Cherry v Steele-Park

Background - overview

1. Messrs David Cherry and Richard Sharpe were the directors of Bathurst Central Pty Ltd. On 4 November 2013, Bathurst Central contracted with Ms Phillippa and Mr Jock Steele-Park to purchase a parcel of land at Raglan near Bathurst (Contract). The Contract was in standard form. One clause provided that if the vendors terminated and sold the land for a lower price to a third party purchaser within 12 months, they could recover the difference from Bathurst Central.
2. Completion of the Contract was to occur no later than 28 March 2014. On 17 March 2014, the parties executed a "Variation of contract for the sale and purchase of land", which extended the completion date to 13 June 2014 (First Variation). The First Variation also provided that if completion took place after 6 April 2014, Bathurst Central agreed to pay interest calculable at a rate of 7% per annum on the number of days between 6 April and the completion date.
3. Completion did not occur by 6 April. Nor had it occurred by 13 June 2014. On 23 July 2014, a "Second Variation of contract for the sale and purchase of land" was executed, which further extended the completion date to 1 October 2014 (Second Variation). As well as extending the completion date, the Second Variation removed the clause which had been inserted by the First Variation for the payment of interest, and instead provided that Bathurst Central agreed to pay, in addition to the purchase price, the sum of $27,500 plus GST (namely, $30,250) on the earlier of 1 October 2014 or completion. Prior to the execution of the Second Variation, the guarantee executed by Mr Cherry and Mr Sharpe which has given rise to this appeal was delivered to Mr and Mrs Steele-Park's solicitors (Guarantee).
4. By 1 October 2014, completion had still not occurred. On 16 October 2014, solicitors for Mr and Mrs Steele-Park served a notice to complete on the solicitors for Bathurst Central, requiring completion by 10 November 2014, which again did not occur. On 24 April 2015, solicitors for Mr and Mrs Steele-Park served a notice of termination of the contract of sale on solicitors for the appellants. On the same day, Mr and Mrs Steele-Park exchanged contracts for sale of the property with a third party purchaser, for a price which was $147,500 less than the purchase price agreed to under the contract with Bathurst Central.
5. On 23 September 2015, Mr Steele-Park (to whom Mrs Steele-Park had assigned her rights under the Contract) commenced an action in the District Court against Bathurst Central, Mr Cherry and Mr Sharpe. He obtained default judgment against Bathurst Central, which took no part in the trial or appeal. As against the guarantors, Mr Steele-Park claimed $176,947.16 as a debt due and payable pursuant to the Guarantee, or alternatively as damages for its breach.
6. Mr Cherry and Mr Sharpe advanced a number of defences which were not ultimately pressed. By the end of the hearing (which occupied one day, with written submissions supplied thereafter), they accepted that they were liable under the Guarantee for the $30,250, but denied that on its proper construction it extended to the balance of the amount for which they were sued. In the alternative, they said that Mr Steele-Park was estopped from claiming the difference in price under the Guarantee because of statements made by his solicitors as to its proper construction.
7. Both defences were rejected by the primary judge. This appeal is concerned solely with the construction of the Guarantee, and there is no complaint as to her Honour's finding that an estoppel was not made out.
8. During the course of the hearing, her Honour ruled that a bundle of emails between the parties leading to the execution of the Guarantee was admitted on a limited basis, namely, that "the evidence is admissible on questions of estoppel only".

The Contract and the First and Second Variations

1. Clause 9 of the Contract provided for Mr and Mrs Steele-Park's remedies in the event that Bathurst Central defaulted under it. It provided: "If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can - … 9.3 sue the purchaser either - 9.3.1 where the vendor has resold the property under a contract made within 12 months after the termination, to recover - • The deficiency on resale (with credit for any of the deposit kept or recovered and after allowance for any capital gains tax or goods and services tax payable on anything recovered under this clause); and • The reasonable costs and expenses arising out of the purchaser's non-compliance with this contract or the notice and of resale and any attempted resale; or 9.3.2 to recover damages for breach of contract." The amount of $176,947.16 claimed by Mr Steele-Park in the action comprised $147,500 (being the difference in price between the two contracts), $30,250 (being the agreed amount under the Second Variation), legal fees of $9,197.16 less $10,000 paid by way of deposit. A defence based on a failure to mitigate was abandoned.
2. Special condition 40 made provision for the time during which Bathurst Central could conduct "due diligence" (which related to a development application) before either electing to rescind or being required to complete. In its unamended form, the time for the "Due Diligence Date" was no later than 28 February 2014. That date was specified by cl 40(a)(i). A little curiously, the completion date was contained in cl 41, which provided: "41 Completion Date (a) Notwithstanding clause 40, the completion date shall be the earlier of: (i) The completion date on the front page of this contract; and (ii) 14 days after the Approval Date." (The "Approval Date" was the date on which development consent was obtained.)
3. As noted above, the First Variation purported to extend the time for completion for some three months. It altered the reference in cl 40(a)(i) from "28 February 2014" to "16 May 2014". Rather than altering the text of cl 41 in terms, it provided that "Completion of the principal agreement will take place on 13 June instead of 28 March 2014." The First Variation also made provision for Bathurst Central to pay interest, in accordance with a formula contained in new special condition 43.

