Elesanar Constructions P/L v State of Qld

SUPREME COURT OF QUEENSLAND

CITATION: Elesanar Constructions P/L v State of Qld [2007] QCA 208

PARTIES: ELESANAR CONSTRUCTIONS PTY LTD / ACN 000 804 384 (plaintiff/appellant) v STATE OF QUEENSLAND (defendant/respondent)

FILE NO/S: Appeal No 503 of 2007 / SC No 895 of 2006

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: Supreme Court at Brisbane

DELIVERED ON: 22 June 2007

DELIVERED AT: Brisbane

HEARING DATE: 21 May 2007

JUDGES: McMurdo P, Holmes JA and Fryberg J / Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDER: Appeal allowedSet aside para 3 of the order of Muir J made on 21 December 2006 and in lieu thereof, declare that the option contained in cl 4 of the lease dated 24 May 2002 was an option for renewal for more than one further term of one yearUnless within seven days of the date of this order either party files submissions seeking some other order as to costs:set aside para 4 of the order of Muir J made on 21 December 2006 and in lieu thereof order that the applicant pay the respondent’s costs of the application up to and including 21 December 2006 to be assessed; andorder that the respondent pay the appellant’s costs of and incidental to the appeal to be assessed

CATCHWORDS: Contracts – General contractual principles – Construction and interpretation of contracts – Lease of crown land – Option for renewal – Length and nature of renewal – Plain meaning of the words – Intention of parties – Purpose and object of transaction – Inference drawn from surrounding circumstances – Admissibility of extrinsic evidence / Acquisition of Land Act 1967 (Qld) / Environmental Protection Act 1994 (Qld), s 18 / Uniform Civil Procedure Rules 1999 (Qld), r 149(1)(b), r 483(1) / Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, approved / Burnie Port Corporation Pty Ltd v Bank of Western Australia Ltd (2003) 12 Tas R 277, distinguished / Caerphilly Concrete Products Ltd v Owen [1972] 1 WLR 372, distinguished / Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, applied / Horton Geoscience Consultants Pty Ltd v Energy Minerals Pty Ltd [2005] QCA 169, considered / Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, cited / Parkus v Greenwood [1950] 1 Ch 644, distinguished / Toll (FGCR) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, cited

COUNSEL: A P Abaza (sol) for the appellant / N Ferrett for the respondent

SOLICITORS: Andrew P Abaza for the appellant / Crown Solicitor for the respondent

1. McMURDO P: Fryberg J has set out the facts and issues in this appeal so that my reasons can be briefly stated.

2. In determining the objective intention of the parties in the commercial tenancy agreement at the heart of this appeal, the learned primary judge relied on the principle of the law of landlord and tenant that courts will not construe an option clause as capable of creating a lease in perpetuity unless the words used make it clear that was the parties' intention: Caerphilly Concrete Products Ltd v Owen,¹ Parkus v Greenwood² and Burnie Port Corporation Pty Ltd v Bank of Western Australia Ltd.³ The tenancy agreements in those cases are distinguishable from the agreement in the present case because it provided for the respondent to grant the appellant a further tenancy for a period of one year if the appellant exercised the option under cl 4. The appellant's exercise of that option under cl 4 was subject both to the time limitations in cl 4.1(a) and to compliance with cl 4.1(b) (punctual compliance with the appellant's obligations under the agreement) and, of more significance, cl 6. Clause 6 allowed the respondent to make the option to renew under cl 4 inapplicable by giving the appellant written notice of the respondent's need to use the premises for works associated with the construction of a railway or upgrade of the Pacific Motorway intersection at least six months prior to the expiration of the term of the agreement.

3. The learned primary judge, who does not seem to have received much helpful assistance from counsel at the hearing, erred in the present case in placing emphasis on the principle of construction referred to above to determine that the objective intention of the parties under the tenancy agreement was, consistent with a sensible commercial construction of agreements of this nature, that cl 4 granted a right to renew the tenancy only for one further term of one year.

4. I agree with Fryberg J⁴ that the ordinary meaning of the plain words used in the tenancy agreement interpreted in the context in which the bargain was struck, is that cl 4, subject to its own terms and specifically cl 6, grants the appellant a right to renew the lease for more than one further term. I agree with Fryberg J that this construction is in the present circumstances entirely consistent with a sensible commercial construction of the tenancy agreement.

5. It follows that it is unnecessary to consider in determining the objective intention of the parties to the agreement the letter of 21 November 2001 from the respondent's lawyer to the appellant's lawyer. The respondent contends that the Court should not have regard to the letter. Were regard to be had to it, it supports the construction of the tenancy agreement adopted by Fryberg J and me.

