'Surrounding circumstances', including 'the object of the transaction', as an aid to interpretation
100At 47-(5), in the course of outlining Toga's submissions, and at [58 - 61], the Tribunal discussed a number of leading cases on two questions of general significance in contract law: namely, (a) whether, in the absence of any ambiguity in a contractual term, regard may be had to 'surrounding circumstances', including the object or purpose of the contract, when seeking to construe it; and (b) if, in the particular context of interpretation of a registered lease, the 'surrounding circumstances' are being taken into account, what kinds of 'surrounding circumstance' may be investigated for this purpose.
101In their written and oral submissions on the cross-appeal, both parties also made reference to this case law.
102In our opinion, the first of these questions need not be answered in these proceedings. Our reason is that, contrary to an opinion expressed by the Tribunal at [67], the contentious provisions of the Sublease should be characterised as ambiguous. We say this even though we believe that important implications arising from the terminology used in them support the interpretation urged by Colonial to a distinctly greater degree than that urged by Toga.
103In ruling that these provisions are 'ambiguous', we rely on the definition of this term in the Macquarie Dictionary. It is as follows:-
1. open to various interpretations; having a double meaning; equivocal: an ambiguous answer.
2. of doubtful or uncertain nature; difficult to comprehend, distinguish, or classify: a rock of ambiguous character.
3. lacking clearness or definiteness; obscure; indistinct.
104It may also be observed - though we do not place much emphasis on this - that each of the two parties to these proceedings, while arguing for diametrically opposed interpretations of the relevant provisions, made the claim that these provisions were not 'ambiguous'. This was not the view put by Colonial in its submissions on the cross-appeal (see for example para 4.4(a)), but it did make this claim in submissions at first instance and the oral submissions of Mr Simpkins during the appeal hearing included the proposition that the meaning of the relevant provisions of the Sublease was 'clear'.
105With reference to the second question, Toga relied in its submissions in the appeal on a judgment in the Court of Appeal to which the Tribunal (at [61 - 62]) paid close attention. This is the judgment of Campbell JA (with which, so far as relevant, Spigelman CJ and Handley JA agreed) in Phoenix Commercial Enterprises Pty Limited v City of Canada Bay Council [2010] NSWCA 64. Toga relied also on the decision of the High Court in an earlier case, Westfield Management Ltd v Perpetual Trustee Co Ltd (2007) 233 CLR 528; [2007] HCA 45.
106The proposition which, in Toga's submission, emerged from these authorities was that in interpreting the contentious provisions of the Sublease, the 'surrounding circumstances' to which recourse could be had (assuming ambiguity to be present) were limited to those that (to quote from Campbell JA in Phoenix at [166]) 'one can know without evidence from outside the terms of the document itself'.
107In response, Colonial argued that evidence as to the prior negotiations and correspondence of the parties could be admitted. It relied on the High Court's decision in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5.
108For reasons outlined below, resolution of this contested issue is not essential for our decision in these proceedings. We are inclined, however, to favour Toga's contention. This was the conclusion reached by the Tribunal.
109In explaining this conclusion, we will first reproduce a relatively lengthy passage from Campbell JA's judgment in Phoenix. We will then state why we believe that his Honour's reasoning in this passage is directly applicable to the present proceedings and that the High Court's decision in Royal Botanic Gardens is distinguishable.
110In Phoenix Commercial Enterprises Pty Limited v City of Canada Bay Council [2010] NSWCA 64, the question at issue was the interpretation of clause 15(d) of the relevant lease. It was in the following terms:-
15(d) Should the Lessor in its capacity as consent authority approve the erection of a general advertising structure on other land within the Lessor's Local Government Area or control then within one (1) month of such approval the Lessor will pay the Lessee an amount equivalent to 25% of the Rental corresponding to the amount of time remaining within the Term.
111At [148 -166], Campbell JA said:-
Relevant Principles of Construction
Available Surrounding Circumstances
148 The orthodox approach to construction of a written agreement is that it involves:
"... the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."
(Per Lord Hoffmann, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912, approved in Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at [11], 188 per Gleeson CJ, Gummow and Hayne JJ (with whom Kirby J at [62], 205 and Callinan J at [89], 212 agreed generally on this point). To similar effect is Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22], 462 per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
149 As recognised by the Court's judgment in Pacific Carriers Ltd v BNP Paribas, carrying out that task "... requires consideration, not only of the text of the documents, but also the surrounding circumstances known to [the contracting parties], and the purpose and object of the transaction." In Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 996 Lord Wilberforce said:
"... When one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties."
150 The ordinary principles of contract law apply to leases: Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 29 per Mason J (with whom Wilson and Dawson JJ agreed), 40 per Brennan J, 53 per Deane J. This suggests that the construction of a lease should be carried out in accordance with the same principles as those applicable to any other written agreement. In Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436 Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ at [10]-[12] accepted the applicability to a registered lease of the principles of construction of a contract by reference to surrounding circumstances, that had been outlined by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.