The Guarantee

1. The Guarantee on which Mr Steele-Park sued was signed by Mr Cherry and Mr Sharpe and dated "July 2014". The primary judge found that it was delivered to Mr Steele-Park's solicitor on 10 July 2014, around a fortnight prior to the Second Variation being executed.
2. The Guarantee contained some drafting infelicities. The execution clause was drafted so as to purport to bind the company by the signing of its two directors in accordance with Corporations Act 2001 (Cth), s 127, rather than binding the appellants personally as guarantors. It was also less than clear whether it operated as a deed or an agreement (it was expressed to be a deed, but was not attested; cf Steiner v Strang [2015] NSWCA 203 at [51]). But although some of those matters contributed to defences advanced at trial, these details may be passed over because they formed no part of the appeal.
3. Clause 2 provided: "2. Guarantee 2.1 Obligations guaranteed In consideration of any financial accommodation that the Beneficiary may make available to or for the benefit of the Debtor, the Guarantor guarantees to the Beneficiary the due and punctual payment by the Debtor to the Beneficiary of the Guaranteed Money and performance by the Debtor of the Guaranteed Obligations. 2.2 Consequences of the Debtor's defaults (a) if the Debtor defaults in the due and punctual payment of any Guaranteed Money, the Guarantor must pay that money on demand to, or as directed by, the Beneficiary…"
4. The "Guarantor" was defined to mean Mr Cherry and Mr Sharpe (who were expressed to be jointly and severally liable), "Debtor" to mean Bathurst Central and "Beneficiary" to mean Mr and Mrs Steele-Park. Clause 3 provided that Mr Cherry and Mr Sharpe also agreed to indemnify Mr and Mrs Steele-Park: "3. Indemnity 3.1 Indemnity in respect of the Guaranteed Obligations For the consideration mentioned in clause 2.1, the Guarantor (as primary obligor) must unconditionally indemnify the Beneficiary against, and must pay the Beneficiary on demand the amount of, any loss that the Beneficiary may suffer because: (a) the Guaranteed Obligations are unenforceable; or (b) the Guaranteed Money is not recoverable from the Debtor or is repaid or restored after it has been recovered, including the amount of any Guaranteed Money (or any money which, if recoverable, would have formed part of the Guaranteed Money) that is not or may not be recoverable."

Correspondence leading up to the entry into the guarantee and the Second Variation

1. Mr Cherry and Mr Sharpe sought to tender twenty pages of correspondence leading up to the entry into the Second Variation and the Guarantee as relevant to the construction of those documents. Grounds 3 and 4 of the appeal challenged the rejection of this aspect of the tender, and so it is necessary to summarise those documents, all of which were communications between two solicitors: Mr Andrew Kermode, acting on behalf of the purchaser and its directors, and Mr Michael Shillington, acting on behalf of the vendors.
2. On 19 May 2014, Mr Shillington wrote to Mr Kermode, setting out a proposal as follows: "Dear Andrew, I have conferred with both my clients and advise that they will agree to extend the time for completion of the contract on the following basis …: -time for completion to be extended to 7 July 2014 upon payment of sum of $12,500.00 plus GST [if applicable] on 7 July 2014 or on completion whichever is the earlier-personal guarantees are to be provided by the directors for the payment of this sum and the purchaser is to meet the legal cost associated with preparing the guarantee. If the amount is paid now the guarantee can be dispensed with. … To be clear this sum is due and payable on 7 July whether completion ultimately occurs or not. -time for completion may be further extended to 1 September 2014 upon payment of an additional sum of $10,000 plus GST [if applicable] on the same terms as for the above extension."
3. It will be seen that in that email, the solicitor for the vendors was advising that a guarantee would be required in respect of the $13,750, unless that amount was paid upfront, and that the same terms would apply for the second extension of time.
4. On 21 May 2014, Mr Kermode responded as follows: "Dear Michael, The below is acceptable. I think the guarantee can be included in the variation. Client understands they are meeting the cost. AK"
5. On 23 May 2014, Mr Shillington's legal secretary emailed Mr Kermode attaching a draft deed of guarantee and contract of variation. The draft guarantee was very similar to the Guarantee which was eventually executed by Mr Sharpe and Mr Cherry. In particular, the broad definitions of "Guaranteed Money" and "Guaranteed Obligations" were identical. The proposed Second Variation of contract included clauses 4 and 5. Clause 4 required a payment of $12,500 plus GST as consideration for the extension of time for completion until 7 July 2014, and cl 5 made separate provision for a further extension by the purchase until 1 September 2014 for an additional payment of $10,000 plus GST.

Ruling and decision of the primary judge

1. The primary judge was asked to provide a ruling pursuant to s 136 of the Evidence Act 1995 (NSW) in relation to the documentary evidence tendered by Messrs Cherry and Sharpe leading to the execution of the Guarantee and Second Variation, confining its admissibility to the estoppel defence. The submissions of counsel for the plaintiff were directed to the absence of ambiguity in the Guarantee. Thus it was put, "Precontractual conduct is only admissible on questions of construction if the contract is ambiguous. The ambiguity is just absent in this case."
2. The submissions made by counsel then appearing for Messrs Cherry and Sharpe in support of an unlimited tender were very narrow. The first was based on cl 4.2, which made any statement by the Beneficiary, including as to the amount of money owed by the Guarantors, "conclusive unless clearly wrong on its face". This was said to mean that the precontractual documents were admissible. But cl 4.2 was directed to communications in the future between Beneficiary and Guarantor, especially, when the guarantee was called upon. It did not purport to incorporate the precontractual negotiations (contrast Todd v Alterra at Lloyds Ltd (2016) 239 FCR 12; [2016] FCAFC 15 at [45]-[46]), still less did it alter the rules governing the admissibility and use of evidence for the purpose of construing its meaning. This submission was close to untenable. It was not sought to be agitated on appeal.
3. The second submission was that because the guarantee was "ambiguous or susceptible to more than one meaning, the documents were admissible." It is true that brief reference was made to Reardon Smith Line Ltd v Hansen Tangen [1976] 3 All ER 570 at 574-5 in a written note supplied to the primary judge. However, the point appears only to have been argued orally on the basis of ambiguity.
4. No reference was made to the more recent decisions of the High Court and intermediate appellate courts to which reference is made below, on the scope of the "true rule" in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 and to the effect that "ambiguity" is a conclusion which can only be reached after regard has been had to extrinsic evidence of the context or surrounding circumstances. Likewise, no reference was made to decisions of this Court turning on the distinction between evidence of a party's subjective state of mind and evidence of objective matters known to the parties.

Admissibility of extrinsic evidence - submissions on appeal

1. Counsel for the appellants, who had not appeared at first instance, advanced substantially different submissions on admissibility in this Court than had been made to the primary judge. Relying on WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd [2016] NSWCA 297, he submitted that it was not necessary for there to be ambiguity on the face of the guarantee for resort to be had to the correspondence, which was part of the Guarantee's context. He said: "Indeed the High Court in Victoria v Tatts Group (2016) 328 ALR 564 at [51] made it plain that the exercise of construction requires an analysis of text, context and purpose. On that basis there wasn't any need to find any question of ambiguity."
2. He added that the genesis and purpose of the Guarantee were an objective matter disclosed by the solicitors' emails, which were admissible on that basis in accordance with what was said in Boreland v Docker [2007] NSWCA 94 and Angas Securities Ltd v Small Business Consortium Lloyds Consortium No. 9056 [2016] NSWCA 182. The emails were said to have "formed part of the objective framework of facts within which the Guarantee came into existence." In particular, the emails were said to have explained: "The genesis of the arrangement between the parties, including that: (a) it was Mr Steele-Park who sought a guarantee from Messrs Cherry and Sharpe; and (b) a guarantee was only sought at the time that an upfront payment was to be made by [Bathurst Central] to Mr Steele-Park (and his then wife) in return for a further extension of the completion date for the purchase of the property; and The object to be achieved by the arrangement; being, to provide certitude and confidence in the payment to be made by Bathurst Central."
3. The appellants also contended that the phrase "in connection with the Agreement or any transaction contemplated by the Agreement" was capable of sustaining more than one literal or grammatical meaning, even without regard to the context of the emails. It was said that even if ambiguity was the test, the emails should have been admitted without any limitation as to their purpose.
4. Mr Steele-Park submitted that many of the emails related to previous iterations of the documents, and observed that the correspondence up to 13 June 2014 "showed only the intentions and the expectations of the appellants" in relation to those iterations. Although later emails did concern the guarantee which was executed, the evidence deriving from those emails was said to relate solely to the subjective understanding of the appellants' solicitor. He submitted that such statements did not form part of the context to be considered because they were merely statements relating to the appellants' solicitor's subjective understanding of the purpose of the guarantee: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [50].

Consideration

1. It is uncontroversial that the task of identifying the legal meaning of provisions in a commercial contract is the task of identifying the imputed intention of the parties, by reference to the contractual text construed in light of its context and purpose: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd at [46]-[51] and [108]-[109]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]-[75]; Simic v New South Wales Land and Housing Corporation [2016] HCA 47; (2016) 91 ALJR 108 at [18] and [78].
2. As is common in law, that uncontroversial generalised proposition is capable of concealing sharp divisions when it is sought to be applied at a lower level of abstraction. A large number of appellate decisions in the last three years have considered the approach to the construction of commercial contracts. However, the primary judge was taken to none of these decisions, many of which were binding upon her. Instead, the submissions and her Honour's ruling were framed in terms of ambiguity and subjective purpose. It should also be noted that the ruling was sought, and made, in circumstances where all of the documents were unquestionably relevant and admissible insofar as they went to the defence of estoppel.
3. It is helpful to isolate three distinctions which were central to the argument at first instance, and which will commonly apply where one party seeks to rely upon extrinsic evidence in order to construe a commercial contract. They are the distinctions between admissibility and use, between subjective intentions and objective matters known to the parties, and between ambiguity and plain meaning.

Admissibility and use

1. Strictly speaking, it is one thing for a document to be admitted into evidence and another for it to be available to be used in support of legal reasoning. Yet quite commonly "admissible" is used as a shorthand way for referring to the use of the evidence: see D Reynolds, "Construction of contracts after Mount Bruce Mining v Wright Prospecting" (2016) 90 ALJ 190 at 191-193. As Campbell JA noted in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [258], the word "admissible" even in a legal context is ambiguous: the word can refer to a rule of evidence, or it may mean that evidence is not legitimately able to be used in some reasoning process. The parties used that shorthand in their submissions, and it was reflected in the terms of the ruling made by the primary judge.
2. Parts of the Evidence Act distinguish between admissibility and use, and contain distinct prohibitions upon both admissibility and use. Examples may be seen in the "tendency rule" and the "coincidence rule" in ss 97 and 98. Although those rules are couched in terms of admissibility in respect of a particular purpose, they must be read together with the prohibition upon the use of such evidence in s 95, because very often such evidence is relevant and accordingly admissible for some other purpose: see El-Haddad v R (2015) 88 NSWLR 93; [2015] NSWCCA 10 at [36]-[42].
3. The issue arising on the ruling was whether the concededly relevant and therefore admissible documents could also be used to construe the Guarantee. Mr Steele-Park applied for a limiting order under s 136: "136 General discretion to limit use of evidence The court may limit the use to be made of evidence if there is a danger that a particular use of the evidence might: (a) be unfairly prejudicial to a party, or (b) be misleading or confusing."
4. However, no submissions were made to the primary judge directed to the terms of s 136. Both parties as well as the primary judge appear to have treated Mr Steele-Park's application for an order under s 136 as if there were a free-standing objection to the tender. There was no reference by Mr Steele-Park to any unfair prejudice or any risk of being misled or confused (to be fair, the absence of those matters was not pointed out by the defendants either).
5. Had submissions been couched in terms of the language of s 136, it is hard to see how the application could have been acceded to. There was no jury. The point was debated after the defendants had cross-examined Mr Steele-Park (during which he gave evidence of his subjective understanding). The plaintiff's case had closed. There was never any objection to the admission of the documents annexed to Mr Sharpe's affidavit for the purposes of the estoppel defence. Mr Sharpe gave no testimonial evidence relevant to construction. In the event, the plaintiff chose not to cross-examine him. It seems unlikely that a cross-examiner who was content to leave estoppel alone would have had any questions relevant to construction. As much is confirmed by the fact that, when a late amendment to the estoppel defence was debated, counsel for the plaintiff advised "[S]ubject to [the proposed amendment], I haven't prepared a cross-examination of Mr Sharpe. On the issues previously defined I formed the view no cross-examination was required."

Subjective intention and objective matters known to the parties

1. Evidence of the parties' subjective intentions is not relevant to construction of a contract. For example, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40], a unanimous High Court said: "It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe."
2. Of course, evidence of the parties' subjective intentions is relevant to issues which arise at law (for example, a defence of non est factum or duress), in equity (for example, equitable estoppel or rescission for innocent misrepresentation or undue influence) and under various statutes. Further, if it is alleged that the contract is a sham, or should be rectified in equity, then again such evidence will be relevant and indeed essential.
3. The distinction presently being drawn, however, is between evidence of surrounding circumstances known to the parties, which may be used to construe the contract, and evidence of parties' subjective intentions, which may not be used to construe the contract. The position was summarised, by reference to the recent High Court decisions, in WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd [2016] NSWCA 297; 341 ALR 467 at [57] by Barrett AJA (with whom McColl JA and Sackville AJA agreed): "Evidence of prior negotiations is admissible to the extent that it establishes objective facts known to both parties and the subject matter of the contract. Conversely, evidence reflecting the subjective intentions of the parties is, in accordance with long-standing authority, necessarily inadmissible for the purpose of determining the meaning of the contract (unless it demonstrates knowledge of surrounding circumstances). In recent times, the High Court has revisited the distinction between impermissible recourse to the parties' subjective intentions and expectations and permissible regard to objective matters known to the parties. In Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51], the Court unanimously approved the formulation of principle advanced by three members of the Court (French CJ, Nettle and Gordon JJ) in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 (at [46]-[51]) that, as a general principle of construction, the rights and liabilities of parties under a contractual provision fall to be determined by objective consideration of its text, context and purpose. The relevant enquiry is to be conducted on the footing of what a 'reasonable businessperson' would have apprehended the terms to mean in light of the particular language used by the parties, the circumstances addressed by the contract and its commercial purpose. Although the Court was of the view that this process would not uncommonly be possible without reference to evidence of surrounding circumstances, it acknowledged that regard could be had to such evidence if, for example, it assisted in establishing the objective facts known to the parties and thereby elucidated with greater precision the commercial purpose or subject matter of the contract". [Footnotes omitted.]

Ambiguity and plain meaning

1. As is well known, Mason J said (with the agreement of Stephen and Wilson JJ) in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352; [1982] HCA 24 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."
2. Once again, the language of "admissible" here is best read as a reference to use, rather than admissibility into evidence. I respectfully agree with Emmett JA's observation to that effect in Righi v Kissane Family Pty Ltd [2015] NSWCA 238 at [44] (Ward and Gleeson JJA agreeing), and with what McDougall J has said, extrajudicially, on the point: "Construction of Contracts: The High Court's Approach" (paper delivered at the Commercial Law Association Judges' Series, 26 June 2015) at [14]. As much is confirmed by the fact that these two sentences are closely followed by the passage distinguishing objective background facts from prior negotiations which I have reproduced above, where "admissible" unquestionably refers to the use which may be made of such evidence.
3. Mason J's proposition applies in Australian courts. It is not displaced, expressly or by necessary intendment, by any provision of the Evidence Act and is therefore unaffected by that statute: s 9(1). And it has been endorsed repeatedly by the High Court.
4. It is uncontroversial that if a written contract is ambiguous, evidence of surrounding circumstances may be tendered and used to assist its construction. Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd is a recent example. "Ambiguous" (like "awkward" or "polysyllabic") is autological: see K Lindgren, "The ambiguity of 'ambiguity' in the construction of contracts" (2014) 38 Aust Bar Rev 153. The word is often used imprecisely, as Basten JA observed in Newey v Westpac Banking Corporation [2014] NSWCA 319 at [14]. However, on the view I take, which permits regard to be had to surrounding circumstances without passing through an "ambiguity gateway", it is unnecessary to consider precisely what the word means when in this context. But there are two aspects of Mason J's statement in Codelfa which warrant elaboration.

The primacy of the text

1. The first is that the "plain meaning" reflects the primacy of the text of a written contract. The starting point and the ending point of the construction of a written commercial contract is the language chosen by the parties to record their bargain. In a familiar passage, Gibbs J referred in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; [1973] HCA 36 to the "primary duty" of a court construing a written contract to ascertain the legal meaning of a document "from the words of the instrument in which the contract is embodied". As I have said, "very often, nothing in the context will come close to displacing the ordinary grammatical meaning of the legal text": Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184 at [74].
2. The limited scope for evidence of surrounding circumstances to detract from the contractual text may be illustrated by two statements made by this Court, both of which refer in terms to regard first being had to such evidence. In Newey v Westpac Banking Corporation [2014] NSWCA 319, Gleeson JA (with whom Basten and Meagher JJA agreed) said at [91]: "there is no licence for 'judicial rewriting' of an agreement: Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [27] (Basten JA; Giles and Tobias JJA agreeing); Franklins at [23] (Allsop P). The ability of 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: Jireh International Pty Ltd v Western Exports Services Inc at [55] (Macfarlan JA; Young JA and Tobias AJA agreeing).
3. To the same effect, in McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) (2011) 81 NSWLR 690; [2011] NSWCA 315 at [17], Bathurst CJ said with the agreement of Macfarlan JA and Sackville AJA: "Whilst it is correct in my opinion that context and the surrounding circumstances known to both parties can be taken into account (see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 350, 352) even in cases where there is an absence of apparent ambiguity (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [8]; Park v Brothers [2005] HCA 73; (2005) 80 ALJR 317 at [39]; Franklins Pty Ltd v Metcash Trading Ltd at [14], [63], [305]) that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109."

Ambiguity is a conclusion

1. There is now a deal of authority for the proposition that whether there is in truth a constructional choice available to a written contract cannot be determined without first at least considering evidence of surrounding circumstances.
2. It is convenient to start with what was said in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]: "The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'." [citations omitted.]
3. At least three intermediate appellate decisions concluded that that passage endorsed the view that it was not necessary first to identify "ambiguity" before regard could be had to evidence of surrounding circumstances: Mainteck Services Pty Ltd v Stein Heurtey SA at [71]-[85], Newey v Westpac Banking Corporation at [89] and Stratton Finance Pty Ltd v Webb [2014] FCAFC 110; 314 ALR 166 at [36]-[40]. However, intermediate appellate authorities were not entirely in accord. A different view was expressed in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) 48 WAR 261; [2014] WASCA 164 at [35]-[45] and [212]-[217], following earlier decisions of that court, which in turn has thereafter been followed. The different approach adopted in State courts in Western Australia appears to have been influenced materially and perhaps dispositively by what was said in refusing special leave to appeal in a civil case (see for example at [37] "This court has taken the view that the guidance in Western Export Services should be followed until further direction from the High Court"). With respect, I do not think that that accords with the absence of precedential status of statements made when refusing special leave: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [52], [112] and [119].
4. In my view, two more recent decisions of the High Court strengthen the conclusion that "ambiguity" is a conclusion, rather than a precondition to the admissibility of evidence of surrounding circumstances. First, in Victoria v Tatts Group Ltd, the question was the legal meaning of "a new gaming operator's licence", noting that the expression "Gaming Operator's Licence" was defined by reference to a particular licence issued under the Gaming Machine Control Act 1991 (Vic). This is a good example of a recurring phenomenon: any conclusion as to whether the undefined term was ambiguous or instead bore a plain meaning could not be reached without first having regard to the context (notably, new legislation governing the licensing of gambling). A unanimous High Court, without once mentioning any threshold "ambiguity gateway", allowed the appeal saying at [51] that the construction it favoured was "supported by references to the text, context and purpose". The High Court then addressed the text (at [52]-[60]) and then the context and purpose (at [61]-[72]) and "other contextual matters" (at [73]-[74]) before concluding that "the text, context and purpose of the 1995 Agreement all support the conclusion" that the term was narrower than had been held by the Victorian Court of Appeal.

The importance of relevant evidence of surrounding circumstances

1. None of the foregoing amounts to an unqualified invitation to burden the record of courts at first instance with voluminous evidence of surrounding circumstances. The threshold question will always be whether the tender is of evidence that is relevant to an issue in the litigation. Although Lord Hoffmann has emphasised as much as anyone in recent years the width of the contextual background to which regard may be had, his Lordship noted in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251; [2001] UKHL 8 at [39] that the touchstone remained what was relevant to the objective meaning of the contractual language: "[W]hen, in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913, I said that the admissible background included 'absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man', I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant. I was merely saying that there is no conceptual limit to what can be regarded as background" [original emphasis].
2. The Guarantee provides a ready example of this point. If there were a live question whether Messrs Cherry and Sharpe were bound, by a document which allowed for their signatures but only as directors, then the earlier form of the Guarantee executed by those men would have been relevant: see Singh v De Castro; Dhaliwal v De Castro; Brar v De Castro [2017] NSWCA 241 at [86]-[97]. That issue was raised on the pleadings but abandoned during the trial.
3. Thus it was necessary to identify some other basis on which the emails preceding execution of the Guarantee were said to be relevant. It was to this end that I said in Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang (2016) 93 NSWLR 561; [2016] NSWCA 370 at [80]: "It is true that this may in some cases lead to an expansion of the evidence tendered on an issue of construction, although ordinarily it may be expected that parties will confine their tender to material which will bear on the meaning of the contract. Indeed, a party seeking to tender a document as evidence of surrounding circumstances and for no other purpose ought to be able, readily and precisely, to identify how it is said that its reception will bear on the process of ascertaining the legal meaning."

Application of principle to this case

1. The primary judge did not apply (nor was her Honour asked to apply) s 136 in its terms. If that were the only point, I would not conclude that these grounds were made out. However, the primary judge also found, in accordance with Mr Steele-Park's submission, that the emails were "no more than evidence of the parties' subjective intentions". With this I cannot agree. This was not a case where one of the vendors swore an affidavit as to what he or she had intended by the email which had been sent by his or her solicitor. Nor were the documents merely reflective of intentions between the vendors and their solicitor, uncommunicated to the purchaser. The emails were objective facts known to both sides of the transaction. Not only did they represent the communicated negotiating position of the parties from time to time, but they also supported the appellants' submission that the commercial purpose of the guarantee was to secure Bathurst Central's obligation to make the additional payments agreed upon as the price of the extension. That is most clearly seen in the initial overture (where the guarantee "can be dispensed with" if "the amount is paid now") and the last email ("the guarantee is to extend to all of the funds payable by 1 October under variation No 2. totalling $27,500 plus GST").
2. The emails were thus potentially relevant to the question of construction. They were the immediate objective context in which the contractual document was drafted and executed. Even the "earlier iterations" were closely linked to the Second Variation and Guarantee which were ultimately executed. All followed from the proposal of 19 May 2014 on behalf of the vendors. They constituted "specific information as to the genesis of the transaction", in Gleeson CJ's phrase in IATA v Ansett Australia Holdings Ltd at [8] which, at least arguably, could bear upon the contractual language.
3. That said, it will be seen that, having considered the language of the Guarantee against the context and purpose provided by the documents, it is not possible to construe the Guarantee narrowly, in the manner supported by that context and purpose. But it is important to recall that this Court has had the advantage of hearing full argument on all aspects of the appeal so as to enable it to reach that conclusion. The primary judge did not have that advantage. That will be the usual case. Where there is an objection to the tender of documents going to surrounding circumstances and the court is not able to, or minded to, rule finally on the question of relevance, then one available course is to admit the documents provisionally under s 57 of the Evidence Act.

Construction of the guarantee - submissions on appeal

1. Mr Steele-Park responded directly to the appellants' submissions based on a range of textual and contextual considerations, making it convenient to set out the parties' submissions together. 1. First, the appellants contended that the definition of Guaranteed Money referred "primarily" to the obligations under the Second Variation, which merely varied the Contract and did not restate it. Transactions "under or in connection with" the Second Variation were said therefore not to include contracts already entered into. Mr Steele-Park responded by pointing out that the Second Variation expressly referred to the Contract and stated that that agreement was to be binding as varied. 2. Secondly, the appellants contended that the phrase "transaction contemplated by the [Second Variation] Agreement" directed attention to transactions to be entered into in the future, not transactions (such as the sale contract) which had already been entered into. Mr Steele-Park characterised this contention as narrow, and argued that "things past, present and future can all be the subject of the phrase 'transaction contemplated'" and that, in any case, while contracts for the sale of land had been exchanged, the transaction had not completed. 3. Thirdly, the appellants pointed to the fact that the term "Agreement", to which the meaning of Guaranteed Money was anchored, was defined to mean the Second Variation, not the Contract. Were obligations under the Contract to be included in the Guarantee, the drafter could easily have stipulated that in the definition of Agreement. Mr Steele-Park submitted that, while the drafting could have been clearer, this point did not demonstrate the proper construction of the Guarantee in the terms in which it was drafted. 4. Fourthly, having regard to the natural meaning of the word "transaction", the appellants submitted that a failure to complete could not be a "transaction contemplated by the agreement". Mr Steele-Park submitted that the words "in connection with … any transaction" were sufficiently broad to encompass transactions not successfully completed, and pointed out that parties to a successful transaction are unlikely to have recourse to a guarantee. 5. Fifthly, the appellants pointed to the fact that the obligation in clause 2.1 of the Guarantee was expressed to be "in consideration of the financial accommodation that [Mr and Mrs Steele-Park] may make available to or for the benefit of [Bathurst Central]." The "financial accommodation" referred to was the extension of the completion date. In turn, that extension was linked to the obligation under the Second Variation to pay $27,500 plus GST. As such, the obligations imposed by clause 2.1 were directly referable to the obligation to pay under the Second Variation and the Guarantee, and hence should not be read as extending to obligations under clause 9.3 of the sale agreement. Mr Steele-Park maintained that this approach was not supported by principle, and that "There is no basis to confine the consideration flowing to and from a party to a contract within the walls of a particular clause." 6. Sixthly, the Guarantee was entered into at around the same time as the entry into the Second Variation, as the email correspondence showed, in circumstances where a price had already been exacted for extending the completion date in the First Variation. The appellants contended that this timing made it more likely that the Guarantee, which was a new document, was put in place to secure the obligations under the Second Variation as additional security for that amount only, not to radically alter the parties' rights as to all of the obligations under the principal contract. Mr Steele-Park submitted that the timing of the Guarantee was not relevant to construction of its express terms, and, alternatively, that given Bathurst Central had already failed to complete by the appointed time twice, it was unsurprising that the respondent would want to secure the price he and his wife had bargained for in the Contract. 7. Seventhly, the appellants relied on the strictissimi juris principle of construction to the effect that, two grammatical meanings being reasonably open, the Court should choose that which is most favourable to the guarantor: Rava v Logan Wines Pty Ltd [2007] NSWCA 62. Mr Steele-Park responded that the principle had no application here, where there was no ambiguity in the Guarantee.

The syntactical structure of the definitions

1. It will be seen that the textual and contextual submissions were not lacking in ingenuity and, indeed, sophistication. Nonetheless, both omitted any detailed reference to the starting point, which is a grammatical and syntactical parsing of the complex definitions of "Guaranteed Money" and "Guaranteed Obligations". For convenience, I reproduce the definition: "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 Clauses 4 and 5 of the agreement ..."
2. I note the following: 1. The definition is expressed to be exhaustive ("means"). This may be contrasted with two components within the definition which are inclusive (see [101] below). 2. It commences with the words "all amounts (including damages)" which are then subject to three disjunctive limbs, namely, amounts that are (i) payable, (ii) owing but not payable, or (iii) otherwise remain unpaid. 3. The following words "by the Debtor to the Beneficiary" confine the scope of the definition and are apt to apply to all three limbs (see [100] below). 4. There follows a long list of words whose effect is to expand that which precedes them. Those expansive words in fact comprise the largest component of the definition: "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" 1. The words emphasised above ("any", "any" and "any transaction contemplated by") are words of generality. There are also a series of disjunctive terms, linked by four uses of the word "or". All these words tend against any implied confinement of the definition. 2. Finally, there are the concluding words: "including the obligation to pay the amounts specified in Clauses 4 and 5 of the agreement."
3. The following matters emerge from that analysis.