[7] HOLMES JA: I have had the advantage of reading the reasons for judgment of the President and of Fryberg J. I agree with what both have said about the construction of the lease; like the President, I find it unnecessary to consider whether regard could properly be had to the letter of 21 November 2001. I agree also as to the proposed orders.

[8] FRYBERG J: The surrounding circumstances: At all material times the State of Queensland (“the State”) has maintained a railway line between Brisbane and Robina and has operated train services on that line. During the 1990s the government began to explore the idea of extending that line to Tugun, near the New South Wales border. Departmental officers decided that a substantial portion of lot 1 on RP 222906 was required for the extension, for railway station infrastructure and for connector roads. The appellant (“Elesanar”) owned that land. It was commonly known as the Reedy Creek quarry. Elesanar used part of it as a waste disposal site, where it conducted landfill operations, and part to conduct a wholesale landscaping supplies business. As part of that business, it carried out operations pursuant to a licence from the Environmental Protection Agency which permitted crushing milling or grinding of 5,000 tonnes per annum on the site.

[9] In (or perhaps even before) 2001 the State decided to acquire the land it needed. Before embarking upon the processes specified in the Acquisition of Land Act 1967, it entered into negotiations with Elesanar to purchase the land, but to lease it back to Elesanar until (putting it neutrally) the State immediately required it. On 26 November 2001 the parties entered into a contract for the sale of lot 1 for $6,550,000. The date for completion was 12 July 2002.

[10] The contract contained a number of special conditions. The first was somewhat startling: the contract was in effect subject to finance, because the necessary funding approval had not been obtained. The State was given until 30 April 2002 to obtain approval of its application for funding. Special condition 3 provided for the State to grant a lease of “the property” to Elesanar substantially in the scheduled form, commencing on the date for completion. Elesanar was permitted to continue its landfill operations, but only “in the normal manner in which it has been carrying out its operations prior to the date of this Contract”, and was required to cease those operations prior to the date for completion. It agreed to continue to charge its current rate until that date.

[11] On 24 May 2002 the parties signed a lease which, but for one matter, was substantially in the scheduled form. That matter was the omission from the lease of a diagram denoting the area the subject of the lease. One might have thought this of no consequence in the light of special condition 3 in the Contract of Sale and a paragraph in the executed lease headed “Details of Land”:

“Location: Pacific Highway and Reedy Creek Road, West Burleigh being known as Reedy Creek Quarry together with the use of the Seller's current landfill operations on the land for a term of 3 years from the 12th July 2002.”

However it was common ground between the parties that only the part of the land used for the quarry and landscaping business was to be leased. That also appeared to be the position if one had regard to the diagram in the scheduled form of lease. Rent was $8,333 per month exclusive of GST payable in advance commencing from 12 July 2002. Under the heading “Details of tenancy” appeared the following:

“Commencement date: Date of Contract: Term of 3 years commencing 12 July 2002”

and:

“The use of the premises by the Tenant is for bulk garden supplies and for the operation of environmental relative activity (ER45) use of land.”

It is common ground between the parties (or at least, pleaded by the State and not challenged by Elesanar) that this refers to –

“‘environmentally relevant activity’ within the meaning given that term by section 18 of the Environmental Protection Act 1994, such activity being ‘Crushing, milling or grinding -- processing products (other than agricultural products and materials mentioned in item 22), including, for example, uncured rubber and chemicals, by crushing or grinding or milling in works having a design production capacity of 5000t or more a year’ as specified in item 45 of Schedule 1 to the Environmental Protection Regulation 1998”.

In fact, what s 18 provides is:

“18. Meaning of environmentally relevant activity

An environmentally relevant activity means –

(a)a mining activity; or

(b) another activity prescribed under section 19 as an environmentally relevant activity.”

It is unnecessary to consider to what extent the definition of the use of premises in the details of tenancy section is inconsistent with Elesanar's covenant “not to use or permit the demised premises to be used for any purpose other than for bulk garden supplies and a landscaping business and also to keep the demised premises open for business as aforesaid during ordinary business hours.”⁵

[12] I mention all of these matters to demonstrate not simply how poorly drafted was the lease, but also the extent to which reference to extrinsic materials is necessary to understand it. That point is not diminished by the fact that by using such materials, the parties have reached accord about a number of potentially controversial matters.