151 However, the way those principles come to be applied to a particular contract can be affected by aspects of the contract such as whether it is assignable, whether it will endure for a longer time rather than a shorter time, and whether the provision that is in question is one to which indefeasibility attaches by virtue of the contract being embodied in an instrument that is registered on a Torrens title register. All these are matters that would be taken into account by the reasonable person seeking to understand what the words of the document conveyed. That is because the reasonable person seeking to understand what the words convey would understand that the meaning of the words of the document does not change with time or with the identity of the person who happens to be seeking to understand the document. That reasonable person would therefore understand that the sort of background knowledge that is able to be used as an aid to construction, has to be background knowledge that is accessible to all the people who it is reasonably foreseeable might, in the future, need to construe the document.
152 Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642 concerned the construction of a rent review clause in a lease that was registered under the RPA. The rent review clause was one whereby the parties agreed that in certain circumstances they would abide by the decision of a valuer about the amount of the rent. The dispute related to the proper construction of the lease provision that stated the criteria by reference to which the reviewed rent was to be decided. Priestley JA (with whom Glass JA) said, at 655:
"The contract was a lease for a term of ten years with options for renewal for two further ten year terms. The leased premises were commercial and in a city in which continual rebuilding was going on. The lessee was a public company. Changes in control of public companies were taking place as part of the ordinary course of commercial life in spasmodic and unpredictable ways. Either the reversion, or, in certain circumstances, the term might be assigned to parties ignorant of the pre-lease negotiations. The persons who negotiated a lease which might run for thirty years were almost certain not to be always available for consultation by lessor and lessee throughout the term. Of more particular importance in the present case, the lease itself shows that the parties to it intended that it should be read and acted on by a third person, a valuer, if the lessee so required, at times some distance from its commencement. These circumstances combine to make me think the parties negotiating and then executing the lease never contemplated and never intended that subsequent persons dealing with the lease on behalf of the lessor, the lessee or the valuer should in the event of doubt about the meaning of the lease have recourse to any but the most obvious extrinsic circumstances in order to be able to understand it and make it work. Stated positively, the terms of the lease itself and those few extrinsic circumstances I have mentioned make it clear that the parties to the lease intended it to state their full agreement and intended that its meaning be derived from the document itself and those surrounding circumstances likely to be within the knowledge of the persons who would be concerned with the administration of the lease during its existence."
153 Priestley JA cast his remarks about construction in terms of ascertaining what "the parties to it intended", rather than in terms of the modern orthodoxy that construction involves ascertainment of the meaning which a document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. However, Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ said in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [40], 179:
"... 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 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462 [22]."
154 If references to the intention of the parties in the passage of Priestley JA are understood in the way explained in Toll, it continues, in my respectful view, to correctly state the law. The fact that a lease is to endure for a long time, is assignable, is to be registered as a dealing under the RPA, and may well on occasions need to be understood and acted upon by people other than the original parties to its creation are themselves relevant surrounding circumstances to the entering of the lease. They are the sort of background circumstances that anyone could infer from a perusal of the lease document itself. They are not background circumstances that are the particular, private knowledge of the people who entered the lease, but rather background circumstances of a type ascertainable by anyone who set out to understand the lease, even many years after it was entered. They are the type of background circumstances not dependent upon the chance of the person seeking to understand the document being able to locate and communicate with the people who negotiated it, and the negotiators still having documents or enough reliable memory for the surrounding circumstances to become known. They are surrounding circumstances that should lead a reasonable person seeking to understand the meaning of the document, to leave out of consideration other surrounding circumstances that are not likely to be ascertainable by others who wish to construe the document in the future.
155 Westfield Management Ltd v Perpetual Trustee Co Ltd [2007] HCA 45; (2007) 233 CLR 528 concerned the construction of the terms of a registered easement over Real Property Act land. The easement had been created by the registration of an instrument under section 88B Conveyancing Act 1919. The dispute concerned the extent of user that was permitted by the terms of the grant. Gleeson CJ, Gummow, Kirby, Hayne and Heydon JJ described the types of extrinsic evidence that one party sought to use as aids to construction of the grant at [36] as including evidence of events after a deed that contained a covenant to grant the easement, evidence of the subjective intention of the then owner of the servient tenement, and evidence of a preceding oral agreement. Their Honours gave another characterisation of the disputed evidence at [41], as being evidence that "goes to the intentions and expectations of the parties to the Instrument respecting the development of an area in the Central Business District of Sydney."...
