lexis/Nexis Butterworths, Sydney, 2002 at [34,021]. Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 (Darlington Futures); Sydney City Council v West (1965) 114 CLR 481 (West). West was a case where the conduct, in question, was not contemplated by the contract and therefore the exclusion clause had no operation. See also BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC) (BSkyB) where the English High Court also made some comments about releases. The exclusion of liability in BSkyB operated as a release. Ramsey J quoted from Lord Bingham in Bank of Credit and Commerce International SA v Ali [2001] 2 WLR 735, “on a fair construction of this document I cannot conclude that the parties intended to provide for the release of rights and the surrender of claims which they could never have had in contemplation at all. If the parties had sought to achieve so extravagant a result they should in my opinion have used language which left no room for doubt and which might at least have alerted [the Applicant] to the true effect of what (on that hypothesis) he was agreeing”. 132 See, Davis v The Commissioner of Main Roads (1968) 117 CLR 529 where Menzies J (with whom Barwick CJ and McTiernan J agreed) held the indemnity clause was not ambiguous and operated according to its terms. His Honour said “. [of]. .Canada Steamship Lines v The King . . .There it was decided, in accordance with well-established principles, that an exemption clause which did not limit liability for negligence in clear terms should be constructed as relating to a liability not based on negligence . . .” contra: Schenker & Co (Aust) Pty Ltd v Maplas Equipment [1990] VR 834 where the Full Court states that secondary rules have no application because to apply them is inconsistent with the approach in Darlington Futures. A similar view has been taken by the South Australian Full Court in Valkonen & Anor v Jennings Constructions Ltd & Ors (BC 9502316 at 12). However, more recently in BI (Contracting) Pty Ltd v Baulderstone Holdings Pty Ltd [2007] NSWCA 173 [73-74] Beazley JA (with whom Tobias JA and Bell J agreed) said that no reference was made to Ankar in Schenker & Co or Valkonan and they should not be taken, to that extent, to be “good law” and the comments made about SS Canada should “be viewed with care”. Further the High Court in Darlington Futures was considering the construction of an exclusion clause not an indemnity provision. The Court of Appeal in B1 Contracting also said that Glebe Island Terminals v Continental Seagram Pty Ltd (1993) 40 NSW LR 206 is no longer good law. 131

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approach to exclusion clauses. This move, we suggest, reflects a shift in the moral and social mores towards individualism and being more ready to adopt an economic realism approach by acknowledging the sanctity and importance of contractual terms and upholding these terms except in cases where the weaker party can demonstrate a need or characteristic that it would be unconscionable for the stronger party to enforce that term. In Photo Production Ltd v Securicor Transport Ltd, Lord Wilberforce said: …in commercial matters generally, when the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said…for leaving the parties free to apportion the risks as they think fit and for respecting their decisions.133 The High Court in Darlington Futures134 stated what is now the accepted approach for construing limitation and exclusion clauses. The Court made it clear that its approach to the construction of such clauses “does no more than express the general approach to the interpretation of contracts”. The meaning of such a clause, …is to be determined by construing the clause according to its natural and ordinary meaning, read in light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and where appropriate, construing the clause contra proferentem in case of ambiguity… Shortly before that passage in Darlington Futures the High Court made reference to H&E Van der Sterren v Cibernetics (Holdings) Pty Ltd 135 where Walsh J stated: the terms of exemption clauses must sometimes be read down if they cannot be applied literally without creating an absurdity or defeating the main object of the contract … such a modification … is not to made unless it is necessary to give effect to what the parties must be understood to have intended.