The present dispute

[13] Clauses 4 and 6 of the lease were as follows:

“**4.**Tenant to be Granted Option

4.1Subject to clause 6, if the Tenant –

(a) not more than 6 months and not less than 2 months prior to the expiration of the term of this Agreement gives written notice to The Chief Executive that it wishes to renew this Agreement; and

(b)at all times up to the date of expiration of the term of this Agreement has complied punctually with its obligations under this Agreement,

then The Chief Executive shall grant to the Tenant a further term for a period of 1 year on the same terms and conditions as are contained in this Agreement.

4.2If the Tenant exercises the option under clause 4.1, then the Tenant shall execute any deeds of extension reasonably required by The Chief Executive.

4.3The rent for the further term shall be the market rent for the demised premises determined in accordance with clause 5.

…

**6.**Land Required by The Chief Executive

If at any time after the commencement date of this Agreement, The Chief Executive requires the demised premises for carrying out of works associated with the construction of a railway or of a railway station, or upgrade of the Pacific Motorway intersection at Reedy Creek, then The Chief Executive shall give the Tenant written notice of that requirement at least 6 months prior to the expiration of the term of the Agreement. If the Chief Executive gives such a notice, then the option to renew this Agreement pursuant to clause 4 will not apply.”

[14] In December 2004 the State purported to give notice under cl 6 and asserted that the option no longer applied. Elesanar did not accept the validity of this notice on the basis that the chief executive did not yet require the demised premises for the relevant works, and by letter dated 9 May 2005 it purported to exercise the option. (There was no suggestion that construction of the railway would not proceed in due course.) It remained in possession of the land and continued its operations, but the parties are in dispute about whether this was pursuant to the lease as extended by the exercise of the option (as Elesanar contends) or to an express licence or alternatively a monthly tenancy (as the State contends). Toward the end of 2005 further disputes arose regarding whether Elesanar was in breach of several conditions in the lease. In December 2005 the State gave Elesanar notice to quit on 12 February 2006. By a further letter dated 1 February 2006 Elesanar purported to exercise the option for the period commencing 12 July 2006 to 11 July 2007. On the following day it commenced proceedings in this court for declarations designed to uphold its position. The State counterclaimed for delivery up of possession of the land.

[15] On 8 December 2006 the State applied, pursuant to r 483(1) of the Uniform Civil Procedure Rules for the determination of the question, “Does clause 4 of registered lease 24 May 2002 grant a right to renew the lease only for one further term or for more than one further term”. It sought to have that question determined on the hearing of the application. That hearing took place before Muir J on 21 December 2006. It was the summer vacation and the second last sitting day in applications before Christmas. His Honour decided to determine the question and heard full argument on it. After delivering ex tempore, but carefully expressed reasons for judgment, his Honour made a declaration that the option was one for renewal for a further term of one year only.

[16] Elesanar now appeals against that declaration. It submits both that the question was not appropriate for summary determination and that upon the proper construction of the lease, the judge should have held that it was renewable for more than one further term. It is convenient to consider the latter question first, on the assumption that it was proper to determine the question under r 483.

Construction of the lease

[17] The answer to the question raised in the application depends upon the construction of cl 4.1 of the lease. It depends upon whether that clause is to be regarded as included in the renewed lease. Read literally the expression “on the same terms and conditions as are contained in this Agreement” would require the inclusion of the one-year option in the renewed lease. Subject to the remaining provisions of the lease, such a construction would, the State submitted, lead to a perpetually renewable lease. It has often been observed that this is a result which, from an objective standpoint, is unlikely to have been intended by the parties.

[18] At first instance, Muir J founded his decision on three matters. First,⁶ he held:

“[The State] owns the land. If it does not determine, for some unexpected reason, not to proceed with railway or other works, it would be more than a little unlikely that it would wish the land to be held in perpetuity by the respondent.”

Second, his Honour relied upon the use of the singular expressions “a further term” and “the further term” in cl 4 and (apparently) “expiration of the term” in cl 6. Third, his Honour relied upon a rule of construction which he derived from English and Tasmanian cases.

[19] Muir J introduced his finding on the first of these matters in this way:

“In the final analysis though on any question of this nature the object of the exercise must be to determine objectively the intention of the contracting parties. The best way to achieve that is normally by a close consideration of the language they have used in the context in which the bargain has been struck.”