The appellants' submissions must be rejected

1. It is true that the preceding emails evinced the commercial purpose that the guarantee, now required only as part of the price for the second extension sought by the purchasers, would be limited to the fees payable as the price of those extensions. This is clearest in respect of the vendors' solicitor's original email of 19 May 2014 ("Personal guarantees are to be provided by the directors for the payment of this sum" and in relation to the second extension "on the same terms as the above") and the purchaser's solicitor's email of 27 June 2014 ("the guarantee is to extend to all of the funds payable by 1 October under variation No 2 totalling $27,500 plus GST"). The point was made by the respondents that this was not, on one view, actually inconsistent with an all monies guarantee. That is so, taking a very strict view of "inconsistency", but is very difficult to reconcile with the statement that the guarantee was unnecessary if payment were made upfront. Viewing the exchanges between the solicitors as a whole, the commercial purpose which most naturally emerges is that of a limited guarantee.
2. But how is that to be reconciled with the document executed by the appellants? It is expressed to be an all monies guarantee. Most of the definition of Guaranteed Money may be unnecessary, but how are those words to be given the restricted legal meaning for which the appellants contend? There are limits to the process of construction, as noted above, including by reference to Newey and McGrath v Sturesteps. Primacy must be given to the text. I do not see how one can confine the repeatedly general language of the definitions of Guaranteed Money and Guaranteed Obligations to exclude damages payable for failure to complete the Contract. There are many ways in which the meaning of the words extends to damages for failure to complete, including: 1. Damages are expressly included within Guaranteed Money, and damages for breach of the Contract as varied by the Second Variation readily answer the description of damages under or in connection with the Second Variation; 2. The conveyance to be effected pursuant to the Contract is a transaction "contemplated by" the Second Variation. The Second Variation refers repeatedly to the Contract, varies the Contract, and proceeds on the basis that the Contract (as varied) will take place. 3. Guaranteed Obligations extends to all other obligations arising under or in connection with the Second Variation. If somehow the damages were outside the scope of Guaranteed Money, it is difficult to see why they would not be caught by Guaranteed Obligations.

Orders

1. For those reasons, the appeal should be dismissed. The appellants' limited success in respect of grounds 3 and 4, advancing arguments not put below, is no reason for costs not to follow the event at first instance and on appeal. A special costs order was made at first instance, presumably reflecting an offer of compromise or Calderbank letter. If any party seeks a special costs order for the appeal, application may be made within the period prescribed by UCPR r 36.16. I propose that the appeal be dismissed with costs.
2. WHITE JA: I have had the advantage of reading the judgment of Leeming JA in draft. Subject to the comments below, I agree with his Honour's reasons and proposed orders.
3. I take a different view on the question whether the primary judge erred in her ruling on paragraph 7 of the affidavit of Mr Sharpe that annexed the series of emails between Mr Kermode and Mr Shillington and drafts of what became the Guarantee and the Second Variation, referred to by Leeming JA at [22]-[33]. That paragraph stated: "7. I annex hereto and mark with the letter 'A' a hard copy of a series of emails between Mr Andrew Kermode and Mr Michael Shillington, solicitor acting on behalf of the plaintiff and Mrs Steele-Park evidencing the agreement reached with the plaintiff and Mrs Steele-Park."
4. It is clear that the primary judge's ruling applied to the documents that were annexed and referred to in paragraph 7.
5. As Leeming JA has explained, the parties' submission on the admissibility of the correspondence focused upon whether evidence of the negotiations was inadmissible because the Guarantee was not ambiguous.
6. I agree with what Leeming JA has said under the heading "Ambiguity and plain meaning" (at [68]-[86]). In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 French CJ, Nettle and Gordon JJ said (at [49]): "The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals."
7. Their Honours also said that their observations in relation to the applicable legal principles for the construction of terms of a commercial contract were not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 ("Codelfa") and in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7. In the latter case the plurality (French CJ, Hayne, Crennan and Kiefel JJ) said that in ascertaining how the terms of a commercial contract would be understood by a reasonable business person, consideration would be required of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract (at [35]). The plurality did not suggest that before consideration could be given to surrounding circumstances there must be an anterior finding that the text of the contract to be construed is ambiguous. The intermediate appellate decisions referred to by Leeming JA hold that ambiguity is a conclusion, rather than a pre-condition to the admissibility of evidence of surrounding circumstances. Unless and until the High Court decides otherwise, lower courts are bound to proceed accordingly.

Amendments 22 November 2017 - [90] "said" before "in Zhu v Treasurer of the State of New South Wales" deleted

[91] "as to" added after "swore an affidavit. "sent" deleted after "he or she had intended by the email"

97 "see the third point below" replaced by "see [100] below"

97 "applies" deleted following "the scope of the definition"

[102] In the first sentence in parenthesis, "in respect of" replaced by "in connection with"

[103] "agreement" replaced by "Agreement" in quoted text in the fourth line

[104] "not likely would the 69 preceding words" replaced by "not lightly would the 69 preceding words"

[143] "actual intentions, of" replaced by "actual, intentions of" 09 November 2018 - [5] and [27]: "Sharp" changed to "Sharpe" [19]: second sentence, "the" deleted before "Mr Cherry" [28]: fourth sentence, "struck-through" changed to "struck through" [69]: second sentence, "AJA" changed to "JA" [85]: third sentence (in quotation), "which" inserted after "mischief"; "at 408" inserted after "CLR 384" [95(5)]: third sentence, "inclusive of" changed to "plus" [110]: third sentence, "content" changed to "contend" [111]: fourth sentence, "was" deleted after "point" [116]: fourth sentence, case citation, "-[109]" deleted 19 November 2018 - Coversheet: "White JA at [120]" changed to "White JA at [119]" [85]: "Emmett AJA" changed to "Emmett JA" [96] and [108]: "Guaranteed Obligation" changed to "Guaranteed Obligations" [103]: Medium neutral citation added to case citation DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 19 November 2018