133

[1980] AC 827 at 843. Lord Diplock similarly at 851 and Lord Salmon at 852. (1986) 161 CLR 500 at 510. The High Court’s decision in Darlington Futures was approved in Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation (1989) 167 CLR 219 and Select Seeds Pty Ltd v QBEMM Pty Ltd (2010) 271 ALR 484 at 490. Also of note in Darlington Futures the High Court rejected Lord Fraser’s comments in Ailsa Craig Fishing v Malvern Fishing (1983) 1 All ER 101 at 104, to the effect that the principles to be applied to exclusion clauses did not apply “in their full rigour” to limitation clauses. Lord Elwyn-Jones, Lord Salmon and Lord Lowry agreed with Lord Fraser. See also Victorian Alps Wine Company Pty Ltd v All Saints Estate Pty Ltd [2012] VSCA 81 at [32] [44-48]. 135 (1970) 44 ALJR 157, 158. 134

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Walsh J’s reasons invite the question, can an exclusion clause “apply to an event which defeats the main object of the contract?”136 This question was considered in Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation Berhad. 137 In Nissho Iwai Australia138, the plurality after referring to the above statement from Darlington Futures said: In determining whether an exemption clause should be construed so as to apply to an event which defeated the main object of the contract, much must depend upon the nature of the events which the clause identifies as giving rise to the exemption from liability. If the happening of a stipulated event will always result in the defeat of the main object of the contract, there will be no scope for holding that the object requires the conclusion that the exemption clause is not applicable to that event. The High Court went on to say that the “occurrence of the events stipulated, will not always defeat the main object of the contract, but there may be an available inference that the exemption clause was intended to apply to defeat the main object of the contract”. 139 3.4

Limitation of the effect of exclusion clauses Legislative intervention against exclusion clauses is for the protection of consumers. Some legislation is directed specifically at exclusion clauses, such as those found in the Australian Consumer Law (ACL) which is contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth). Other legislation is also directed at contracts that are unjust or unfair, such as the New South Wales Contracts Review Act 1980 (NSW). In order to ensure that the intention of the parties is clear, a limitation clause should specifically refer to the statutory prohibition that affects the limitation of liability, thereby demonstrating clearly the intention of the parties and making accurate representations about the extent to which the exclusion operates. 140 The purpose of sections 60 and 64 of the ACL is to prohibit exclusion clauses and imply into all consumer contracts certain non-excludable guarantees. It imposes additional contractual terms, regardless of the intention of the parties. However, it does not confer a statutory right of action – any action is for breach of contract.

136

Electricity Generation v Woodside Energy Ltd [2013] WASCA 36 at 59. (1989) 167 CLR 219, 227 (Nissho Iwai Australia). 138 (1989) 169 CLR 219, 227. 139 (1989) 169 CLR 219, 227 and see also Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 48 NSWLR 206, where the court held that exemption clauses on their proper construction may apply to wilful and unauthorised breaches of contract. 140 Carter on Contract, Lexis/Nexis Butterworths, Sydney 2002 at [15-240]. 137

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The provisions only apply in relation to contracts for the supply of goods or services to a consumer.141 3.5

Limitation of liability for negligence Negligence is a particular form of conduct that parties attempt to exclude in contracts or in relation to which they obtain indemnities. Gleeson CJ, McHugh, Gummow and Hayne JJ in Astley v Austrust Ltd noted that unlike the duty of care arising under the law of tort, in contract, the promisee gives consideration for the implied duty of care and therefore it is a term that the parties can, and often do, bargain away or limit as they choose. 142 Because negligence involves damage to and loss of property and persons, a strict view on the exclusion or limitation of liability for negligence has historically been adopted. The leading case English case on the rules of construction in relation to negligence is the Canada SS143 case. The 3 principles are not “rigid rules but are broad guidelines to assist the Court’s ascertainment of the intention of the parties to the contract”144. The rules provide: (1)

an express reference to negligence will generally exclude liability for negligence;