I respectfully agree with that approach. It accords with recent High Court authority:

“The case provides a good example of the reason why the meaning of commercial documents is determined objectively: it was only the documents that spoke to Pacific. The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction. In Codelfa Construction Pty Ltd v State Rail Authority of NSW, Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen:

‘In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’”⁷

And later the same year (2004):

“This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. 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. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.”⁸

[20] I summarised my own view on this question when sitting in this division in Horton Geoscience Consultants Pty Ltd v Energy Minerals Pty Ltd:

“In the alternative Mr Thompson submitted that the agreement was ambiguous as to whether the liability for the listed expenses by the respective parties was limited to the first year. He submitted that on that basis evidence of circumstances surrounding the preparation of the agreement could be considered. That submission was based on a passage in the judgment of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW:

‘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.’

Although that passage is expressed in the language of admissibility of evidence, it is evident from an earlier passage that it was intended equally to apply to the interpretation of a written instrument. In my judgment subsequent High Court decisions establish that in determining the meaning of the terms of a contractual document the surrounding circumstances known to the parties, and the purpose and object of the transaction, may normally be taken into account; their impact is not restricted to the case where the language is ambiguous (whether latent or patent) or susceptible of more than one meaning.”⁹

That was a dissenting judgment, but I do not understand the foregoing passage to have been the subject of disagreement, as far as it went. In my judgment, therefore, Muir J was correct to examine the context in which the lease was made without regard to the existence of any ambiguity in the particular passage under consideration. Establishing that context necessarily required an examination of the surrounding circumstances known to the parties and the purpose and object of the transaction.

[21] Having identified the correct approach, Muir J continued, “I have already provided some, if not all, of the relevant context.” His Honour had earlier recorded, “The subject land was purchased by [the State] for the purposes of constructing on it part of a railway. It was a term of the agreement for sale and purchase that the subject lease be granted.” However that was all his Honour referred to. Even allowing for the economy of expression reasonably to be expected in the circumstances of his Honour’s judgment, I cannot avoid the conclusion that he must have overlooked some other features of the case:

Elesanar was originally the owner of the land

the sale to the State took place against the background of a probability that the land would otherwise be resumed

the nature of Elesanar's business did not encourage any belief that its business could be conducted in perpetuity

no other business could be conducted on the land

there was no suggestion in the evidence that the railway would not be built - the only question was when the land was required

from the commercial point of view, the object of the contract of sale and lease back was to facilitate the construction of the railway, not to provide for what might happen in the eventuality (highly unlikely on the evidence) that construction might not proceed

the option was (somewhat unusually) for one year only, a much shorter term than the original period

the lease was poorly drafted and reference to extrinsic materials was necessary to understand a number of its provisions.

It is true that the annual rent ($100,000) represented a return to the State of only a little over 1.5 per cent on the cost of the land. However there was evidence to suggest that if the highest and best use of the land was not for the construction of a railway, it may have been (at least in the foreseeable future) for residential subdivision: the diagram annexed to the lease was overlaid onto a drawing of a proposed subdivision made in 2001.

[22] In my judgment his Honour erred in failing to give due weight to these considerations and in assessing the objective intention of the contracting parties only from the point of view of the State.¹⁰ This was a lease which the parties plainly expected would eventually come to an end. On the evidence there was no doubt that sooner or later the land would be required for the railway. They did not envisage a perpetually renewable lease and by reason of cl 6, this was not, when looked at from a commercial viewpoint, such a lease. It is quite possible to imagine practical reasons which would lead the parties to enter into such a lease. The State might be happy to have a continually renewable lease, knowing that it could put an end to it whenever it needed the land for the railway and that there was no practical chance that such a need would not arise. Elesanar might require such a clause in return for giving up title to potentially valuable land without having a right of first refusal in the event that the railway did not proceed.¹¹ A continually renewable lease would ensure that it had the means to secure for itself a share of any premium in the unlikely event of a resale. It is not for the court to the judge the parties’ motives. If, after the surrounding circumstances known to the parties and the purpose and object of the transaction are considered, there is nothing to displace the plain meaning of the words used, the court should give effect to that meaning. As Gibbs J said in Australian Broadcasting Commission v Australasian Performing Right Association Ltd, “The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust.”¹²

[23] The State submitted that Elesanar should not be permitted on the appeal to rely on extrinsic evidence, because its approach at first instance was to oppose the use of such evidence. That submission is rejected, for reasons elaborated later in these reasons.¹³

[24] The second reason advanced by Muir J related to the use of the singular in referring to a further term and the expiration of the term in cls 4 and 6. With respect, that cannot support the conclusion that only one renewal is envisaged. Use of the plural in the context would make no sense.

