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What you need to know
- When parties fall out, the drafting of contractual documents can come under the microscope and be open to different approaches in interpretation when referred to a court.
- This is demonstrated in a case involving a long-term farm lease which was decided one way at first instance and the other way on appeal, and which is now set to be heard by the High Court of Australia tomorrow, 14 December 2016.
- The case is a reminder that all contractual documents should be clearly, fully and precisely drafted to reflect the commercial terms agreed by the parties.
As lawyers, we are forever expounding the importance of careful legal drafting. We are after all in the risk management business. However, this can sometimes be seen as unnecessary or at worst, pedantic and obstructive. There may be times when this is a valid criticism. The goal should always be not to hold up a commercial transaction but to ensure that it is recorded accurately and in plain language.
Of course, there are times when the blow torch is to the belly. It is midnight and the deal has to be done. Some compromise wording is reached after tough negotiation which gets the deal across the line. Each party may feel that it has some wiggle room while regarding the other party as tightly bound. Neither party entertains the thought that at some stage in the future, a bevy of highly paid lawyers and judges will spend hours, perhaps days, scrutinising the meaning of words that were agreed in a matter of minutes.
In other situations, it may be thought that a transaction is not worth spending much time on. This may be especially true where the transaction is one of a large volume of similar deals. The face value of each such transaction may mean that it is only profitable if administrative costs are kept to a bare minimum. In most cases, there will be no problem but now and then an issue will arise and the agreement will need to be examined in detail.
Under the microscope
Once a written contract does come under the microscope, issues are raised which the parties may never even have considered. This is the inherent danger when a third party is asked to determine what the original parties had in mind when they entered into the agreement. Sometimes that third party may mean the judges of various courts and appellate courts listening to the highly reasoned arguments of skilled senior and junior counsel.
The position is further complicated because the judges themselves are not fully agreed on the approach to be taken in such cases.
Generally, the test is what the terms of the contract would mean to a reasonable person without reference to what may have been the actual intentions of the parties. However, the words may have been so poorly drafted that there is no clear meaning that a reasonable person can understand. In such situations, the question arises as to whether the court can look at contextual matters outside the contract itself.
The 'true rule'
Sir Anthony Mason's much-quoted statement in Codelfa Construction Pty Ltd v State Rail Authority back in 1982 is often referred to as the 'true rule': "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning".1
However, it is argued (and lawyers love to argue) that no language has a 'plain meaning' and words can only be interpreted in the context in which they are used.
There have been a number of decisions in intermediate appellate courts in which it has been held that ambiguity does not need to be identified before regard can be had to surrounding circumstances in construing a contract.
A liberal approach
An even more liberal approach has been taken in England where Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society, in rejecting any notion of an ambiguity threshold, stated that, subject to certain exceptions, the background knowledge which can be considered by the court "includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man".2
Given the differences in approach, various judges of the High Court of Australia have taken the opportunity at different times3 to point out that until the High Court has decided on whether there are differences between the arguably more liberal British approach and Codelfa, and if so which should be preferred, Codelfa should be followed in Australia. However, some High Court judges have acknowledged that while Codelfa refers to ambiguity, it does not actually say how an ambiguity might be identified.
Certain legal authors have suggested that there should be no exclusionary rules at all in relation to the admissibility of extrinsic evidence in construing the meaning of a contact. I particularly like Bond J's reaction (in a paper delivered for the Current Legal Issues Seminar Series 2016): "I recoil with horror from the breadth of these suggested reforms of the law". Bond J continues by expressing his concern that "the pursuit of theoretical purity can sometimes occur with insufficient attention to feasibility and practical consequences". From this viewpoint, Bond J argues that the question of admissibility of extrinsic evidence in aid of construction must be managed in "such a way as will permit of its occurrence only where it is of real utility and must hold the evidence out if it is not".4
The Gee Dee case
All of this leads us to the Victorian Court of Appeal case of Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd5 which concerns a long-term farm lease and the payment of outgoings. The outgoings clause principally in issue is as follows:
The question first considered by the trial judge and then by the Court of Appeal is whether or not the tenant is liable under the lease to pay the cost of rates, taxes, assessments and outgoings levied on the landlord. The clause has been held to be ambiguous because it can be read in two ways. On one reading, it imposes on the tenant an obligation to pay all rates, taxes, assessments and outgoings. On another, the obligation to pay is confined only to those amounts payable by the tenant.