Section 4B of the ACL. “Consumer contract” is the unfair contracts terms covering “consumer contracts” only (does not affect business-to-business contracts). A “consumer contract” is a contract for the supply of goods or services or to sell or grant an interest in land to an individual wholly or predominantly for personal, domestic or household use or consumption. The new regime of ‘consumer guarantees’ replaces the TPA method of implying consumer protection terms into contracts with consumers for the supply of goods and services and then requiring consumers to claim in contract when there is a breach of the implied terms. All contracts will have to include (implied) non-excludable consumer guarantees; in the case of goods, express warranties and pre-contractual statements made in relation to the goods will be non-excludable consumer guarantees; and any provision which purports to exclude an implied consumer guarantee is invalid and may be illegal. See J W Carter The Consumer Side of Australian Consumer Protection Law (2010) 26 J.C.L. 221. 142 (1999) 197 CLR 1, 22-23 [47]. 143 Canada SS Lines Ltd v The King [1952] AC 192 (Canada SS). The New South Wales Court of Appeal considered the Canada SS case in BI (Contracting) Pty Limited v A W Baulderstone Holdings Pty Limited [2007] NSWCA at 173. Beazley JA noted that Canada SS was applied in Smith v South Wales Switchgear Ltd [1978] 1 All ER at 18. That case also involved an indemnity clause and the question was whether it allowed the respondents to be indemnified against a liability caused solely by their own negligence. Beazley JA said at [91] “It is commonly said that the first and second principles are matters of common sense: see Valkonen & Anor v Jennings Constructions Ltd & Ors (BC 9502316). It is the third “principle” that is contentious”. See also MWH Australia Pty Ltd v Wynton Stone Australia (in liq) [2010] 31 VR 575 at 596. In the past, very “clear words were necessary to exclude liability for negligence”. While that was so, an exemption clause expressly excluded liability for negligence. But since the High Court’s decision in Darlington Futures Ltd v Delco Australia Pty Ltd, the approach has been different. Now, the meaning of an exemption clause is to be determined by construing it according to its natural and ordinary meaning read in light of the contract as a whole and, only where appropriate, contra proferentem in the case of ambiguity. In this case, liability in negligence was not expressly mentioned. But, according to the natural and ordinary meaning of the phrase “all claims and demands whatsoever in respect of the contract,” the phrase encompasses liability for breach of duty to exercise reasonable skill and care in the performance of the contract. There is an abundance of authority that the words “in respect of” are words of wide possible connection. Since it may be taken that it was an implied term of Wynton Stone’s retainer that it would exercise reasonable skill and care in the provision of engineering services in accordance with the contract, a breach of its common law duty to exercise that same degree of skill and care can even more readily be seen as something “in respect of the contract”. 144 BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [90]. 141

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(2)

where there is no express reference to negligence, the issue is whether an intention to exclude liability should be imputed to the parties on the basis of the words used;

(3)

where the words used are wide enough to cover liability for negligence but there exists some ground other than negligence on which liability may be based, the clause may be treated as applying to that other ground.145

Although statutory intervention has largely replaced the need to rely on the Canada SS rules in relation to construction of an exclusionary or indemnity provision, they are still useful as aid to construction.146 Thus, if a clause seeks to limit liability for negligence, a clear manifestation of intention is required. The cases have held, if general words are used, which can apply to negligence and some other liability, the limitation clause will be read down so as to apply only in respect of that other liability.147 Whether negligence is excluded will also depend on whether the parties have entered into a detailed written commercial agreement and whether it was intended to regulate with precision what was required of the parties and whether the relationship between them was to be solely governed by that agreement. In this sense the degree of complexity of the contract is important when determining whether a common law duty of care has been excluded.148 In Thomas National Transport the question was did an exemption clause, exempting Thomas National Transport and its agents from liability for loss and damage to goods in transit or storage “for any reason whatsoever”, apply where the goods were damaged when a sub-contractor of the transport company had taken the goods to his home instead of leaving them in the Thomas National Transport’s depot. Windeyer J, stated: 149

