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, Stephen, Aickin & Wilson JJ

Codelfa Construction v State Rail Authority of New South Wales is a widely cited Australian contract law case which serves as authority for the modern approach to contractual construction. The case concerned a construction company whose works had been held up by an injunction, and 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. The works were to include "the excavation of two single track tunnels commencing at Edgecliff and running through Woollahra to Bondi Junction, an open cut excavation at the site of the Woollahra Station, and an underground excavation at the site of the Bondi Junction Station." The State Rail Authority issued Codelfa Construction's with a notice to proceed on 7 March 1972. From this date, Codelfa was bound to complete all 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 Construction 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 New South Wales granted an injunction, constraining the works to six days a week and two shifts per day. This effectively made it impossible for Codelfa Construction to complete the required work within the agreed-upon timeframe without incurring additional costs.

Procedural History

Pursuant to a Scott v Avery clause within the contract, the parties started arbitration proceedings in 1976 to establish whether by reasons of an implied term or frustration Codelfa Construction could recover damages or if they were liable for the incomplete works. As the arbitration proceedings had no jurisdiction with regard to frustration of the contract, they dealt principally with the issue of an implied term in the contract. The arbitrator found that a term could be implied into the contract to the effect that the deadline could be extended if workable hours varied. Both parties issued summons in the Supreme Court of New South Wales to reach a determination on a number of questions raised in the proceedings. Codelfa Construction alleged that the contract had been frustrated and further alleged that an implied provision of the contract, to pay a reasonable sum for work performed, had not been met. The State Rail Authority's allegations were to the effect that Codelfa Construction was bound to complete the works. Following the arbitrators decision a case was commenced in the Supreme Court of New South Wales. In his judgment Justice Ash found that the contract had not been frustrated, instead he extended the implied term found by the arbitrator to also account for the understanding that work's could not continue where an injunction was granted. On appeal, Justices Reynolds, Glass and Samuels of the Court of Appeal varied Justice Ash's implied term but reached the same conclusion that an implied term could be found in the contract but that the contract was not frustrated.

Codelfa Construction then appealed to the High Court challenging the finding regarding the action in frustration. The State Rail Authority cross-appealed on a number of grounds centrally challenging the court's assertion that a term could be implied into the contract.

The High Court Decision

Construction

According to the Parol evidence rule, it can be said that where 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."Goss v Lord Nugent, 110 ER (House of Lords 1833).XXXX In order to ascertain whether the contract is wholly or partly in writing the court will consider the 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 implementing this principle, 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 when determining the meaning and effect of contractual terms. In English law courts may consider the "matrix of fact" surrounding the formation of the contract. The "matrix of fact" extends to the words and conduct of the contractual parties, common industry knowledge and any other factor which may have affected the reasonable person's understanding of the language of the contract. The Court will interpret the meaning of the contract in light of these circumstances, per Investors Compensation Scheme Ltd v West Bromwich Building Society.

In Australian law however the High Court deviated from the English rule of contractual construction and instead held that Australian courts should follow 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) XX

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 delays caused by the injunction. The High Court rejected that a term could be implied, holding that it was impossible to formulate a term with appropriate 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 held "so obvious that it went without saying" that the contracting parties intended for such a term to form part of their contractual relationship.

Frustration

However, Codelfa Construction succeeded on the second ground of appeal, with the majority finding that the contract was frustrated. In coming to this determination, the court followed the definition 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.

However, a number of decisions made the High Court following Codelfa contradicted the 'true rule' including Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70, Pacific Carriers Ltd v BNP Paribas - [2004] HCA 35 and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52. Following this apparent shift in judicial opinion, numerous intermediate appellate courts and lower courts followed the principles established by Investors Compensation Scheme Ltd v West Bromwich Building Society. The 'true rule' was understood by many courts to have lapsed in favour of the English approach to contractual construction.

However, in other High Court cases the 'true rule' was affirmed as the correct approach to contractual construction. 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 High Court noted that ambiguity must first be established before referring to extrinsic evidence. The court held that the use of the term "may" introduced ambiguity into the contract, and 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 open to ambiguity. Further, they argue that this demonstrates the difficulty of applying the "true rule" and determining which contextual factors are truly extrinsic to the language of the contract.

Furthermore, an application for special leave for a case to be heard in the High Court in Western Export Services Inc v Jireh International Pty Ltd  [2011] HCA 45, the bench held that Codelfa remained good law in Australia. Justices Gummow, Bell and Heydon noted that primary judges and intermediate appellate courts are ‘bound to follow that precedent' until the High Court holds otherwise.

As an application for special leave is a procedural motion rather than a substantive hearing the statements of the bench did not establish a binding precedent. However, this application for special leave is notable for being published in the Australian Law Reports and representing the unambiguous judicial opinion of three justices of the High Court.XXX Yet in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 Chief Justice French, as well as Justices Nettle and Gordon made clear that lower courts had been incorrect in identifying Western Export Services Inc v Jireh International Pty Ltd  [2011] HCA 45 as an authoritative statement on the correct approach to contractual construction, as a procedural motion in itself is not binding in Australian law.

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 have involved the High Court applying the approach set out in Investors Compensation Scheme Ltd v West Bromwich Building Society despite affirming the 'true rule' in Western Export Services Inc v Jireh International Pty Ltd  [2011] HCA 45. This suggests 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 authority 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. Legal scholars have noted that this is a significant area of law, in which a binding decision in favour of Investors Compensation Scheme Ltd v West Bromwich Building Society or in favour of Justice Mason's 'true rule' would have significant implications for contractual disputes.

At present contractual construction in Australian law is not consistent and uniform between different states and territories, with lower courts and intermediate appellate courts adopting different positions in relation to Codelfa. The Supreme Court of New South Wales in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 supported the conclusion that Investors Compensation Scheme Ltd v West Bromwich Building Society had been accepted in Australian law, therefore, ambiguity did not have to be pointed to before referring to 'surrounding circumstances.' This position was supported by the Full Court of the Federal Court of Australia in Stratton Finance Pty Ltd v Webb (2014) 314 ALR 166. However, the Western Australian Supreme Court has stated that Codelfa remains good law in Australia in Technomin Australia Pty Ltd v Xstrata Nickel Australia Operations (2014) 48 WAR 261; [2014] WASCA 16.

• 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

External links

• www.example.com