[25] The primary consideration which influenced Muir J's decision was a passage from the reasons of Russell LJ in Caerphilly Concrete Products Ltd v Owen:

“The approach to the question whether a lease is perpetually renewable is not in doubt. The language used must plainly lead to that result; although the fact that an argument is capable of being sustained at some length against that result does not of course suffice. As a matter of history, when a covenant by a lessor conferred a right to renewal of the lease, the new grant to contain the same or the like covenants and provisos as were contained in the lease, the courts refused to give literal effect to that language, which if taken literally would mean that the second lease would contain the same covenant (or option) to renew, totidem verbis, and so on perpetually. The reference to the same covenants was construed as not including the option covenant itself. This limited the tenant’s right to one renewal.”¹⁴

[26] His Honour noted that this passage was considered by Underwood J in Burnie Port Corporation Pty Ltd v Bank of Western Australia Ltd. Underwood J preceded his citation of the passage with this proposition:

“It is a well established principle of the law of landlord and tenant that the courts will not construe an option clause as being capable of creating a lease in perpetuity unless the words used make it perfectly clear that that was the parties' intention.”¹⁵

Muir J observed that this proposition was supported by Parkus v Greenwood,¹⁶ a case also cited by Underwood J. He concluded:

“I have seen no authority which casts doubt on the correctness of the propositions stated by Russell L.J. in Caerphilly at 374. With respect, they are perfectly in accord with what one might expect and consistent with a sensible commercial construction of agreements of this nature.”

[27] The first point to be made about the two English cases is that they were decided in a very different context. By s 145 of the Law of Property Act 1922, special provision was made for the purpose of converting perpetually renewable leases into long terms and for preventing the creation of perpetually renewable leasehold interests. Such leases were to take effect as leases for a term of 2000 years. In this context one might readily understand a predisposition against finding that a lease was a perpetually renewable lease within the meaning of the act. The second point is that in both cases the result was that the relevant clauses were interpreted as creating perpetually renewable leases. In other words the outcome in each case was the opposite of that reached by Muir J. Of course, as his Honour observed in relation to the Caerphilly case, that result was not surprising given the wording of the renewal clause. Nonetheless the passage from the reasons for judgment of Russell LJ contained only obiter dicta. Third, that passage has not been cited in any Australian judgment other than Burnie Port Corporation Pty Ltd v Bank of Western Australia Ltd. That may not be surprising in a country where statutory perpetual leases are a commonplace. Finally, and by far most importantly, the approach to interpretation taken in each of those cases was not that discussed above. Regard was had to context, but only to semantic context: the place of the relevant clause in the document as a whole. There was no attempt to identify relevant surrounding circumstances or even the purpose and object of the transaction in determining whether the renewal clause should be construed as one which provided for its own presence in the renewed lease. Indeed in Caerphilly, Sachs LJ found that the lease was perpetually renewable notwithstanding that he was not convinced it was the mutual intention of the parties that this should be so. His Lordship thought the English approach “blinkered”, but felt constrained by authority to adopt it. That would not be an acceptable outcome in Australia today.

[28] In my judgment to construe the present lease by reference to a presumption of interpretation is to adopt a wrong approach. I would rather adopt the approach described by Davies JA in relation to contracts of indefinite duration:

“In my opinion presumptions of this kind are solutions of last resort. The first resort in a case of this kind where the meaning of the clause is uncertain is to look at the context in which the contract was entered into, the background facts or as Mr Thompson put it, the matrix of facts in which the contract was made.”¹⁷

[29] The inconsistency between the English and the Australian approaches to construction was tacitly recognised by Muir J when his Honour said, “In the final analysis though on any question of this nature the object of the exercise must be to determine objectively the intention of the contracting parties.” The same recognition lies behind the reasons of Underwood J, who rejected a submission that the plaintiff would be entitled to obtain a lease in perpetuity saying, “If that was the intention of the parties, it is not reflected in either the matrix of the events leading up to the making of the rental plan, nor in the terms of the rental plan itself.”¹⁸ (For that reason I would not question the outcome of that case.) In my judgment it is not appropriate to resolve the interpretation of the lease in the present case by the application of a presumption of construction.

[30] That is not to say that in the absence of anything to suggest otherwise in the surrounding circumstances or the purpose and object of a contract, a court will not favour an interpretation which leans against perpetual renewability. In the abstract such an outcome would seem unlikely to have been intended. One of the matters which must be considered is the actual wording in the particular case. The use of expressions such as “(including this clause)” or “(excluding this clause)”, for example, provides a powerful indicator one way or the other, particularly if reinforced by evidence of local conveyancing practice. The more strongly the wording indicates one view or the other, the more likely it is that that view would be adopted. Semantic analysis has its place. But it is not the only factor. Provided the words of Russell LJ are viewed in this light, they can perform a useful function.

[31] For these reasons I have reached a construction of the present lease different from that of Muir J. In my judgment there is nothing in the surrounding circumstances to displace the ordinary meaning of the words used by the parties. Those circumstances are (at least) perfectly consistent with the existence of an intention that the lease be continually renewable. The preliminary question should be answered, “Clause 4 grants a right to renew the lease annually for more than one further term.”

[32] I have reached this conclusion without taking into account any evidence of the subjective intentions of the parties. In fact there was evidence before Muir J of the State's subjective intention in relation to cl 4. The question of what use could be made of that evidence on the appeal was one of the major controversies between the parties at the hearing. To deal with that question I must return to the facts of the case.

Ms Hill's letter

[33] At first instance Elesanar relied upon an affidavit sworn by Dennis Standfield, a member of the firm of solicitors engaged by it. The affidavit had been sworn in June 2006 and filed, I infer, in relation to some other interlocutory proceedings. No objection was taken to it. It exhibited e-mail correspondence passing between Mr Standfield on behalf of his client and Mr Paul Murphy, Mr Neil Graham and Ms Robyn Hill on behalf of the State shortly before the contract for the sale of the land was executed on 26 November 2001. Its contents were admitted in evidence without objection in the present application.

[34] On 22 October 2001 Mr Murphy, on behalf of Mr Graham, sent Mr Standfield a copy of the Main Roads Department's standard commercial tenancy agreement. This document ultimately became the foundation for the lease. On the following day Mr Graham sent a number of suggested amendments to that document to Mr Standfield and copied his e-mail to Ms Hill. She was an Executive Legal Consultant engaged by Crown Law. On 16 November Mr Standfield sent a suggested draft to Mr Murphy. It was not adopted. Clause 4.3 in it provided that subject to the land being required for the railway, “the one (1) year extension shall also be able to be further extended on terms similar to clause 4.1 and 4.2 for further terms of one (1) year”. Negotiations continued about other matters and on 19 November Mr Standfield sent a further e-mail to Mr Graham about them. That e-mail was copied to Ms Hill. On 21 November Ms Hill sent an e-mail to Mr Standfield, copying it to Mr Graham. Attached to it was a letter from Ms Hill to Mr Standfield. The letter outlined amendments to the contract and the lease requested by Ms Hill on behalf of the State.

[35] Among the amendments to the lease was a proposed new cl 4. Mr Standfield's response is not in evidence, but it can be inferred that he accepted at least this part of Ms Hill's proposal, since cl 4 of the lease as scheduled to the contract of sale five days later was in precisely the terms proposed by Ms Hill.

[36] The controversy arose in relation to the paragraph of the letter immediately following the text of the proposed new cl 4:

“The inclusion of a provision in clause 4.1 that any renewal of the term will be on the same terms and conditions as those contained in the Agreement will allow for the continual renewal of the option which I understand has been agreed by the parties.”

[37] Muir J made no reference to this letter in his reasons for judgment. That was not surprising. Not a word about it was said by either party before him. No criticism can be made of his Honour for not reading every document formally read into evidence. If judges in the applications list did that in every case, the list would never be finished. The practice of judges is to read the documents which the parties request them to read and to rely upon the parties’ statements from the bar table as fairly reflecting the content of the balance, in the absence of contradiction. Probably the parties completely overlooked the significance of Ms Hill's letter, if indeed they were aware of it at all. There may be some explanation of the State’s oversight. Mr Standfield's affidavit was six months old and no warning of the intention to read it had been given. But that hardly constitutes an excuse for not objecting to its contents if they were indeed objectionable.

Use of the letter on appeal

[38] The State objected to reliance being placed upon the letter in this appeal on the ground that the point was not taken below. It submitted that reliance on the letter was inconsistent with the case run by Elesanar before Muir J; and that Elesanar had not even raised the point in its pleadings. It is submitted that had the point been raised, it might have conducted its case differently, in that it might have cross-examined Mr Standfield about the letter. Associated with this submission was one that in the court below, Elesanar had not relied on surrounding circumstances in aid of the construction of the lease.

