Surrounding circumstances as an aid to the construction of contracts

Articles Written by Richard Lilly (Partner), Claudia Scardigno (Senior Associate)

While there is a divergence in views among courts in Australia as to whether ambiguity remains a prerequisite for the admissibility of surrounding circumstances in construing a contract, the Western Australian Court of Appeal in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 has reaffirmed Mason J's 'true rule' in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24.

Background

Technomin related to the sale of two joint venture interests and a mining tenement in return for payment of a royalty on the revenue received from production on mining tenements, pursuant to the terms of a 'GPR Deed'. Following the amalgamation of tenements covered by the GPR Deed into one tenement including land which the original tenements did not, the contentious issue became whether the royalty payable under the GPR Deed was confined to production from an area covered by the original mining tenements as at the effective date, or whether the royalty extended to the mining of minerals on the new areas as well.

The dispute turned on the construction of the definition of 'Tenements' in the GPR Deed. Technomin argued that it was entitled to a royalty under the GPR Deed on all minerals produced, on the basis that the whole area fell within the definition of 'Tenements'.

Key findings

At first instance,1 Allanson J rejected Technomin's claim. The court held that 'Tenements' for the purpose of the GPR Deed meant the area covered by the original tenements at the time the contract was entered into and the royalty payment was confined to production from the original tenements.   

The trial judge held that the context and commercial purpose of the GPR Deed were relevant in construing the meaning of 'Tenements' because the definition was ambiguous. In determining the meaning of 'Tenements', the trial judge had regard to the following surrounding circumstances:

   a) a letter of agreement;

   b) antecedent joint venture agreements;  

   c) the common practice of amalgamation of mining leases and tenements; and  

   d) the permit holder's capacity by its election to include or exclude additional tenements from the operation of the GPR Deed.  

Importantly, the trial judge took into account the commercial unreasonableness of Technomin's construction. Technomin's construction would in effect permit the owner of the tenements to unilaterally choose whether to include neighbouring lands in the amalgamated tenement and effectively increase the royalty payments to be received, which would result in an uncommercial windfall. 

The decision on Appeal

On appeal, Technomin claimed that the trial judge erred in holding that the meaning of any material part of the GPR Deed was ambiguous or uncertain and using this uncertainty as a basis to have regard to extrinsic evidence in the construction of the GPR Deed. The Court of Appeal unanimously held that the appeal should be dismissed. The court held that the definition of 'Tenements' was ambiguous and susceptible of more than one meaning and therefore the trial judge was correct to rely on surrounding circumstances as an aid to construction.

Interestingly, the court held that in construing the object or purpose of a contract by looking to evidence oflegal or statutory context, or by having regard to a subject matter with which the court is familiar, ambiguity is not required. Furthermore, the court held that ambiguity is not required in relation to background facts which form part of the factual matrix. The court considered the history and location of the mining tenements to be in that category.

The court held that the following matters could be taken into account in construing the GPR Deed without having to establish ambiguity, on the basis that these items were contextual matters expressly referred to in the GPR Deed:

   a) the terms of related agreements; and

   b) the law governing the tenement interests.

Further, upon finding ambiguity, the court looked to the following surrounding circumstances in interpreting the GPR Deed:

   a) the extent of the existing adjoining tenement interests in the area;

   b) the nature of the tenement interests under the Mining Act 1978 (WA); and

   c) industry practice.

Summary

   a) The court will endeavour to take a business-like approach in interpreting a commercial contract, in light of surrounding
   circumstances.

   b) If the court is unfamiliar with the subject matter and market of the transaction, it is more likely to be satisfied that the
   meaning of the language used is ambiguous.

   c) In construing the contractual purpose or object of a contract, ambiguity is not required in admitting evidence of the legal or
   statutory context, or having regard to subject matter with which the court is familiar.  

   d) However, in construing the objective aim or purpose of the transaction, the prerequisite of ambiguity must be satisfied to
   admit evidence of the genesis of the transaction such as the subject matter, market and terms of the instrument, as the court
   is supplementing its own understanding of the contract. 

 

1Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [No 3] [2012] WASC 481.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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