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Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 (11 May 1982)
HIGH COURT OF AUSTRALIA
CODELFA CONSTRUCTION PTY. LTD. v. STATE RAIL AUTHORITY OF N.S.W. [1982] HCA 24; (1982) 149 CLR 337
Contract - Arbitration
High Court of Australia
Stephen(1), Mason(2), Aickin(3), Wilson(4) and Brennan(5)JJ.
CATCHWORDS
Contract - Construction - Implied terms - Frustration - Contract to carry out excavations for rail authority - Completion required by certain date - Contractor working three shifts seven days per week - Injunction granted to third party restraining contractor from working at certain times - Whether implied term of contract that authority would grant reasonable extension of time and indemnify contractor against additional costs occasioned by grant of injunction - Whether injunction frustrated contract - Extrinsic evidence of intention.
Arbitration - Jurisdiction to entertain claim that contract frustrated - Power to award interest on award - Compound interest - Supreme Court Act 1970 (N.S.W.), s. 94(1).
HEARING
1981, November 10-13; 1982, May 11. 11:5:1982
APPEAL from the Supreme Court of New South Wales.
DECISION
1982, May 11.
The following written judgments were delivered:-
STEPHEN J. I have had the considerable advantage of reading the judgments of myself to the expression of my agreement with what has been written by others. (at p344)
2. Five distinct matters were canvassed in this appeal. As to the first, concerned with the implication of a term in the contract between the parties, I agree with all that my brother Mason has said. (at p344)
3. The second matter concerns the doctrine of frustration. As to it, I agree with what has been said concerning it by each of my brothers Mason and Aickin. On the question of the rise and fall clause I agree with Aickin J. and, on the matters of the power to award interest and the power to award compound interest, I agree with Mason J. (at p345)
MASON J. I have had the advantage of reading the reasons for judgment prepared by Brennan J. in which the relevant facts and questions are comprehensively set out.
(1) Implied Term. (at p345)
2. In this ocean of litigious controversy there is one large island of agreement between the parties. It is common ground that their contract consists of the agreement dated 21 March 1972 and the various documents which it incorporates. The appellant does not suggest that dehors the agreement and the incorporated documents there is to be found a term actually agreed upon by the parties which together with the contract documents stands as the true contract or which stands in its own right as a collateral contract. Nor does the appellant suggest that there is a case for rectification arising from the existence of such a term on the footing that it was inadvertently omitted from the contract documents. The appellant's case is that a term has to be implied in the contract to give it business efficacy, to make it workable. Consequently, there is no contest as to what constitutes the contract; rather the contest is as to its meaning and effect. (at p345)
3. When we say that the implication of a term raises an issue as to the meaning and effect of the contract we do not intend by that statement to convey that the court is embarking upon an orthodox exercise in the interpretation of the language of a contract, that is, assigning a meaning to a particular provision. Nonetheless, the implication of a term is an exercise in interpretation, though not an orthodox instance. (at p345)
4. Of course, I am speaking of an implied term necessary to give business efficacy to a particular contract, not of the implied term which is a legal incident of a particular class of contract, of which Liverpool City Council v. Irwin [1976] UKHL 1; (1977) AC 239 is an example. The difference between the two categories of implied term was mentioned by Viscount Simonds in Lister v. Romford Ice and Cold Storage Co. Ltd. [1956] UKHL 6; (1957) AC 555, at p 576 , where he referred to the search for the second category of implied term as being based "upon more general considerations", a comment endorsed by Lord Wilberforce in Irwin (1977) AC, at p 255 . (at p346)
5. The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties' actual intention; the implication of a term is designed to give effect to the parties' presumed intention. (at p346)
6. For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question. (at p346)
7. Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. So in Heimann v. The Commonwealth (1938) 38 SR (NSW) 691, at p 695 Jordan C.J., citing Bell v. Lever Brothers Ltd. [1931] UKHL 2; (1932) AC 161, at p 226 , stressed that in order to justify the importation of an implied term it is "not sufficient that it would be reasonable to imply the term. . . . It must be clearly necessary". To the same effect are the comments of Bowen L.J. in The Moorcock (1889) 14 PD 64, at p 68 ; Lord Esher M.R. in Hamlyn & Co. v. Wood & Co. (1891) 2 QB 488, at pp 491-492 ; Lord Wilberforce in Irwin (1977) AC, at p 256 ; Scrutton L.J. in Reigate v. Union Manufacturing Co. (Ramsbottom) (1918) 1 KB 592, at pp 605-606 . (at p346)
8. The basis on which the courts act in implying a term was expressed by MacKinnon L.J. in Shirlaw v. Southern Foundries (1926) Ltd (1939) 2 KB 206, at p 227 in terms that have been universally accepted: "Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. . . " (at p347)
9. The conditions necessary to ground the implication of a term were summarized by the majority in B.P. Refinery (Westernport) Pty. Ltd. v. Hastings Shire Council [1977] HCA 40; (1977) 52 ALJR 20, at p 26 : "(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract." (at p347)
