Ambiguity

Introduction
A key principle of contract interpretation is that words are given their natural and ordinary meaning, but there is much more to interpreting commercial contracts than this. Courts will consider the contract as a whole (not just words in isolation). They will apply an objective approach to discern what a reasonable business person in the position of the parties would have understood the words to mean. This is where it becomes more complicated. In order for a court to properly understand what a reasonable business person would have intended in the circumstances of the parties, the court usually needs to have regard to at least some of the surrounding circumstances.

In recent years, Australian contract law been vexed by the question of whether a court is generally entitled to consider the surrounding circumstances or whether this is only allowed if the words in the written contract are ambiguous.

A recent unanimous decision of the Court of Appeal of the Supreme Court of New South Wales has decided that no ambiguity is required before evidence of surrounding circumstances can be considered.

Who needs to know?
People who draft and negotiate contracts or have to interpret them.

Background
The case of Newey v Westpac Banking Corporation [2014] NSWCA 319 related to Westpac’s acquisition of St George Bank in December 2008.

After the acquisition, St George was initially operated as a wholly-owned subsidiary before all of its assets and liabilities were statutorily transferred into Westpac on 1 March 2010. Once the transfer was completed, St George Bank Limited ceased to exist as a separate legal entity. The business of St George was thereafter continued as a separate division within Westpac.

Some former employees of the St George business made claims against Westpac. Most of these had their employment terminated by St George Bank prior to final integration with Westpac on 1 March 2010. However, some of the employees transferred into Westpac and their employment was terminated by Westpac after 1 March 2010.

Several of the former employees instructed a law firm to make their claims against Westpac. As it transpired, many of the former employees settled their claims with Westpac in 2011. As part of the settlement arrangements, the law firm acting for the former employees agreed that, apart from its current “Applicants” and certain “Prospective Applicants”, it would not bring or assist in any other claims against Westpac (or any of its related bodies corporate) on behalf of any former employee of St George Bank Limited “whose employment was or is terminated by Westpac” (underlining added for emphasis).

The settlement deed defined Westpac by describing it as a party to the deed i.e. “Westpac” meant “Westpac Banking Corporation”. When the restraint clause referred to employees whose employment had been terminated “by Westpac”, the clause literally only meant termination by Westpac Banking Corporation (not St George Bank Limited). As mentioned above, most of the employees had been terminated by St George Bank Limited, not Westpac.

About 2 years after the settlement deeds were signed, the law firm commenced proceedings against Westpac on behalf of two former employees of St George Bank Limited whose employment had been terminated by St George Bank Limited in 2009. The law firm argued that the restraint did not apply because the employment of these employees had been terminated by St George Bank Limited, rather than “by Westpac”. The law firm argued that the wording of the deed was very clear. It submitted that there was no ambiguity and the deed should be given its literal interpretation.

Westpac argued that the reference to “by Westpac” should be interpreted as meaning “by Westpac or any of its related bodies corporate”. Westpac argued that this interpretation was a more business like interpretation which was more consistent with what it believed had been intended by the parties.

What did the trial judge say?
The trial judge agreed with Westpac.

The trial judge proceeded on the basis that the words must be given their ordinary meaning unless there is “some ambiguity or it is clear that something has gone wrong with the language or unless the language gives rise to an absurd operation”. There had to be some ambiguity before the court could consider evidence of the surrounding circumstances as a means of interpreting the deed.

The trial judge held that an ambiguity existed because of the way in which one of the employees listed in the definition of “Prospective Applicants” had in fact been terminated by St George, rather than by Westpac. If the restraint only applied to employees terminated by Westpac, why was a person who had been terminated by St George included in this list? The law firm argued that this was just an “incongruity which could safely be ignored”. It stated that it simply wanted that employee excluded for all of the restraints in the deed. In this regard, some aspects of the deed did not depend on who did the terminating.

The trial judge held that inclusion of this particular employee revealed an “anomaly” which suggested that “something different was intended”. The trial judge then had regard to the surrounding circumstances and based on that evidence it decided to depart from the literal interpretation. It ultimately decided in favour of Westpac.