[39] Should Elesanar have raised the letter in a pleading? Assuming the letter is admissible, its relevance is to the validity of the second renewal. Elesanar pleaded the fact of the second renewal in para 13 of its statement of claim. In its defence, the State pleaded that the right to renewal was to a (new) lease on terms identical to the (existing) lease save for cl 4. Elesanar replied to that pleading with an assertion that cl 4 on its proper construction included the right to further extend the term of the lease to 11 July 2007. It raised no issue of estoppel and did not amend the statement of claim to seek rectification. Had it taken either of those courses, an explicit reference to the letter would no doubt have been necessary. However Elesanar was content to approach the matter as one of construction. It now wishes to use the letter only as evidence to support the construction for which it contends. It would therefore have been inappropriate to have pleaded it.¹⁹

[40] The State submitted that at the hearing below, Elesanar had made its submissions on the basis that extrinsic evidence was not to be taken into account in the construction of the contract; and that in relation to the question whether the preliminary point should be determined at all, it had submitted that evidence about the negotiations upon which the State wished to rely was inadmissible. In my judgment that does less than justice to the submissions advanced by counsel on behalf of Elesanar. It is true that the written outline of argument given to Muir J contained some objections to evidence proposed to be led by the State. The objections were taken in the context of submissions about whether the determination of the separate question should be refused, but were advanced in the alternative. The principal submission was that it was inappropriate to determine the question separately because the defendant's affidavits raised matters of fact which required the calling of witnesses and the determination of issues of credit. That position was initially adhered to in oral submissions and although counsel later appeared to concede that the construction point was a short one which could be determined summarily on the material, it is plain from the reasons for judgment that the judge understood the submission to be that preliminary determination was inappropriate because the question required factual analysis. Most importantly, the objections to the State’s evidence were not pressed when the affidavits were formally read.

[41] As to the construction point, counsel for Elesanar in oral argument referred to the circumstances under which the contract of sale and the lease were made. He referred to the acquisition of the land for a railway and the fact that the context was against the background possibility that the land would be acquired by the Crown if not sold. He referred to evidence of other litigation between the State and a company associated with Elesanar, which bore upon questions of when the land would be required. He referred to evidence of an announcement by the Premier about when the railway was to be constructed. He submitted that the imminence of the railway was very much a factor in the minds of the parties at the time the contract was made. He also referred to the reasons for judgment in proceedings between the related company and the State in the Planning and Environment Court which he submitted was relevant to the intention of the State at the time the contract was made. He submitted that these things should be taken into account “as being a part of the matrix of surrounding circumstances”.

[42] In my judgment it ought to have been quite clear that Elesanar was making submissions on the basis of extrinsic evidence. There is no inconsistency between the case now advanced and that advanced below. The case now advanced is rather more elaborate and raises a fresh point in relation to Ms Hill's letter, but there is no inconsistency.

[43] What would have been the position had attention been directed to the letter at first instance? The only difference suggested by the State is that it might have cross-examined Mr Standfield about the existence of the agreement which Ms Hill understood did exist. A need to cross-examine in relation to a matter going to the construction of the contract would seriously have jeopardised the State's contention that the question was one suitable for preliminary determination. I very much doubt that counsel would have risked such a tactical disadvantage when it was probable that Mr Standfield would have affirmed the existence of the agreement.²⁰ Moreover to cross-examine Mr Standfield, the State would have required leave to reopen the evidence, and it would not necessarily have obtained such leave on a busy applications day just before Christmas. That is particularly the case when the State had not put forward any evidence to contradict the inference to be drawn from the letter that such an agreement had been made. In my judgment, the possibility of cross-examination is not an obstacle to reliance on the letter in the appeal.

[44] In the course of the hearing it became apparent that even now that they are alert to the significance of the letter, the State's legal advisers have not taken instructions from Ms Hill about the letter. That is unfortunate. The State holds itself out to be, and usually is, a model litigant. Even if Ms Hill's letter was technically inadmissible, a model litigant would not take the point if it knew that Ms Hill's understanding was correct. To propound a construction of the lease in flat contradiction of an express agreement between the parties would not be the conduct of a model litigant. Nor would it be the conduct of a model litigant to refrain from taking instructions in order to leave open the argument that the State might have cross-examined Mr Standfield to establish the absence of any such agreement.

The use to be made of the letter

[45] In Codelfa Construction Pty Ltd v State Rail Authority of NSW,²¹ Mason J wrote:

“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. …

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the 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. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.

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. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting? 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.”

[46] The possible exception referred to in the last sentence of that passage is relevant in the present case. The letter is no doubt evidence of prior negotiations, and it is evidence from which an inference of the mutual intention of the parties, amounting to concurrence, may be drawn. The State is propounding a construction of the lease inconsistent with that inference. To do so it relies not on the literal words of the lease, but on the surrounding circumstances and a presumption of interpretation. It relies on these matters to establish what Muir J called “a sensible commercial construction” of such an agreement. Is the letter admissible in evidence “so as to negative an inference sought to be drawn from surrounding circumstances”?

