Jurisdiction - Australia
News
Australia – WA Says NSW Can Go Your Own Way On Evidence Of Surrounding Circumstances.

7 October, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Technomin Australia Pty Ltd V Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164


What You Need To Know

 

  • There is continuing uncertainty in Australia about when circumstances surrounding the creation of a contract can be used to interpret it. It is likely that this uncertainty will remain until the High Court has the opportunity to clarify the law in this area. 
  • What is clear is that the courts will often be able to rely on contextual evidence, including evidence from pre-contractual negotiations in their consideration of the proper construction of a contract. This should be kept in mind when negotiating commercial contracts.

The Ongoing Debate About Contractual Interpretation


It is often useful to have regard to surrounding circumstances in interpreting contracts. Understanding the purpose of the transaction, the subject matter of the contract, the background contractual or legislative framework, or commercial practice in a particular industry can shed light on the words of a contract. 


It can be helpful to consider things said or done in pre-contractual negotiations, to identify the objective background facts known to the parties. (In general, the parties’ subjective intentions are irrelevant to interpreting a contract.) 


Australian courts have been reluctant to identify with precision when surrounding circumstances can be taken into account. The critical question is whether the courts should consider surrounding circumstances in every case, or only where the meaning of the contract is ambiguous (sometimes known as the “gateway requirement”). 


The point at which surrounding circumstances can be considered has a number of practical implications, for example:

 

  • in technical contracts, ambiguities may only be apparent when the language of the contract is read in its correct context; and
  • in general contractual disputes, evidence of surrounding circumstances can add greatly to the cost and burden of discovery and the provision of evidence.

In Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, the HighCourt suggested that evidence of surrounding circumstances was admissible only if the meaning of the contract was ambiguous. 


Intermediate appellate courts subsequently interpreted Codelfa and later decisions as permitting consideration of surrounding circumstances in all cases, but highlighting that the context cannot give the words of the contract a meaning they cannot bear

.
In Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604, a special leaveapplication, Justices Gummow, Heydon and Bell criticised the approach that had been taken by intermediate courts and affirmed that, unless and until the High Court reconsidered Codelfa, evidence of surrounding circumstances was not admissible unless the contract was ambiguous. However, as a judgment in a special leave application its value as a precedent is uncertain.


Subsequently, in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7 (EGC), the High Court appeared to take a different approach, stating that the objective approach to contract interpretation 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” [35]. Unfortunately, the value of these remarks is also uncertain because the point was not argued. 


Intermediate appellate courts are now grappling with the tension in these two High Court pronouncements. For example, in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184, the New South Wales Court of Appeal concluded that the approach in EGC now required courts to consider surrounding circumstances in all cases. Conversely, in Technomin, the Western Australian Court of Appeal took a very different approach.


Technomin: Background


The case concerned a dispute regarding royalty payments under a series of related royalty and joint venture agreements.


Two Xstrata entities (Xstrata) and Hunter Resources Ltd (Hunter) were party to a Gross Production Royalty Deed (GPR Deed). Under the GPR Deed, Hunter had a right to a 2% gross royalty on Xstrata’s share or interest in minerals produced from the “Project”, which was in turn defined to mean the exploitation of the “Tenements”. Hunter had assigned its rights under the GPR Deed to Technomin Australia Pty Ltd (Technomin).
The case turned on the definition of “Tenements”.


The GPR Deed was executed in consideration for a Deed of Assignment and Assumption (DAA) in respect of certain tenements. Under the DAA, Hunter novated or assigned its rights to certain tenements, including the “Violet Range Tenement” to Xstrata.
Under the GPR Deed, Tenements was defined as:

 

Tenements means the [tenements including the Violet Range Tenement] and any extension or variation or addition or replacement or substitution of any of them (whether or not also affecting other tenements or land outside the Area).” (emphasis added).


Xstrata was subsequently issued a mining lease that incorporated the Violet Range Tenement and a further, unrelated, series of tenements (Xstrata Mining Lease). Under the Mining Act 1978 (WA), “Mining Tenement” was defined by reference to, among other things, a mining lease.


Technomin argued that the Xstrata Mining Lease in its entirety was an “extension or variation or addition or replacement or substitution of” the Violet Range Tenement and demanded royalty payments on all production from it.


Xstrata argued that the definition simply made clear that the royalty was still payable in respect of production from the original land areas, regardless of any technical changes in the boundaries of the tenements. 


The trial judge found in favour of Xstrata. In so finding, the judge had regard to surrounding circumstances and the consequences of Technomin’s interpretation – which he regarded as commercially unreasonable.

 

The Appeal


A key issue on appeal was whether the trial judge erred in having regard to surrounding circumstances in interpreting the definition of Tenements.


President McLure, with whom Newnes JA agreed, considered that until the High Court expressly held differently, ambiguity was a gateway requirement before surrounding circumstances could be considered. Her Honour noted that there were exceptions – for example, even absent ambiguity, regard could still be had to:

 

  • the terms of related agreements; and
  • the legislative background to the tenement interests,

as essential contextual matters to an integrated contractual scheme.

 

Similarly, Murphy JA, after a careful review of the authorities, expressed the view that there was nothing in the decisions of the High Court since Codelfa which was inconsistent with ambiguity being a gateway requirement before surrounding circumstances could be used as an aid to interpretation. His Honour doubted the correctness of the view reached by the NSW Court of Appeal in Mainteck, although he noted that the WA Court received no submissions on that judgment, which was delivered after the hearing in Technomin


All of the judges nonetheless found that the definition of Tenements in the GPR was ambiguous, and that all the relevant contextual factors pointed clearly to the conclusion that the royalty only applied to production from the land the subject of the original tenements. The decision of the trial judge was therefore upheld.


Steps To Take In Light Of The Divergence On When Surrounding Circumstances Are Admissible To Interpret A Contract 


There is now a divergence between the WA and NSW courts on when surrounding circumstances are admissible to interpret a contract. That is undesirable and it is hoped that the High Court takes the opportunity to clarify the law in the near future. 


Notwithstanding the different approaches currently being taken by the NSW and WA courts, Technominillustrates that, since most difficult contractual interpretation issues result from some ambiguity in a contract, it is likely that in such cases surrounding circumstances, including pre-contractual negotiations, will be able to be used in resolving competing interpretations of the contract. 


This makes it critical to keep records of pre-contractual negotiations and discussions regarding complex and critical terms of contracts. Parties should also bear in mind, when corresponding about contractual terms, that the court may look back and draw inferences about the commercial background to the contract from the correspondence. This makes the accuracy of such correspondence critical. Parties should ensure that any incorrect statements in pre-contractual correspondence are clarified so that the written record is accurate

 

Ashurst Logo

 

For further information, please contact:

 

Lucas Wilk, Partner, Ashurst

lucas.wilk@ashurst.com


Mark Bradley, Ashurst
mark.bradley@ashurst.com


Huw Watkins, Ashurst
huw.watkins@ashurst.com

 

Ashurst Dispute Resolution Practice Profile in Australia

 

Homegrown Dispute Resolution Law Firms in Australia

 

 

Comments are closed.