145

Canada SS King Ltd v The King [1952] AC 192 at 208. J W Carter, “’Commercial’ Construction and the Canada SS Rules” (1995) 8 JCL 69, and J W Carter and D Yates “Perspectives on Commercial Construction and the SS Canada Case” (2004) 20 JCL 233. 147 See Lord Wilberforce’s reasons in Ailsa Craig [1983] 1 All ER 101 at 102. The High Court in Darlington Futures did not reject Lord Wilberforce’s reasons. See in respect of clear words, Concut Pty Ltd v Worrell (2000) 176 ALR 693, where Gleeson CJ, Gaudron and Gummow JJ said “In discerning that intention [the absence of an expression of contrary intention of the parties] regard should be had to the familiar principle of construction that clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law”. In relation to an exclusive code of breach relief in a contract, Regional Power Corporation v Pacific Hydro Group Two [No 2] [2013] WASC 356 at 33-34 and Electricity Generation t/as Verve Energy v Woodside Energy Ltd [2013] WASCA 36 [171] and [215]. 148 Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 at [333] (Bleby J) citing RW Miller & Co Pty Ltd v Krupp (Australia) Pty Ltd & Ors (1992) 11 BCL 74, 150 (Giles J). 149 Thomas National Transport (Melbourne) Proprietary Limited and Anor v May & Baker (Australia) Proprietary Limited (1966)115 CLR 353 at 376. 146

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[an exemption clause] is not construed as relieving [the party for whose benefit the clause is inserted] against liability for negligence of himself or his servants, unless it expressly or by implication covers such liability. It will by implication do so if there could be no ground of liability other than negligence to which it could refer. 3.6

Limitation clauses As stated above, a limitation clause restricts a party’s liability arising from a breach of contract. It operates only in certain circumstances and can limit damages to a specified sum or to a maximum amount.

3.7

Indemnities An indemnity is an obligation by one party to make good losses sustained by another party. It is a primary obligation as opposed to that arising under a guarantee which is secondary or collateral. Indemnities commonly refer to acts or omissions of the party giving the indemnity. It is therefore important to consider such matters carefully when drafting the indemnity. It will be observed from the following decision that it is important to draft indemnity obligations with precision as relatively insignificant differences in drafting may affect the interpretation of such clauses, which are construed strictly. Andar Transport Pty Ltd v Brambles Ltd150 is an illustration of the court construing indemnity clauses strictly and contra proferentem. In Andar, Brambles Ltd (the head contractor) sub contracted with Andar Transport Pty Ltd to deliver large trolleys of clean linen to hospitals. Mr Wail was an employee (and director) of the sub-contractor. Until 1990, Brambles conducted the business itself. However, in 1990, Brambles decided to outsource the work to sub-contractors. Mr Wail, who was at the time an employee of Brambles, decided to establish Andar Transport and Brambles awarded a sub-contract to it. The change to sub-contracting was designed to be invisible to customers, as the trucks remained badged as Brambles. Mr Wail was injured during the course of a delivery and successfully claimed damages in negligence against Brambles. Brambles then sought to claim the amount of the award from Andar, relying on the indemnity clauses in the contract. The majority in the High Court reviewed first, the principles of the construction of contracts of guarantee. The majority referred to the previous High Court decision in Ankar Pty Ltd &

150

(2004) 217 CLR 424 (Andar). Applied in Optus Networks v Gilsan Ltd [2006] NSWCA 171 and in BI (Contracting) Pty Ltd v A W Baulderstone Holdings Pty Limited [2007] NSWCA 173 [19]. APAC-#81976459-v1

Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd 151 which held, in relation to guarantees, that: At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety…The doctrine of strictissimi juris provides a counterpoise to the law’s preference for a construction that reads a provision otherwise than as a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety. The majority in Andar also acknowledged the decision in Chan v Cresdon Pty Ltd152, in which Mason CJ, Brennan, Deane and McHugh JJ accepted that the principle stated in Ankar was the “settled principle governing the interpretation of contracts of guarantee”. The majority in Andar acknowledged the differences between guarantees and indemnities but stated: notwithstanding the differences in the operation of guarantees and indemnities, both are designed to satisfy a liability owed by someone other than the guarantor or indemnifier to a third person. The principles adopted in Ankar, and applied in Chan, are therefore relevant to the construction of indemnity clauses. The High Court in Andar found an ambiguity in the indemnity clauses.