10. In the present case the New South Wales Court of Appeal placed much emphasis on the speeches of Lord Wilberforce in Prenn v. Simmonds (1971) 1 WLR 1381, at pp 1383-1385; (1971) 3 A11 ER 237, at pp 239-241 , and in Reardon Smith Line v. Hansen-Tangen (1976) 1 WLR 989, at pp 995-997; (1976) 3 A11 ER 570, at pp 574-576 . Their Honours, though acknowledging that his Lordship's remarks were directed not to the implication of a term but to the application of the parol evidence rule, for in each of the two cases the issue was one of orthodox construction of a contract, thought that the remarks had significance for the implication of a term in a contract. With this I agree. But there is a question whether these two cases and other authorities support the Court of Appeal's view that it is legitimate to take into account the common beliefs of the parties as developed and manifested during their antecedent negotiations. (at p347)
11. The broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument (Goss v. Lord Nugent (1833) 5 B & Ad 58, at pp 64-65 (110 ER 713, at p 716) . Although the traditional expositions of the rule did not in terms deny resort to extrinsic evidence for the purpose of interpreting the written instrument, it has often been regarded as prohibiting the use of extrinsic evidence for this purpose. No doubt this was due to the theory which came to prevail in English legal thinking in the first half of this century that the words of a contract are ordinarily to be given their plain and ordinary meaning. Recourse to extrinsic evidence is then superfluous. At best it confirms what has been definitely established by other means; at worst it tends ineffectively to modify what has been so established. (at p348)
12. On the other hand, it has frequently been acknowledged that there is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning - see, for example, the remarks of Knox C.J. in Life Insurance Co. of Australia Ltd. v. Phillips [1925] HCA 18; (1925) 36 CLR 60, at p 69 . This has led to a recognition that evidence of surrounding circumstances is admissible in aid of the construction of a contract. So Lord Wilberforce in L. Schuler A.G. v. Wickman Machine Tool Sales Ltd. [1973] UKHL 2; (1974) AC 235, at p 261 was able to state the broad thrust of the rule in this way:
"The general rule is that extrinsic evidence is not admissible for the construction of a written contract; the parties' intentions must be ascertained, on legal principles of construction, from the words they have used. It is one and the same principle which excludes evidence of statements, or actions, during negotiations, at the time of the contract, or subsequent to the contract, any of which to the lay mind might at first sight seem to be proper to receive."
His Lordship noted that evidence of surrounding circumstances is an exception to the rule, but he had no occasion to discuss its scope for there it was not, as it is here, a critical question. (at p348)
13. However, as Lord Wilberforce had earlier pointed out in his speech in Prenn, a speech in which four other members of the House of Lords concurred, the English rule forbidding recourse to extrinsic evidence is not as strict as some have thought. The issue in Prenn was whether the word "profits" meant the separate profits of R.T.T., a company controlled by the appellant, or the consolidated profits of the group of companies consisting of R.T.T. and its subsidiaries. It was held that, although evidence of prior negotiations and of the parties' intentions, and a fortiori the intentions of one of the parties, ought not to be received, evidence restricted to the factual background known to the parties at or before the date of the contract, including evidence of the "genesis" and objectively of the "aim" of the transaction, was admissible. Considered in the light of this evidence "profits" meant "consolidated profits". (at p348)
14. Lord Wilberforce said (1971) 1 WLR, at pp 1383-1384; (1971) 3 A11 ER, at pp 239-241 :
"The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern, antiliteral, tendencies, for Lord Blackburn's well-known judgment in River Wear Commissioners v. Adamson (1877) 2 App Cas 743, 763 provides ample warrant for a liberal approach. We must, as he said, inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. Moreover, at any rate since 1859 (Macdonald v. Longbottom (1859) 1 E & E 977 [1859] EngR 635; (120 ER 1177) ) it has been clear enought that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term." (at p349)
15. His Lordship went on to assert that the well-known decision of Cardozo J. in Utica City National Bank v. Gunn (1918) 118 NE 607 "followed precisely the English line" (1971) 1 WLR, at p 1384; (1971) 3 A11 ER, at p 240 . There extrinsic evidence of the circumstances in which a guarantee was executed and of its object was received for the purpose of giving the words "loans and discounts" the looser meaning of "renewals". Lord Wilberforce quoted with evident approval the comment of Cardozo J. (1918) 118 NE, at p 608 that surrounding circumstances may "stamp upon a contract a popular or looser meaning" than the strict legal meaning, certainly when to adopt the latter would make the transaction futile. (at p349)
16. In Macdonald it had been held that the defendant's contract to buy "your wool" included not only wool which the plaintiffs had on their own farms, but also wool which they had bought in from other farms, one of the plaintiffs having stated before the contract in a conversation with the defendant's agent that he had wool from those two sources. This decision was followed in Bank of New Zealand v. Simpson (1900) AC 182 . Lord Davey (1900) AC, at pp 188-189 quoted with approval the remarks of Lord Campbell in Macdonald (1859) 1 E & E, at pp 983-984 (120 ER, at p 1179) :
"I am of opinion that, when there is a contract for the sale of a specific subject-matter, oral evidence may be received, for the purpose of shewing what that subject-matter was, of every fact within the knowledge of the parties before and at the time of the contract."
