Contractual Construction – further clarification from the High Court

Contractual Construction – further clarification from the High Court

On 14 October 2015, the High Court provided further clarification on the correct approach to commercial contractual construction in Australia in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd.[1]

This appeal related to a dispute over the entitlement by Wright Prospecting Pty Ltd and Hancock Prospecting Pty Ltd (Hanwright) to royalties from mining activities undertaken in areas known as the Eastern Range and Channar A in the Pilbara region.  The question in dispute was whether Hanwright was entitled to royalties from these regions.  The amount in dispute was in the order of $131million.

The dispute required a review of contractual arrangements between the parties of tenements governed by the Mining Act and various State Agreements, spanning a period from 1962 and, relevantly under a 1970 agreement.

The facts are relatively complicated but the question which arose was whether, as there were new agreements and changes in the mining rights and certain changes to the areas covered by the agreements, the provisions under the 1970 agreement entitled Hanwright to royalties from subsequent mining activity.

Different questions arose in relation to each of the Eastern Range and Channar A areas.

Ultimately the High Court upheld the rights of Hanwright for royalties from mining in both areas. 

The importance of the decision is that the High Court has continued to clarify the correct approach to construing commercial contracts.  This approach was recently dealt with by the High Court in Electricity Generation Corporation v Woodside Energy Limited.[2]  That decision has received a great deal of subsequent discussion and debate.  It is built upon the early decision of Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.[3] 

The court confirmed that:

“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.”  [46]

Further the court confirmed that in a commercial document the meaning is to be understood by what a reasonable business person would have understood the terms to mean.  The court noted:

“that enquiry would require consideration of the language used by the parties to the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.” [47]

The court confirmed that, ordinarily, contractual construction is undertaken by reference to the contract alone.  Where the contract is unambiguous or susceptible to only one meaning evidence of surrounding circumstances is impermissible.

However recourse to events, circumstances and things external to the contract is permissible in circumstances where there is ambiguity or the contract is susceptible to more than one meaning.  In those circumstances the court noted:

“it may be necessary and identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding of ‘the genesis of the transaction, the background and the context and the market in which the parties are operating’”. [49]

The court noted that even in that case recourse has to be to what is objective and not to the parties’ statements and actions reflecting their actual intentions and expectation.  Rather guidance may be had to history of the transaction of the background and context and the markets in which parties were operating.  Likewise the court confirmed that unless a contrary intention is evinced by the contract the court is entitled to approach the basis that the parties intended to produce a commercial result. [51]

In emphasising the importance of the Codelfa decision and the Electricity Generation decision, the three member of the majority expressly stated those observations were not to be any departure on the law as set out in those two cases. [52]

Further, all members of the court, referred to the application of refusal for special leave in Western Export Services Inc v Jireh International Pty Ltd[4] which is often quoted.   They observed  that the question in Western Export Services namely whether there is a requirement that is essential to identify ambiguity and the language of the contract before the court may have regards to surrounding circumstances and the object of the transaction, remains a live one, to be determined when there is an appropriate case before the court.  Further they stated that what was said in Western Export Services ought not to be treated as contradictory to, or modifying the test in, Codelfa at this time.

By the application of those tests, and on an objective interpretation of the language of the contract, giving a business meaning to it, it was found that Hanwright had an entitlement to royalties in relation to both areas.

The decision is an important one in giving further clarity of the correct method by which contracts are to be interpreted and the material which is relevant to that exercise and, in particular, that courts will strive to give a commercial meaning and outcome to a contract including by reference to the objectives surrounding circumstances known to the parties and the commercial purpose or objects to be secured by the contract. 

[1] [2015] HCA 37

[2] (2014) 251 CLR 640

[3] (1982) 149 CLR 337

[4] [2011] HCA 45