High Court clarifies when “surrounding circumstances” may be used to construe a contract.
Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited  HCA 37
In obiter remarks the High Court has now provided some clarity by unequivocally stating that “surrounding circumstances” may only be used to construe a written contract when “ambiguity” is present.
Confusion has reigned for some time as to whether, and if so when, a court may have regard to surrounding circumstances as an aid to the construction of the terms of a contract: can it do so only when a term is “ambiguous” or susceptible to more than one construction, or is resort to the surrounding circumstances permitted whenever the task of construction is at hand?
The High Court in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited  HCA 37 (Mount Bruce) has now provided some clarity on the issue.
In Electricity Generation Corporation v Woodside Energy Ltd  HCA 7; (2014) 251 CLR 640 at 656  the High Court reaffirmed the proper approach to construction of contracts in terms that suggested that surrounding circumstances may always be considered as an aid to construction regardless of whether a threshold requirement of ambiguity is present. This approach was seen by some subsequent courts as an abandonment by the High Court of the gateway requirement (identified by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352) of ambiguity before consideration of surrounding circumstances was permitted: see for example the comments of McClure P in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd  WASCA 164 at  –  and Murphy JA at  – .
The question of whether evidence of the surrounding circumstances may be considered in determining the meaning of a contract did not arise for determination in Mount Bruce. Nevertheless, in obiter comments, the plurality (French CJ, Nettle J and Gordon J) reaffirmed the basic principles of construction to be applied including the following unequivocal statements:
“ The 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.
 In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
 Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
 However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in 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, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice.”
This passage makes clear that in the absence of ambiguity or if the provision is incapable of more than one meaning, evidence of surrounding circumstances cannot be adduced to contradict that plain meaning. In other words, these matters are threshold requirements for the recourse to surrounding circumstances as an aid to construction of a contract.
Kieffel and Keane JJ at  –  appeared to accept that Mason J’s statements in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 as to the admissibility of surrounding circumstances to construe a contract were directed to resolving ambiguity. These passages appear to be in agreement with the plurality.
However, they then referred Western Export Services Inc v Jireh International Pty  HCA 45; 282 ALR 604 – a decision refusing special leave to appeal in which Gummow, Heydon and Bell JJ said that “it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and object of the transaction” – and noted that decisions on special leave applications “create no precedent and are binding on no-one.” As to whether it is essential to identify ambiguity as stated in Western Export Services Inc v Jireh International Pty Kieffel and Keane JJ said:
“ … There may be differences of views about whether this requirement arises from what was said in Codelfa. This is not the occasion to resolve that question.”
Bell and Gageler JJ were also of the view that Mount Bruce was not the occasion to review what was said in Codelfa about the need for ambiguity before recourse can be had to the background facts and circumstances.
The Court in Mount Bruce made it clear that Codelfa remains good law in Australia and therefore, evidence of the surrounding circumstances will be admissible as an aid to construction only if the relevant term is ambiguous or capable of more than one meaning.