Is my contract truly ambiguous?
Is my contract truly ambiguous?
Contractual interpretation principles surrounding ambiguity clarified in Cherry v Steele-Park  NSWCA 295
The New South Wales Court of Appeal has recently provided a useful exploration of the authorities in relation to contractual interpretation in the decision of Cherry v Steele-Park  NSWCA 295. There is a divergence of opinion in other states, so this article is only indicative of the position in New South Wales.
It is settled authority from the High Court that the construction of a contract will be determined according to its text, context and purpose: Simic v New South Wales Land and Housing Corporation  HCA 47. It is also settled authority that the text has primacy.
Justice Mason’s statement in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 of the “true rule” in relation to the role of extrinsic evidence in contractual interpretation is well known. His Honour stated that:
“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.”
The question of what constitutes “ambiguity”, however, has remained itself ambiguous.
There is differing authority around Australia as to whether the written terms of a contract are ambiguous because of the text’s surrounding circumstances and context or whether there must be first a determination that the terms are ambiguous and extrinsic evidence is then permitted to resolve the ambiguity.
The NSW Court of Appeal has held that “ambiguity is a conclusion, to be reached after consideration of evidence of surrounding circumstances, rather than a precondition to the admissibility of evidence of surrounding circumstances”.
In other words, determining whether the text is ambiguous or not, is found by evidence of surrounding circumstances. If having regard to those surrounding circumstances an ambiguity in the text arises, then the evidence (provided it is relevant to an issue in dispute in the litigation) can be used to assist in determining the context and purpose of the contractual arrangement.
Cherry v Steele-Park involved a contract for the sale of a property by the plaintiff to a company controlled by the defendants. The completion date of the sale was twice varied by way of Deed, with the defendant required to pay further consideration each time the date of completion was extended. About a fortnight prior to the Second Variation, the defendants/appellants executed a directors’ guarantee that stated relevantly:
“Guaranteed Money means 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 Clause 4 and 5 of the agreement.”
The sale never completed and the plaintiff terminated the contract for sale. It eventually sold the property for a lower price to another purchaser, obtained default judgment against the company controlled by the defendants and sued the defendants under the guarantee for approximately $176,000 – either as a debt due and payable or, alternatively, as damages for breach.
The defendants (appellants on the appeal), argued that only the damages arising out of the second variation ought to be the subject of the guarantee, an amount of $30,250.
At the original trial, the defendant argued that the guarantee was ambiguous and argued that some emails between the parties’ solicitors at around the time of entry into the guarantee should be admitted into evidence for the purpose of determining the true construction of the guarantee, in addition to an estoppel argument raised.
The judge at first instance did not allow those emails into evidence, except in respect of an estoppel argument (which did not succeed) and found, on the basis of the words of the guarantee, that the guarantee was not so limited as contended for by the defendant and gave judgment in full for the plaintiff.
On appeal, the appellant argued that the emails were part of the guarantee’s context and could be admitted on the basis of WIN Corporation v Nine Network Australia Pty Ltd  NSWCA 297 and Victoria v Tatts Group (2016) 328 ALR 564. The plaintiff (respondent on the appeal) argued those emails only went to the subjective understanding of the defendant/appellant’s solicitor.
The Court of Appeal held that those emails should have been admitted as and were relevant to construction. However, it held that “the contextual evidence [was] incapable of defeating the wide words of the guarantee”. Accordingly, Court of Appeal dismissed the appeal.
The take home
Avoiding ambiguity has, and will continue to be, the primary goal of contractual drafting. However, how you conduct yourself during the negotiation and formation of the contract could be very important if, having regard to all the events, there can be more than one sensible contractual meaning in the text. That evidence could become critical.
If you are a party to a contract where you and/or the other side are unsure as to its intended meaning Surry Partners is happy to assist you in navigating any potential dispute.
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