The relevant

clauses in the contract provided as follows: [Andar] shall – 8.1

Conduct the Delivery Round at its sole risk and releases [Brambles] from all claims and demands of every kind and from all liabilities of every kind which may arise in respect of any accident loss or damage to property or death of or injury to any person of any nature or kind in the conduct of the Delivery Round by [Andar].

8.2

Indemnify [Brambles] from and against all actions, claims, demands, losses, damages, proceedings, compensation, costs, charges and expenses for which [Brambles] shall or may be or become liable whether during or after the currency of the

151 152

(1987) 162 CLR 549 (Ankar). (1989)168 CLR 242.

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Agreement and any variation renewal or extension in respect of or arising from – (1)

loss damage or injury from any cause to property or person occasioned or contributed to by the neglect or default of [Andar] to fully, duly, punctually and properly pay, observe and perform the obligations, covenants, terms and conditions contained in the Agreement and on the part of [Andar] to be paid, observed and performed;

(2)

loss, damage, injury or accidental death from any cause to property or person caused or contributed to by the conduct of the Delivery Round by [Andar];

(3)

loss, damage, injury or accidental death from any cause to property or person occasioned or contributed to by any act, omission, neglect or breach or default of [Andar]. [Emphasis Added]

Andar argued that the indemnity clauses set out above were limited to the indemnification of Brambles against vicarious liability, which Brambles might incur against third parties. If the Court accepted that construction, the type of injury suffered by Mr Wail, as an employee of Andar, would not be covered by the clause. Neither clause provided expressly for liability on the part of Brambles, as a result of injuries to Andar’s employees. The High Court held that such an omission was not surprising given that Brambles, which had drafted the contract (containing the indemnities), wanted to show to its customers no change of its methods of delivering its laundry services. Further, the majority of the High Court found the indemnity arose in connection with the “conduct of the Delivery Round by [Andar]”. The Delivery Round was expressed elsewhere in the contract to be capable only of being “conducted” by a “nominated driver”. Consequently the High Court held: “in the absence of an express provision to the contrary, it is unlikely that the indemnity contained in clause 8 extends to liability arising in respect of injuries suffered by that nominated driver as a result of the conduct of the Delivery Round by that person” [Emphasis Added]

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In addition Kirby J described the strict construction rule as applying “especially in the case of any ambiguity or uncertainty”. This statement potentially opens the door for the strict construction rule to operate even in circumstances where there is no ambiguity.153 In Andar, Gleeson CJ, McHugh, Gummow and Heydon JJ approved the statement of the Privy Council in Coghlan v SH Lock (Australia) Ltd154: [s]uch a document falls to be construed strictly; it is to be read contra proferentem; and, in case of ambiguity, it is to be constructed in favour of the surety . . . these principles do not . . . mean that where parties to such a document have deliberately chosen to adopt wording of the widest possible import that wording is to be ignored.

Nor do they oust the

principle that where wording is susceptible of more than one meaning regard may be had to the circumstances surrounding the execution of the document or aid to construction. As Beazley JA said in B1 (Contracting) Pty Ltd v A W Baulderstone Holdings Pty Limited:155 The [High] Court [in Andar] held that, to the extent that there was an ambiguity in an indemnity clause, “[these] principles of construction . . . require the provisions [of the indemnity clause] to be construed in favour of [the party providing the indemnity]”. Further the Court said: An examination of the joint judgment in Andar reveals that their Honour’s approach to the construction of the indemnity clause was first to construe the clause strictly in the context of the contract as a whole and to the extent that there remained any ambiguity, to construe the indemnity in favour of the proferens.156 3.8

Practical legal and drafting tips for exclusion or limitation clauses: Make sure any pre-contractual statements in a disclosure letter or otherwise are specifically included or excluded as terms of the contract.