In resolving the issue, much has turned on the significance to be attached to the wording which had been struck out by the parties but which remained legible in the executed document. In the Victorian Court of Appeal, McLeish and Santamaria JJA held that the striking out of the words "Landlord or" was an indication that, by mutual concurrence, the parties rejected the possibility that the tenant should pay the rates, taxes, assessments and outgoings levied on the landlord. Although the deleted words did not (by virtue of their deletion) form part of the contract, they were admitted as extrinsic evidence.
This was in fact a situation that had been identified by Mason J in Codelfa where pre-contractual negotiations of the parties could be considered if they provided evidence of the parties' "mutual concurrence" which negatived "an inference sought to be drawn from surrounding circumstances". In the Gee Dee case, Santamaria JA held that "the deleted words may be referred to in order to negative an alternative possible construction".6
The trial judge's view
This is important because the alternative possible construction found by the trial judge was that the lease document was intended to be, in effect, a conveyance of freehold title which had been prevented at the time by planning restrictions on subdivision. The original landlord had received, as the payment of rent, the sum of $70,000 at the commencement of the lease, being more or less the freehold value. As such, the trial judge took the view that the clause should not be construed as imposing an obligation on the landlord to pay the rates, taxes, assessments and outgoings for nearly a century as this would be wholly at odds with the result that would have been produced had the parties been able to give effect to their intention of transacting a freehold conveyance by way of sale.
In the Court of Appeal, Kyrou JA, in a dissenting judgement, concluded that the trial judge did not err in his construction of the clause and that the appeal should be dismissed. As noted above, McLeish and Santamaria JJA thought otherwise and the appeal was allowed.
Headed for the High Court
There is now to be a further appeal. Special leave to appeal to the High Court in Canberra has been granted and a hearing has been set down for 14 December 2016. In applying to the High Court for special leave to appeal, the landlord's counsel argued that Justice McLeish had not given sufficient weight to the subjective intent of the parties as evidenced by a clause in the lease which acknowledged that the parties had intended a sale and purchase of the freehold. Justice McLeish noted that the acknowledgement set out what the parties had intended and saw it merely as an explanation for the length of the term and the advance payment of rent.
The landlord's counsel argued that the relevant wording was much more than mere background and was "intended to have operative effect as a statement of present intention and as an explanation of the whole deal".7 In applying to the High Court for special leave to appeal, the landlord's counsel submitted that the case provided an opportunity for the court to review the way in which statements of subjective intent might be used in the course of interpretation.
Whichever way the final decision goes, the Gee Dee case illustrates the difficulties (and resulting time and expense) that can arise from a poorly drafted document. In the application for special leave, Chief Justice French noted to the landord's counsel as follows: "You have got pointers in all directions, as various of the judgments have indicated. You have got what amounts to a two/two split. One could be forgiven for forming the view that any assertion of a correct construction is making a sort of silk purse out of a sow's ear and why should the Court get involved in untangling that kind of mess or having another go".8
Once again, the key takeout is to ensure that all contractual documents, including leases, state fully, clearly and precisely the commercial terms agreed by the parties.
Footnotes
1 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352
2 Investors Compensation Scheme Ltd v West Bromwich Building Society (1998) 1 All ER 98 at 114-115
3 For example, see Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 240 CLR 45, Byrnes v Kendle (2011) 243 CLR 253 and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) HCA 37
4 Bond, The Honourable Justice John --- "'The use of extrinsic evidence in aid of construction: a plea for pragmatism', paper delivered for the Current Legal Issues Seminar Series 2016 (QSC)" [2016] QldJSchol 9 at [10] and [12]
5 Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd (2016) VSCA 23
6 Note 5 at [5]
7 HCA transcript, p 3, line 49
8 HCA transcript, p 4, line 133
This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories
