Tripping the Light fantastic – “The true rule” and the admissibility of extrinsic material in contractual interpretation
A quick and nimble dance through the High Court’s excursus of contractual interpretation and the necessity of a “constructional choice” for the admissibility of extrinsic material.
In the interpretation of a contract, be it a policy of insurance or a straightforward garden variety agreement, we know that the text is given primacy, and the words are to be construed with a business-like construction.
But what is the relevance and admissibility of evidence of surrounding circumstances to the construction of a contract? This enigma is often referred to as the ambiguity in contractual ambiguity or the quandary of the “constructional choice”.
The question as to what extent evidence of surrounding circumstances is admissible as an aid to the construction of contracts is, on one view, still a live issue in cases involving the interpretation of commercial agreements, and perhaps one which the High Court still needs to resolve.
The inquiry begins with what Mason J (with whom Stephen and Wilson JJ agreed) said in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352, with what has become known 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.
The “true rule” appears, at first blush, to prohibit the use of evidence of surrounding circumstances or the extrinsic evidence, unless there is an ambiguity or a constructional choice in the language of the contract. However, as is clear from Codelfa, there are other bases on which extrinsic evidence can be admitted, these bases are: (1) to identify the meaning of a descriptive term, and (2) to explain the genesis or aim of a transaction. However, Codelfa would appear to prohibit the use of extrinsic evidence to contradict the language of the contract when it has a plain meaning; or to establish subjective intentions of the parties, even where shared by both parties.
In Byrnes v Kendle  HCA 26; (2011) 243 CLR 253 at 284 – 285 (before which the High Court delivered many decisions on this topic, but which I do not discuss here), the plurality held - , that “[c]ontractual construction depends on finding the meaning of the language of the contract – the intention which the parties expressed, not the subjective intentions which they may have had, but did not express. A contract means what a reasonable person having all the background knowledge of the “surrounding circumstances” available to the parties would have understood them to be using the language in the contract to mean. But evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of “surrounding circumstances””. Byrne v Kendle was an orthodox restatement of the rule that extrinsic evidence may not be used for to establish subjective intentions of parties, as well as an additional affirmation that Courts must nonetheless start their inquiry by receiving “all the background knowledge of the “surrounding circumstances” available to the parties”.
More recently, in Electricity Generation Corporation v Woodside Energy Ltd  HCA 7; (2014) 251 CLR 640 at , the majority held:
…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”.
In the most relatively recent statement of the joint judgment in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd  HCA 37 ; (2015) 256 CLR 104  – , French CJ, Nettle and Gordon JJ apparently summarised the circumstances in which recourse to matters external to the contract may be necessary: (1) to identify the commercial purpose or objects of the contract by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”; (2) in order to resolve a constructional choice – that is, where the text of the contract is ambiguous or susceptible of more than one meaning; and (3) to understand the genesis of the transaction, and the background, context and market in which the parties to a commercial contract were operating, which may be relevant to the proper construction of that contract irrespective of whether the court is confronted with a constructional choice.
Bridie appears regularly in cases which involve the proper interpretation of contracts and can assist her clients in drawing contracts which serve to neutralise and avoid issues frequently confronted in contractual disputes.
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