Lord Campbell, after referring to the conversation relating to the sources of the plaintiffs' wool continued:
"The two together constituted his wool; and, with the knowledge of these facts, the defendant contracts to buy 'your wool.' There cannot be the slightest objection to the admission of evidence of this previous conversation, which neither alters nor adds to the written contract, but merely enables us to ascertain what was the subject-matter referred to therein."
It is apparent that the principle on which the Judicial Committee acted in Simpson is that where words in a contract are susceptible of more than one meaning extrinsic evidence is admissible to show the facts which the negotiating parties had in their mind. (at p350)
17. Later, in Great Western Railway and Midland Railway v. Bristol Corporation (1918) 87 LJ Ch 414 , Lord Atkinson (1918) 87 LJ Ch, at pp 418-419 and Lord Shaw (1918) 87 LJ Ch, at pp 424-425 stated that evidence of surrounding circumstances was inadmissible except to resolve an ambiguity, that is, where the words are susceptible of more than one meaning, and that Lord Blackburn was dealing with just such a case in River Wear Commissioners. Their Lordships took the view that evidence of surrounding circumstances was not admissible to raise an ambiguity for in their opinion that would be to contradict or vary the words of the written document, the assumption being that in the overwhelming majority of cases the written words will have a fixed meaning. Lord Wrenbury (1918) 87 LJ Ch, at p 429 thought otherwise, stating that in every case of construction extrinsic evidence is receivable to raise and resolve an ambiguity. (at p350)
18. Lord Wilberforce in Prenn did not discuss these competing views, perhaps because the difference between them is more apparent than real. However, I doubt whether English and United States use of extrinsic evidence for the purpose of interpretation is quite as uniform as his Lordship appeared to think. (at p350)
19. Lord Wilberforce returned to the same theme in Reardon Smith (1976) 1 WLR 989; (1976) 3 A11 ER 237 . In a speech concurred in by a majority of the members of the House of Lords he acknowledged that it is legitimate "to have regard to. . . 'the surrounding circumstances'" (1976) 1 WLR, at p 995; (1976) 3 A11 ER, at p 574 . He went on to say (1976) 1 WLR, at pp 995-996; (1976) 3 A11 ER, at p 574 :
"In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating." (at p350)
20. After discussing Utica, Prenn (1971) 1 WLR 1381; (1971) 3 A11 ER 237 and Wickman [1973] UKHL 2; (1974) AC 235 , his Lordship continued (1976) 1 WLR, at p 996; (1976) 3 A11 ER, at p 574 :
"It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties."
His Lordship thought that this approach was supported by the speeches in Hvalfangerselskapet Polaris Aktieselskap v. Unilever Ltd. (1933) 39 Com Cas 1 and Charrington & Co. Ltd. v. Wooder (1914) AC 71, esp at pp 77, 80, 82 . He expressed the conclusion to be drawn from them in this way (1976) 1 WLR, at p 997; (1976) 3 A11 ER, at p 575 :
". . . what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts which form part of the circumstances in which the parties contract in which one, or both, may take no particular interest, their minds being addressed to or concentrated on other facts so that if asked they would assert that they did not have these facts in the forefront of their mind, but that will not prevent those facts from forming part of an objective setting in which the contract is to be construed." (at p351)
21. In D.T.R. Nominees Pty. Ltd. v. Mona Homes Pty. Ltd. [1978] HCA 12; (1978) 138 CLR 423, at p 429 , Stephen and Jacobs JJ. and I, following Prenn, in a joint judgment said:
"A court may admit evidence of surrounding circumstances in the form of 'mutually known facts' 'to identify the meaning of a descriptive term' and it may admit evidence of the 'genesis' and objectively the 'aim' of a transaction to show that the attribution of a strict legal meaning would 'make the transaction futile' . . . "
And in Secured Income Real Estate (Australia) Ltd. v. St. Martins Investments Pty. Ltd. [1979] HCA 51; (1979) 144 CLR 596, at pp 605-606 in a judgment concurred in by other members of the Court I not only accepted and applied the statement in the majority judgment in B.P. Refinery [1977] HCA 40; (1977) 52 ALJR 20 of the conditions necessary to support the implication of a term, but I also accepted and applied Lord Wilberforce's different treatment, for the purpose of construing a contract, of evidence of surrounding circumstances on the one hand and of the parties' intentions on the other hand. Having considered the topic in more detail on this occasion I see no reason to qualify what I then said. (at p352)