Codelfa Construction Pty Ltd v State Rail Authority of NSW

Codelfa Construction v State Rail Authority of New South Wales
Court	High Court of Australia
Full case name	Codelfa Construction Pty Ltd v State Rail Authority of NSW
Decided	11 May 1982
Citations	[1990] HCA 39, (1990) 170 CLR 394
Court membership
Judges sitting	Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron & McHugh JJ

Codelfa Construction v State Rail Authority of New South Wales is a widely cited Australian contract law case which establishes the modern approach to contractual construction. The case concerned a construction company whose works had been held up by an injunction, from which they had been advised they were exempt. The case greatly influenced the development of the Eastern Suburbs railway line. In terms of contract law it addresses questions of frustration, construction and the parol evidence rule. The case diverged from the well established English approach, per Investors Compensation Scheme Ltd v West Bromwich Building Society, regarding the use of extrinsic evidence in contractual interpretation.

Background

The State Rail Authority engaged Codelfa construction under a contract for services to excavate tunnels in the Eastern Suburbs allowing for the development of the Eastern Suburbs railway line. Codelfa construction was obliged to complete the works within 130 weeks. On the basis of legal advice the contracting parties were lead to believe that the work would be exempt from injunction as it was was authorised by s 11 of the City and Suburban Electric Railways (Amendment) Act 1967 (NSW), supposedly providing crown immunity. In 1972 Codelfa commenced the work in three shifts each day for seven days a week. However, the noise generated by their underground drilling lead several local residents and Council to apply for an injunction. On 28 June 1972, the Supreme Court of NSW granted an injunction, constraining the works to six days a week and two shifts per day.

Procedural History

Arbitration proceedings commenced in 1976 to establish whether by reasons of an implied term or frustration Codelfa construction could recover. As the arbitration proceedings had no jurisdiction with regard to frustration proceedings it dealt principally with the issue of an implied term in the contract. The arbitrator found that an a term could be implied into the contract to the effect that the deadline could be extended if workable hours varied.

The High Court Decision

Construction

According to the Parol evidence rule, where it can be said that a contract is wholly in writing "verbal evidence is not allowed to be given of what passed between the parties, either before the written document was made, or during the time that it was in a state of preparation, so as to add to or subtract from, or in any manner to vary or qualify the written contract." In order to adduce whether the contract is wholly or partly in writing the court will examine the evidence of oral statements which parties claim forms part of the final contract. On this point the law is uniform in Australia and the United Kingdom.

The rationale behind contractual construction, as explained by J.W. Carter, is not to infer the subjective intentions of the parties or give meaning to a term of a contract consistent with those subjective understandings. Instead, the goal is to give meaning to the contract that is consistent with what a reasonable person in the position of the contracting party would have understood the term to mean.

In achieving this rationale British and Australian courts have diverged in their allowance of extrinsic evidence which is said to form part of the "surrounding circumstances" of a contract. In English law this evidence will be allowed and the Court will interpret the contract in light of these circumstances, per Investors Compensation Scheme Ltd v West Bromwich Building Society. In Australian law however the Court pronounced the 'true rule' of contractual construction.

Goss v Lord Nugent (1833) 5 B &Ad 58; 110 ER 713 at 64-5 (B & Ad), 715-6 (ER)

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The 'true rule'

The true rule is 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 it is not admissible to contradict the language of the contract when it has a plain meaning.

— Mason J, Codelfa Construction Pty Ltd v State Rail Authority of NSW [55]

Under this rule extrinsic evidence of the surrounding circumstances and commercial objectives of a contract may only be referred to where the Court has established that a term of a contract is ambiguous. However, Justice Mason did not define the kind of ambiguity required to meet the requirements of the 'true rule.'

Implied term

The court considered whether a term could be implied into the contract allowing for a reasonable extension of time to complete the works given the injunction. The High Court rejected that a term could be implied, deciding it was impossible to formulate an appropriate term with clarity and precision. Further, even if it could be established that such a term would be necessary to give business efficacy it could not be termed "so obvious that it went without saying."

Frustration

However, on the second ground of appeal Codelfa Construction succeeded, with a majority of the court finding that the contract was frustrated. In coming to this determination, the court followed the defintion of frustration laid out in Davis Contractors Ltd v Fareham Urban District Council. That is that "frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance called for would render it a thing radically different from that which was undertaken by the contract." Therefore the critical issue which the court had to determine was whether the situation resulting from the grant of an injunction rendered the situation "radically different" from that which was contemplated at the time of contractual formation. On this point, the Court found:

“It is a different situation from that in which one party has been prevented from completing the contract work within a specific time because of a shortage of materials or labour…the injunction made it impossible to complete the work being done in a manner of time, which, from the outset, both parties knew were essential…’

— Justice Aickin, Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 381

Consequences

The position of the Codelfa decision in Australian law remains unclear.

In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45, the court indicated that the decision remained good law in Australia. In that case, the Court noted that that ambiguity must first be established before referring to extrinsic evidence. It found such ambiguity in the use of the term "factors may include," followed by a list of contractual considerations. The Court argued that the use of the term "may" could refer to an exhaustive or inexhaustive number of considerations. This has attracted criticism from many academics, who have found that the term "may" was not possible of being ambiguous. Further, they argue that this demonstrates the difficulty of the "true rule."

In an application for special leave for a matter to be heard in the High Court, Codelfa was said to remain good law in Australia. Justice Mason noted that primary judges and intermediate appellate courts are ‘bound to follow that precedent.’ As Mason J is a respected Australian jurist this application has been cited in many judgments. Yet in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 French CJ, Nettle and Gordon JJ made clear that Jireh had been incorrectly referred to by lower courts, as a procedural motion is itself is not binding in Australian law. In particular, the Western Australian Supreme Court found this compelling...

Decisions such as Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 provide tentative evidence that Codelfa may no longer be good law in Australia. The New South Wales Supreme Court has taken the view that Codelfa no longer represents the view of the court and as such has moved towards accepting the English approach laid out in Investors Compensation Scheme Ltd v West Bromwich Building Society.

As the position of the Codelfa decision remains an unsettled point in Australian law many issues have arisen in contractual construction at lower level courts. One common practice used to circumvent this issue has been the use of recitals at the start of the contract, per Adventure Golf Systems Australia Pty Ltd v Belgravia Health & Leisure Group Pty Ltd [2017] VSCA 326. This allows the contract to be read in light of circumstances that both parties agreed at the time of formation were relevant to the interpretation of terms.

• In English law a contract is to be construed objectively and in context but we do not consider the parties’ prior negotiations, their subjective understandings or their subsequent conduct.
• Construction is objective. We do not consider the parties’ purely subjective understandings. We do not consider, subject to some narrow exceptions, prior negotiations or subsequent conduct
• But it is unclear in Australia where regard can be had to context. When can we look at the factual matrix?
• IMPORTANT: EITHER WE FOLLOW THE ENGLISH APPROACH AND ALWAYS WE READ THE CONTRACT IN CONTEXT, OR WE FIRST MUST POINT TO TEXTUAL AMBIGUITY
• The ‘True Rule’
  • Codelfa Construction Pty Ltd v State Rail Authority of NSW 1982 Mason J
    • The true rule is 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 it is not admissible to contradict the language of the contract when it has a plain meaning.
    • — Mason J, Codelfa Construction Pty Ltd v State Rail Authority of NSW [55]
  • At least on one view, this statement can be taken to mean that, when construing a contract, it is necessary to point to ‘ambiguity’ before recourse can be had to evidence of ‘surrounding circumstances’ as an aid to interpretation
• Maggbury Pty Ltd v Hafele Australia Pty Ltd seems to contradict this
• Pacific Carriers v BNP Paribas - seems to refer to surrounding circumstances first AND Toll FGCT v Alphapharm

Journals

-J W Carter, Wayne Courtney and Gregory Tolhurst, ‘Reasonable Endeavours in Contract Construction’ (2014) 32 Journal of Contract Law 36

• JW Carter is a highly regarded Australian legal scholar whose work has been cited in numerous Court decision. In particular, his practitioner's handbook on contract law has been widely referenced.

• This article outlines some of the key contemporary consequences of the Codelfa decision.

-Ryan Catterwell, ‘The “Indirect” Use of Evidence of Prior Negotiations and the Parties’ Intentions in Contractual Construction: Part of the Surrounding Circumstances’ (2012) 29 Journal of Contract Law 183

- This article provides a reputable account of attempts to circumvent the problems associated with the Codelfa decision.

-David McLauchlan, ‘The Contract that Neither Party Intends’ (2012) 29 Journal of Contract Law 26

• This article draws out the problems associated with the Codelfa decision.

-David McLauchlan, ‘Plain Meaning and Commercial Construction: Has Australia Adopted the ICS Principles?’ (2009) 25 Journal of Contract Law 7

- This article discusses some of the contemporary movement in the position of the Codelfa decision in Australian law.

-David McLauchlan and Matthew Lees, (2012) ‘More Construction Controversy’ (2012) 29 Journal of Contract Law 97^[4]

-Catherine Mitchell, ‘Behavioural Standards in Contracts and English Contract Law’ (2016) 33 Journal of Contract Law 234^[5]

- This article provides further background for understanding the journal

Cases

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12, (2017) 91 ALJR 486, 343 ALR 58

Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98

• This case outlines the preexisting english principle from which the Australian case diverges.

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337

• This is the case to be discussed in the entry.

Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45

Western Export Services v Jireh International [2011] HCA 45; (2011) 86 ALJR 1

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104

Use of recitals in interpreting the contract: Adventure Golf Systems Australia Pty Ltd v Belgravia Health & Leisure Group Pty Ltd [2017] VSCA 326

Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties although, if the facts are notorious, knowledge of them will be presumed.

It is here that a difficulty arises with respect to the evidence of prior negotiations. Prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable.

There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal.

However, it is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances. See Heimann (at 695).

External links

• www.example.com