Pre-contractual communications and disputes: NSW Court of Appeal provides guidance

It is not uncommon for contracting parties to dispute the interpretation and effect of terms of the contract that governs their relationship, with at least one of the parties asserting that the terms are ambiguous. Understanding how a court may approach such a dispute will be critical to determining whether or not to litigate.

In a recent decision of the New South Wales Court of Appeal – Cherry v Steele-Park [2017] NSWCA 295 (Cherry) – the Court provided guidance to contracting parties on what documents or communications will be admissible to determine:

• if the contract is ambiguous, and
• the meaning of a contractual provision.

Many readers will recall that the High Court held, in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (Codelfa), 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 that evidence is not admissible to contradict the language of the contract when it has a plain meaning.

In Cherry, Leeming JA confronted the anterior question, which is this: how does a party identify whether the contract is ambiguous in the first place?

Cherry – The facts

Bathurst Central Pty Ltd (Bathurst Central) was contracted to purchase a parcel of land near Bathurst. That contract provided that if the vendor terminated the contract and sold the property for a lower price, then the vendors could recover the difference from the purchasers.

Completion was due on 28 March 2014. The parties, by written agreement, extended the completion date to 13 June 2014. That extension also provided that if completion took place after 6 April 2014, interest would become payable.

Again, completion did not occur on time, and on 23 July 2015, the parties:

• removed the interest condition
• extended the completion date to 1 October 2014, and
• agreed that Bathurst Central would pay $30,250 as consideration for the variation.

On 10 July 2014, just prior to the 23 July variation, and in the process of negotiating that variation, the directors of Bathurst Central guaranteed Bathurst Central’s payment of the ‘Guaranteed Money’.

‘Guaranteed Money’ was given the following definition:

‘All amounts (including damages) that are payable, owing but not payable, or that otherwise remain unpaid by the Debtor to the Beneficiary on any account at any time under or in connection with the Agreement or any transaction contemplated by the Agreement, whether present or future, actual or contingent or incurred alone, jointly, severally or jointly and severally and without regard to the capacity in which the Debtor is liable including the obligation to pay the amounts specified in Clauses 4 and 5 of the agreement.’

To any reasonable person, that definition is very broad and would cover almost any amount owing to the ‘Beneficiary’ (in this case, the vendor). The contract did not complete and the vendors later sold the property for $147,500 less than the earlier agreement. They sued the directors for the difference.

The directors argued that the ‘Guaranteed Money’ only extended to the $30,250, and not the larger amount. The directors relied on the following email in aid of their argument:

‘Dear Michael

I have confirm [sic] with my client that the guarantee is to extend to all of the funds payable by 1 October under variation No 2. totalling $27,500 + GST. If you could amend the variation No 2 and send it through’

They also relied on another, which said:

‘Time for completion to be extended upon payment of sum of $12,500 plus GST on 7 July 2014 or on completion whichever is the earlier-personal guarantees are to be provided by the directors for payment of this sum and the purchaser is to meet the legal costs associated with preparing the guarantee. If the amount is paid now the guarantee can be dispensed with.’

The directors argued that these emails meant the contract was to be interpreted as only guaranteeing the lower amount, not the difference between the sale prices of the land.

At trial, the primary judge made an evidentiary ruling that this correspondence was ‘no more than evidence of the parties’ subjective intentions’ and was not ‘evidence of objective facts known to both contracting parties’. Consistent with that ruling, her Honour then approached the construction of the guarantee solely by reference to the words in that document, and ruled against the directors.

The directors appealed. By unanimous decision, the Court of Appeal dismissed the appeal, holding that the contextual evidence was incapable of defeating the wide words in the guarantee. However, by split decision, it also held that the primary judge had erred in the evidentiary ruling.

Cherry – The evidentiary ruling

The Court held that in considering whether or not a contract is ambiguous, and therefore whether pre-contractual communications can be used in the reasoning process of how a provision is to be interpreted, the Court is permitted to look at the evidence of objective surrounding circumstances.

The Court confirmed that only ‘objective facts’ known to both sides could be used in evidence.

Depending on the dispute in question, this would usually include:

• emails between the parties about the contract
• email between the lawyers for each party about the contract
• the usual ‘versions’ of a document which are produced when a contract is negotiated, and
• conversations between the parties about the contract.

For example, a written file note of a party’s own thoughts about the contract would not be able to be used in interpreting the contract if that file note had not been provided to the other party and if the other party did not know of its contents. But a written file note of a meeting between the parties about the contract would be able to be used in considering whether the contract is ambiguous.

Conclusion

While the Court of Appeal accepted the limited scope for evidence of surrounding circumstances to detract from the contractual text, its decision means that objective facts may be considered to determine whether a contractual provision is ambiguous. Of course, in most instances this should not cause any problem as parties should strive to have any contract accurately reflect their agreement.

McCullough Robertson is well placed to advise on any contractual issues, including the interpretation of contracts.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.