CLLC Contract Lawyers, “Casenote – Indemnities are not always what they seem – a case study”, Contract Management in Practice vol 1, number 8 October 2004. 154 (1978) 8 NSW LR 88 at 92 – see Andar (2004) 317 CLR 424 at 434. 155 [2007] NSWCA 173 at [23]. 156 Ibid at [25]. 153

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Make sure each party has the opportunity to obtain independent legal advice before signing the contract, and acknowledges that in the contract. Consider carefully (or have a lawyer review) your limitation or exclusion of liability clauses to ensure they will work the way you want them to. For each representation, make sure it is complete and correct at the time you make it – or, if it is a representation as to a future matter, you had reasonable grounds to believe it to be true at the time you made it – and make sure that you correct any representation that becomes untrue, if this is relevant. Ensure that the exclusion or indemnity clause reflects the intention of the parties. Where possible, specifically identify the statutory prohibition that affects the limitation of liability, thereby clearly demonstrating the intention of the parties and making accurate representations about the extent to which the exclusion operates 157. Further, ensure that the limitation or exclusion clause reflects the factual reality. In Waltip Pty Ltd v Capalaba Park Shopping Centre Pty Ltd 158, Pincus J held that clauses in a deed of acknowledgement providing that no pre-contractual statements had been relied on before the parties entered into a lease were of no effect, if the facts were to the contrary. Include a clause which states specifically that the contra proferentem rule does not apply simply because the party that will benefit from the clause, put it forward. If you are advising a client regarding the use of disclaimers ensure that the disclaimer is clear, detailed and prominent. It is also important, when drafting limitation clauses to identify the type of liability you are attempting to limit of exclude. The table below sets out the different stages of liability:

157 158

J W Carter, Carter on Contract, Lexis/Nexis Butterworths, Sydney, 2002 at [15-240]. [1990] ANZ ConvR 181; (1989) ATPR 40-975; (1989) Q ConvR 54-333.

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DIFFERENT STAGES OF LIABILITY – SUMMARY

Contract

Primary duty

Secondary duty

Damages

Breach of contract

To pay damages to put

Payable from the

plaintiff in same

time the breach

position had breach not

occurs, whether or

occurred

not the plaintiff has suffered any loss

Tort

Commission of the

To pay damages to put

Payable from date

tort

plaintiff in same

the loss is incurred

position prior to commission of the tort Restitution

Unjust enrichment

To pay damages equal

Payable from the

to the benefit or gain of

date the defendant

defendant

is unjustly enriched

CONCURRENT LIABILITY – SUMMARY

Tort

Contract

Cause of action

Damages

Remoteness

Arises when the

Expectation (plaintiff

Reasonable

loss or damage is

put in the position had

expectation/

suffered by the

the tort not been

foreseeability

plaintiff

committed)

Arises when the

Restoration (plaintiff

Hadley v

breach occurs

put in the position had

Baxendale rule:

(immediate right of

the breach not

“general or natural

action)

occurred)

loss”, ie. loss that is not unlikely to occur

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Liability for misleading and deceptive conduct

4.1

This is obviously a very wide topic. For the purposes of this paper we only wish to make a few comments about the effect of section 18 in the ACL on limitation or exclusion clauses.

4.2

Many contracts contain clauses that attempt to exclude liability for pre-contractual statements. However, prima facie ACL section 18 (formerly section 52 of the Trade Practices Act 1974 (Cth)) and its analogues prohibits exclusion of liability for pre-contractual statements. French CJ in Campbell v Backoffice Investments Pty Ltd stated:159 “[A] person accused of engaging in misleading or deceptive conduct may claim that its effects were negated by a contemporaneous disclaimer by that person, or a subsequent disclaimer of reliance by the person allegedly affected by the conduct. The contemporaneous disclaimer by the person engaging in the impugned conduct is likely to go to the characterisation of the conduct. A subsequent declaration of non-reliance by a person said to have been affected by the conduct is more likely to be relevant to the question of causation”

4.3

Where a contravention has been proved the courts are generally willing to find a contravention of section 18 despite the existence of an exclusion clause or a disclaimer.