[47] Mason J described the situation where the parties had refused to include in the contract a provision which would give effect to the objectively presumed intention of persons in their position. In my judgment there is no distinction of principle between that position and one where the parties have expressly assigned a meaning to a provision which has been included in the contract. In Horton Geoscience Consultants Pty Ltd v Energy Minerals Pty Ltd, Williams JA said:

“[7]Later at 352-3 Mason J particularised a situation in which evidence of the actual intention of the parties could be received. He said: ‘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.’ In other words, if the language of the agreement might give rise to a presumed intention contrary to the actual mutual intention of the parties, evidence of that intention may be received.”²²

Certainly no distinction of principle was suggested in argument on behalf of the State. Indeed the State did not seem seriously to dispute that if the possible exception raised by Mason J was the law, it applied to the present case.

[48] Mason J's dictum has been applied in at least four Australian cases.²³ It has been considered but not applied on the facts in numerous other cases. I have found no case which doubts that it accurately states the law. In my judgment it reflects the law of Australia on the interpretation of contracts. It covers Ms Hill's letter. The letter can properly be used as extrinsic evidence in aid of the construction of the lease.

[49] So used, it confirms the construction of the lease which I have reached independently of the letter.

Determination of a separate question

[50] Muir J did not formally make an order for the determination of a separate question. That did not comply with the requirements of r 483, but nothing turns upon that. His Honour's decision on this aspect of the case was perfectly obvious and the State conceded that an appeal lay against it notwithstanding the absence of a formal order. His Honour’s reason for the decision was succinctly stated: “I can see nothing in the material which suggests that there is any further relevant evidence to be adduced in respect of the construction question.”

[51] The State certainly did not contend that there was any further relevant evidence which might be adduced on the construction question. Elesanar did so contend, at least in its written submission, and with the benefit of hindsight one can see that there was some force in that contention. Further investigation of the matters asserted in Ms Hill's letter might have been thought appropriate before a decision was made against Elesanar, particularly since there was evidence that disclosure on that aspect of the matter was not complete. However that point was not made to his Honour. The written submission was expressed in general terms. Not only were these not given the force of particularity in oral submissions, but also the concession was made, albeit not acted upon by his Honour, that the construction point was a short one which could be determined summarily. Nothing in the material to which his Honour's attention was directed suggested that there was any further relevant evidence to be adduced.

[52] In view of my decision on the construction question, it is unnecessary to resolve Elesanar's submissions on the present matter.

Order

[53] Clearly para 3 of the order of Muir J made on 21 December 2006 should be set aside and in lieu thereof it should be declared that the option contained in cl 4 of the lease dated 24 May 2002 was an option for renewal for more than one further term of one year. Conformably with what was said during the hearing of the appeal, the parties should be allowed seven days in which to make submissions about costs, particularly having regard to the matter raised for the first time in the Court of Appeal. I propose the following orders:

1. Appeal allowed.

2. Set aside para 3 of the order of Muir J made on 21 December 2006 and in lieu thereof, declare that the option contained in cl 4 of the lease dated 24 May 2002 was an option for renewal for more than one further term of one year.

3. Unless within seven days of the date of this order either party files submissions seeking some other order as to costs:

(a) set aside para 4 of the order of Muir J made on 21 December 2006 and in lieu thereof order that the applicant pay the respondent’s costs of the application up to and including 21 December 2006 to be assessed; and

(b) order that the respondent pay the appellant’s costs of and incidental to the appeal to be assessed.

Footnotes

1. [1972] 1 WLR 372 at 374. ↩

2. [1950] 1 Ch 644. ↩

3. [2003] 12 Tas R 277; [2003] TASSC 73 at para 88. ↩

4. At [21], [22] and [31]. ↩

5. Clause 1(j). ↩

6. I deal with them in a different order from his Honour. ↩

7. Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at pp 461-2; [2004] HCA 35 at para 22 (citations omitted and emphasis added). ↩

8. Toll (FGCR) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at p 179; [2004] HCA 52 at para 40 (citation omitted and emphasis added). ↩

9. [2005] QCA 169 at para 36 (citations omitted and emphasis in the original). See now Spigelman, J: “From text to context: Contemporary contractual interpretation”, (2007) 81 ALJ 322. ↩

10. See the passage quoted in para [18]. ↩

11. See special condition 4 of the contract for the sale of the land. ↩

12. (1973) 129 CLR 99 at p 109; [1973] HCA 36 at para 3. ↩