Ambiguity Required?
On appeal, the New South Wales Court of Appeal unanimously stated that there is no need to identify an ambiguity before considering surrounding circumstances known to both parties. It endorsed what is now generally referred to as the “contextual approach” to contract interpretation.

The Court of Appeal referred to the High Court’s recent, yet relatively brief, comments about contract interpretation in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 at 35 (Woodside). In that case, the High Court stated that contract interpretation “will require” consideration of “the surrounding circumstances” known to the parties. Nevertheless, the High Court’s comments were brief and the Woodside case did not involve any dispute about whether ambiguity is required before surrounding circumstances can be considered.

The Court of Appeal also referred to Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 (Jireh) where the High Court previously made statements which have been understood as meaning that evidence of surrounding circumstances could only be considered if an ambiguity existed. The NSW Court of Appeal then essentially stated that the High Court’s remarks in Jireh should not be followed given the more recent decision of the High Court in Woodside. Since some supreme courts in other Australian states seem to have stuck to what was said by the High Court in Jireh and earlier High Court cases (including Codelfa), this issue needs to be clearly resolved by the High Court to give certainty.

In any event, the Court of Appeal held that the “anomaly” identified by the trial judge was not in fact an ambiguity in the text of the contract, but was only an apparent anomaly which arose from the surrounding circumstances. In other words, the fact that the relevant employee had been terminated by St George was itself evidence deduced from the surrounding circumstances rather than the terms of the contract. So, even if the Court of Appeal had agreed with the need to identify an ambiguity in the text as a pre-condition to examining surrounding circumstances, it held that there was in fact no ambiguity in the text insofar as the contract simply listed the relevant employee as one of the Prospective Applicants. The Court of Appeal was nevertheless satisfied that the simple reference to “Westpac” was itself sufficiently ambiguous (in the sense of being susceptible to more than one meaning) having regard to its use within the context of the contract (particularly other instances where it was accompanied by references to its related bodies corporate). Whether a word is ambiguous is “very much a matter of impression” and, as this case demonstrates, courts can be relatively flexible when they want to identify ambiguities.

Interpretation in light of the surrounding circumstances
The Court of Appeal considered a wide range of surrounding circumstances, including evidence of draft agreements, correspondence and negotiations between the parties.

Weighing up all of this evidence, it ultimately favoured the more literal interpretation advocated by the law firm i.e. it concluded that Westpac meant Westpac. In doing so, the Court of Appeal found that the trial judge had erred in making some of the inferences he drew from the surrounding circumstances.

The Court of Appeal summed up its approach as follows:

“The ability of the courts to give commercial agreements a commercial and business-like interpretation is constrained by the language used by the parties. If, after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the Court must give effect to that language unless to do so would give the contract an absurd operation”.

Here, the Court of Appeal actually held that the language was ambiguous (see above), so it seems the Court of Appeal could have adopted Westpac’s interpretation if the surrounding circumstances justified it, although to do so would have clearly moved way from the literal interpretation.

As noted above, most of the relevant employees had been terminated by St George Bank, not Westpac. The interpretation given by the Court of Appeal therefore meant that the restraint had relatively limited operation. The Court of Appeal did not think this result was absurd or inconsistent. On the contrary, it stated that the deed operated “perfectly well” when interpreted this way. Therefore, even if the Court of Appeal had held that there was no ambiguity, it still would have adopted the literal interpretation.

Points to Take Away

• According to the New South Wales Court of Appeal, there is no need to identify an ambiguity before having regard to evidence of surrounding circumstances. This issue needs to be resolved by a clear and principled decision of the High Court to remove all uncertainty.
• Apart from contract interpretation claims, a party should also consider making a concurrent claim for rectification of the contract (rectification is where the court rewrites the contract to accord with the true or common intention of the parties). Evidence of surrounding circumstances is usually admissible in rectification claims. To make out a rectification claim you must show by clear and convincing proof that there was a common intention of the parties which has failed to be embodied in the written contract. The onus on the party seeking rectification is a heavy one. In this case, Westpac argued for rectification but failed to make out its case on the facts.
• Given the “contextual approach” to contract interpretation, there may now be less distinction between contract interpretation and rectification claims in terms of admissible evidence.