4.4

Gummow J described the predecessor to section 18 in Marks v GIO Australia Holdings Ltd160 as “establish(ing) a norm of conduct but imposes no sanction and specifies no remedy”. This is an important concept when considering whether the wide scope of the section may be limited.

4.5

In circumstances where a purchaser brings an action against a vendor for misleading or deceptive conduct, the vendor may escape liability by demonstrating that the purchaser did not rely on the statement before entering into the contract. The vendor is attempting to break the nexus between the contravention of section 52 and the “loss or damage” suffered under section 82 (now section 236 of the ACL). In Butcher v Lachlan Elder Realty Pty Ltd,161 for example, Kirby J (in dissent) acknowledged that “an issue may be presented as

159

(2009) 238 CLR 304, 320 [29]. (1998) 196 CLR 494, 520. 161 (2004) 218 CLR 592 (Butcher). See Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, [130] where Gummow, Hayne, Heydon and Kiefel JJ said “It is as well to add, however, that, of itself, neither the inclusion of an entire agreement clause in an agreement nor the inclusion of a provision expressly denying reliance upon pre-contractual representations will necessarily prevent the provision of misleading information before a contract was made constituting a contravention of the prohibition against misleading before a contract was made constituting a contravention of the prohibition against misleading or deceptive conduct by which loss or damage was sustained”. As pointed out earlier, by reference to the reasons of McHugh J in Butcher, 160

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to whether the chain of causation of the purchasers loss or damage (signified by the preposition ‘by’ in Section 82 (i) of the Act) has been snapped”. However, the comments of French CJ in Campbell v Backoffice Investments Pty Ltd and the other members of the majority, mean that such clauses are unlikely, in most cases, to be effective to defeat a claim for misleading and deceptive conduct. 4.6

In Henjo Investments v Collins Marrickville Pty Ltd,162 the court held that the vendor had represented to the purchaser that a restaurant was licensed to seat 128 persons when in fact it was licensed to seat 84. This was despite the fact that the contract for the sale of the business contained two exclusion clauses. The Full Federal Court stated: “[S]ection 52 is a section in the consumer protection provisions of an Act concerned to protect the public from misleading or deceptive conduct and unfair trade practices which may result in contravention of the Act. It has been held that exclusion clauses of which (the two clauses in the contract), are examples, cannot operate to defeat claims under s52”

4.7

In this case the vendor was attempting, by its exclusion clauses, to break the nexus between the conduct, which was in contravention of section 52, and the formation of the contract.

4.8

The Court in Henjo Investments,163 like McHugh J (in dissent) in Butcher, commented on the public policy reasons for the creation of the Trade Practices Act and stated that it would be against public policy to allow exclusion clauses to deny a statutory remedy for offending conduct under the Trade Practices Act.164

4.9

The recent decision of the Victorian Supreme Court in Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd165 has consequences for the exclusion of liability for misleading and deceptive conduct under the ACL.

4.10

The Court held that subcontract provisions which purported to impose a time limitation for commencing an action of misleading or deceptive conduct under the ACL which was less than the 6 year time period provided by section 236(2) of the ACL, were unenforceable, on the basis that such a purported limitation was contrary to public policy. This has practical implications where contracting parties are considering the exclusion of liability for misleading or deceptive conduct under the ACL.

whether conduct is misleading or deceptive is a question of fact to be decided by reference to all of the relevant circumstances, of which the terms of the contract are but one”. 162 (1988) 79 ALR 83, 95 (Henjo Investments). 163 (1988) 79 ALR 83. 164 The majority of High Court in Butcher, confirmed the “strict liability” of section 52 of the Trade Practices Act. 165 [2018] VSC 246. APAC-#81976459-v1

4.11

This is in contrast to certain decisions of the Supreme Court of New South Wales, which have found that monetary or temporal limits on statutory remedies under the ACL are enforceable, because they can be distinguished from a complete bar to, or purported ouster of, statutory remedies.

4.12

As a result, this recent decision casts doubt on the enforceability of clauses imposing limits on claims under the ACL outside of New South Wales, and has significant consequences for contracts already in place and for drafting future contracts.

