33 YEARS ON: CODELFA CONSTRUCTION PTY LTD V STATE RAIL AUTHORITY OF NSW [1982] HCA 24 – Does the Codelfa Principle still apply to using extrinsic material in interpretation?

Introduction

All law students who passed the subject Contracts will have grappled with the case Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24 (“Codelfa”) when learning the principles of frustration. Lawyers who have practiced will know that Codelfa continues to haunt you in the area of interpretation of contracts. Constructing a contract can involve examining extrinsic material to assist with finding the legal meaning of the words. Codelfa provided a test for when it is appropriate to use extrinsic material as an aide. Two competing interpretations of the test in Codelfa emerged and were adopted in different High Court cases, culminating in 2014 with the case of Electricity Generation Corporation (trading as Verve Energy) v Woodside Energy Ltd [2014] HCA 7.  In this article I attempt to summarise where the law is today. Note that this article focuses on when extrinsic material can be used. It does not cover what type of extrinsic material can be used. However, I may cover this in a future blog post.

Short answer:

Yes, the Codelfa Principle still applies, but has been reinterpreted over time, culminating in the 2014 High Court case of Woodside. Codelfa is now interpreted as supporting the contextual approach to use of extrinsic material in constructing contracts.

Key case: Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24

The NSW government contracted with Codelfa Constructions to excavate tunnels for the new Eastern Suburbs train line. When the contract was signed, Codelfa Constructions intended to work 24/7 to achieve timeline targets and receive bonus payments. Both parties assumed that the work would not be subject to injunctions. However, the work created noise and vibrations and local residents successfully obtaining injunctions. Codelfa could only work six days a week and for only two shifts a day.

Codelfa tried to claim compensation from the government for lost profits associated with not being able to work 24/7 and meet time targets in the contract. There was no explicit term in the contract, so Codelfa argued either that there was an implied term or in the alternative that the contract was frustrated. The interpretation put forward by Codelfa hinged on whether or not certain extrinsic material could be used in constructing the contract.

The Codelfa Principle:

The traditional reading of the Codelfa Principle is that extrinsic material evidencing surrounding circumstances can only be used in interpreting a contract where the contract is ambiguous on its face. Where the contract is not ambiguous, the investigation ends with the text of the contract. This is known as the literal approach.

The Codelfa Principle is taken from Mason J’s judgment ((1982) 149 CLR 337 at 352):

 “The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. 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.”

So where is the controversy?

Two possible readings of the Codelfa Principle have been put forward. They differ as to the point in time in the contract interpretation process that extrinsic material can be considered. In Ray Brooks Pty Ltd v NSW Grains Board [2002] NSWSC 1049 Palmer J distinguished the two approaches with the terms “literal approach” and “contextual approach”:

1.      Literal approach: Ambiguity must be identified before extrinsic material can even be looked at. If there is no ambiguity in the clause in question, extrinsic material must not be examined. To me this seems the obvious intention of Mason J in the above extract and was favoured in the years immediately after Codelfa.

2.      Contextual approach: Extrinsic material can be used at any point in the interpretation process including to determine if ambiguity exists.

The interpretation outcome for a contract between the literal and contextual approaches can be huge.

Cases supporting the “contextual approach”

1.      Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 185 ALR 152 (“Maggbury”)

In this High Court case, Gleeson CJ, Gummow and Hayne in their joint judgment adopted the contextual approach that the meaning of the words would be that as understood by a reasonable person with all the background knowledge (at 155). This is not the traditional approach of first looking at the text alone. The joint judgment relies on the UK case of Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28 (“West Bromwich”) in which the contextual approach was favoured. Lord Hoffman stated that `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’. It was also suggested by Lord Herschell that contractual language must be “interpreted in the way in which business men would interpret them”. This approach is also known as the “business efficacy” approach. However, as already mentioned, the UK had made a clear departure from requiring ambiguity to examine extrinsic evidence.

2.      Ray Brooks Pty Ltd v NSW Grains Board [2002] NSWSC 1049

Palmer J analysed Mason J’s approach in Codelfa and concluded Mason J was sympathetic to the “contextual approach”. At [59]:

`His Honour is not saying: evidence of surrounding circumstances is admissible only if it first appears that the language of the contract is ambiguous. His Honour is saying: evidence of surrounding circumstances is admissible only for the purpose of explaining ambiguous language in the contract and not for the purpose of changing the meaning of clear words.’

Palmer J believed Mason J in Codelfa was sympathetic to the view that the contracts cannot be isolated from the matrix of facts in which they were set.

3.      Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 (“Franklins”)

Allsop P states at [18]:

“The construction and interpretation of written contracts is to be undertaken by an examination of the text of the document in the context of the surrounding circumstances known to the parties, including the purpose and object of the transaction and by assessing how a reasonable person would have understood the language in that context. There is no place in that structure, so expressed, for a requirement to discern textual, or any other, ambiguity in the words of the document before any resort can be made to such evidence of surrounding circumstances”.