4.13

Brighton, a plasterwork contractor, brought a claim in relation to two subcontracts it entered into with Multiplex. Brighton alleged that Multiplex had made representations that were misleading or deceptive in contravention of section 18 of the ACL.

4.14

Under the subcontracts, Brighton was required to give notice of a claim against Multiplex within 7 days from the earlier of when Brighton: (1)

could reasonably have been aware of the conduct upon which the claim is or will be based; and

(2) 4.15

could reasonably have been aware of the entitlement to make the claim.

Brighton submitted that the clause was void for illegality because it excluded liability under section 18 of the ACL, relying on Henjo Investments, where it was found that it would be contrary to public policy for private agreements to oust Consumer Law remedies.

4.16

Multiplex submitted that clause 46 was a temporal limitation that was procedural in nature, and merely regulated, not ousted, the operation of the ACL. It relied on the New South Wales Supreme Court decisions in Lane Cove Council v Michael Davies & Associates 166 and Firstmac Fiduciary Services Pty Ltd v HSBC Bank of Australia Ltd.167

4.17

Riordan J considered that limiting the time in which a misleading or deceptive conduct claim can be brought under the ACL was “an unacceptable interference with the public policy underpinning the provisions [of the ACL].” His Honour noted that the extension of limitation periods (3 years to 6 years) was specifically identified in the Second Reading Speech to the ACL, as one of the mechanisms by which the public policy of consumer fairness would be achieved in the Consumer Law.

4.18

Further, Riordan J considered that uncertainty about whether Courts would decide that individual contractual time limits were or were not unreasonable, would be inconsistent with the public purpose of the ACL, to protect rights properly characterised as public rights.

166 167

[2012] NSWSC 727. [2012] NSWSC 1122.

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4.19

Riordan J noted that while inconsistent with decisions of the New South Wales Supreme Court relied on by Multiplex, his conclusion was consistent with the comments of Ball J in the 2015 decision of Omega Air Inc v CAE Australia Pty Ltd168 in the New South Wales Supreme Court.

4.20

It is important to be aware that where a commercial contract seeks to limit the time in which a party can claim under the ACL, parties ought to ensure that time bars only apply to ACL claims bought six years after the date on which a cause of action accrued.

168

[2015] NSWSC 802.

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Annexure A: Example clauses

Release

1.1

A releases and discharges B from any Claim it has or may have in the future against B to the extent that it relates to: (1)

the Circumstances; and

(2)

the Dispute,

wherever and whenever arising, whether: (3)

known or unknown at the time of execution of this agreement;

(4)

presently in contemplation of the parties; or

arising under common law, equity, statute, restitution or otherwise.

Indemnity

2.1

B indemnifies A against: (1)

all losses incurred by A;

(2)

all liabilities incurred by A; and

(3)

all costs actually payable by A to its own legal representatives (whether or not under a costs agreement) and other expenses incurred by A in connection with a demand, action, arbitration or other proceeding (including mediation, compromise, out of court settlement or appeal);

arising directly or indirectly as a result of or in connection with …

Acknowledgment

3.1

Each of the Parties acknowledge that they are aware that they, their advisers, agents or lawyers may discover facts different from or in addition to the facts that they now know or believe to be true with respect to the subject matter of this Deed, but that it is their intention to, and they do, fully and finally settle all Claims on the terms of this Deed.

Choosing the right device – some examples (1)

Definition of obligation: “A is entitled to discharge its obligations under this contract by doing X or Y”.

(2)

Exclusion of liability: “A is not liable to B for any breach of contract”.

(3)

Disclaimer: “A disclaims all responsibility for any representations made to B, including any duty of care that would arise save for this disclaimer”.

(4)

Release: “In consideration of A releasing B from liability in relation to B’s failure to do X, B agrees to pay A the sum of $Y”.

(5)

Indemnity: “A indemnifies B and holds B harmless in respect of B’s failure to do X”.

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