Franklins clearly states there is no need for ambiguity and that the High Court cases are clear on this. Allsop P relies on Maggbury and the following High Court cases in making this statement:

Pacific Carriers v BNP Paribas (2005) 222 CLR 241 at 461-462 [22];

 Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at 559[82]; 

International Air Transport Association v Ansett Australia Holdings Limited (2008) 234 CLR 151 at 160 and 174.

4.      Electricity Generation Corporation (trading as Verve Energy) v Woodside Energy Ltd [2014] HCA 7 (“Woodside”)

Prior to this case, there was serious doubt as to whether to apply the contextual or literal approach to contract construction. In 2011, in Jireh, the High Court had indicated ambiguity needed to be identified before extrinsic evidence was examined. In 2014, in Woodside, the High Court found the opposite. In Woodside, the High Court clearly favoured the contextual approach (at [35]):

“The meaning of the terms of a commercial contract is to be determined by what a reasonable business person 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”.

There is no mention at all of first requiring ambiguity. Instead the focus is on construing the contract so as to avoid it ‘making commercial nonsense or working commercial inconvenience’ (at [35]).

Cases supporting the “literal approach”

1.      LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74

Young CJ, Meagher JA and Hodgson JA in the New South Wales Court of Appeal stated that it was necessary for ambiguity to be shown before the surrounding circumstances are examined. They compared the Australia path with the English path where the prerequisite of ambiguity had been clearly discarded. As an aside, the Court of Appeal did consider the use surrounding circumstances could be put to and suggested the Codelfa doctrine is not only that a court uses the surrounding circumstances to aid its interpretation and to put itself in the armchair of the parties to look to see what each knew when it was making the contract, but also that inferences can be drawn from the surrounding circumstances virtually to add terms’. While this looks to be a broad approach to the use of surrounding circumstances, this step can only be taken if ambiguity has been identified.

2.      Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 (“Jireh”)

The High Court case of Jireh is very important, as it cast away doubt that had built up surrounding Codelfa and reaffirmed that ambiguity is needed before surrounding circumstances can be examined. The High Court refused special leave to appeal, and in providing its reasons stated that the “true rule” as stated by Mason J with the concurrence of Stephen J and Wilson J in Codelfa remained the law in Australia. The High Court then gave a mini-lecture to the lower courts:

“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. The position of Codelfa, as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council and it should not have been necessary to reiterate the point here.”

It is important to note that Jireh was decided in 2011. The High Court case of Woodside is more recent.

3.      See also: Royal Botanic Gardens and Domain Trust v South Sydney City Council  (2002) 240 CLR 45. This case is particularly important for the breadth of extrinsic material and surrounding circumstances that can be used.

Can Jireh and Woodside be reconciled?

Jireh and Woodside take the opposite approaches to the interpretation problem. To me there seems to be irreconcilable inconsistency between the two cases. Jireh requires ambiguity before extrinsic evidence can be looked at. Woodside requires extrinsic evidence and surrounding circumstances to be taken into account at first instance to reach a commercially workable interpretation. Woodside was decided in 2014, so has the upper hand in terms of recent High Court precedents. Some lower courts have tried to reconcile the two judgments:

1.      Stratton Finance Pty Limited v Webb [2014] FCAFC 110

The Federal Court acknowledged there had been uncertainty since Jireh, but that this was resolved by Woodside:

“As the reasons in Franklins stated, the conclusion that ambiguity need not be discovered before any resort to legitimate surrounding circumstances in the relevant task was drawn only from existing High Court authority.” (See Franklins above for list of High Court cases relied on).

2.      Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184

The NSW Court of Appeal has also expressed the view that Jireh and Woodside are inconsistent. In their reasons, the Court of Appeal stated how the contextual approach in Woodside is not inconsistent with Codelfa (at [79]):

“There is no inconsistency [between Codelfa and Woodside] because whether contractual language has a "plain meaning" is (a) a conclusion and (b) a conclusion which cannot be reached until one has had regard to the context. That accords with what was said by Allsop P in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [17]:

"the phrase used by Mason J in Codelfa Construction (at 352) 'if the language is ambiguous or susceptible of more than one meaning' does not mean that the susceptibility of the language to more than one meaning must be assessed without reference to the surrounding circumstances ... "

Mason J was indicating that there are very real limits to the extent to which grammatical meaning can be displaced by contextual considerations. However, in order to determine whether more than one meaning is available, it may be necessary first to turn to the context”.

Conclusion

Thirty three years on, Codelfa still stands as authority on the use of extrinsic material in interpretation. However, it has been “reinterpreted” over time to the point that the contextual approach in the 2014 High Court case of Woodside now applies. This requires extrinsic material and the surrounding circumstances to be examined at the outset in constructing a contract. Ambiguity is still required to be identified, but the extrinsic material and surrounding circumstances must be examined to see if this ambiguity exists..

Note: In this article I use the words “interpretation” and “construction” interchangeably. Some authors like to maintain a strict separation and “interpret legislation” and “construct a contract”. I don’t believe this strict distinction is necessary.