156 The specific reasons that their Honours gave for rejecting it are at [37]-[39]:
"However, in the course of oral argument in this Court it became apparent that what was engaged by the submissions respecting the use of extrinsic evidence of any of those descriptions, as an aid in construction of the terms of the grant, were more fundamental considerations. These concern the operation of the Torrens system of title by registration, with the maintenance of a publicly accessible register containing the terms of the dealings with land under that system. To put the matter shortly, rules of evidence assisting the construction of contracts inter partes, of the nature explained by authorities such as Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350-352, did not apply to the construction of the Easement.
Recent decisions... have stressed the importance in litigation respecting title to land under the Torrens system of the principle of indefeasibility expounded in particular by this Court in Breskvar v Wall (1971) 126 CLR 376...
157 The unavailability of extrinsic evidence to construe even a grant of an easement is not complete. In Westfield v Perpetual Trustee the High Court judgment at [44] acknowledges that evidence could be admissible
"... to make sense of that which the Register identifies by the terms or expressions found therein. An example would be the surveying terms and abbreviations which appear on the plan found in this case on the DP."...
158 It is important that what their Honours state is that it is rules of evidence assisting the construction of contracts inter partes, of the type referred to in Codelfa at 350-352, that do not apply to construction of the easement. They do not deny the applicability of the principle whereby a document will be construed as having the meaning that a reasonable reader, with such knowledge of the surrounding circumstances as is available to him or her, would attribute to it...
159 A question arises of how the principles that their Honours stated at [37]-[39] apply concerning covenants in a registered lease. Their Honours did not state the principles at [37]-[39] any wider than by reference to what extrinsic evidence could legitimately be used to construe the words of the grant of an easement. There are some differences between the grant of an easement, and the entering of a registrable lease that is ultimately registered. The grant of an easement is the creation of a legal property right. When the easement is created by registration of a section 88B instrument, it can be a unilateral act by the grantor, rather than a consensual one... A lease, by contrast, is a consensual document, and creates both contractual rights and property rights.
160 Even recognising these differences, the reasons that their Honours give are capable of applying to a registered lease. The first reason that their Honours give concerns the importance of indefeasibility. Insofar as the inapplicability of the Codelfa rules of evidence rests on the importance of indefeasibility, one would expect that the same result would apply concerning the construction of the terms of any estate or interest, or covenant, to which indefeasibility attached.
161 Relevantly for present purposes, there can be some provisions of a registered lease to which indefeasibility does not attach: Mercantile Credit Ltd v Shell Co of Australia Ltd (1976) 136 CLR 326; PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643 at 681; Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd (1998) 1 VR 188 at 196; Small v Tomassetti [2001] NSWSC 1112 ("indefeasibility for what?"); Chandra v Perpetual Trustees Victoria Ltd [2007] NSWSC 694. The covenant contained in the new clause 15(d) that was introduced by the Variation of Lease does not create any interest in the land. It is in the nature of a contractual right only, that the Lessee has if the Council engages in a particular type of conduct. That conduct need not have any connection with the land the subject of the lease. Clause 15(d) is not a covenant that touches and concerns the land itself, or that delimits or qualifies a registered interest. For those reasons, it is not the type of covenant to which indefeasibility attaches: PT Ltd v Maradona Pty Ltd at 679; Karacominakis v Big Country Pty Ltd (2000) 10 BPR 18,235 at 18,247, and see generally Peter Butt, Land Law, 6th ed (2010) at para [20 22]. Thus, any limitation on the availability of extrinsic evidence as an aid to construction by reason of indefeasibility of a registered instrument would not apply in relation to the construction of the new clause 15(d).
162 However, the final sentence in para [39] of Westfield v Perpetual Trustee is not dependent upon any considerations of the extent of indefeasibility, but rather on the inherent probabilities concerning the inquiries that a purchaser of Torrens title land will make... The inherent probabilities of what inquiries a purchaser of the benefit of the leases in the present case are likely to make are not changed by the particular covenant in clause 15(d) not having the benefit of indefeasibility.
163 The terms of the leases show that there might be such a purchaser. The Leases as originally executed did not contain any prohibition against assignment...
165 [However, a Variation of Lease that the parties executed] reintroduced the notion that either the Lessor or the Lessee might assign. Thus, at all times the lease in question in this case was assignable by both parties.
166 In these circumstances, the surrounding circumstances that can be used as an aid to construction of clause 15(d) are limited to ones that one can know without evidence from outside the terms of the document itself. That is consistent with the account that Priestley JA gave in Howard Chia. It is also consistent with the surrounding circumstances that the majority judgment in Royal Botanic Gardens at [11] approved and took into account to construe the scope of "additional costs and expenses" in a clause of the lease of the site of the Domain parking station:
"(a) the parties to the transaction were two public authorities;
(b) the primary purpose of the transaction was to provide a public facility, not a profit;
(c) the lessee was responsible for the substantial cost of construction of the facility;
(d) the facility was to be constructed under the lessor's land and would not interfere with the continued public enjoyment of that land for its primary object, recreation;
(e) the parties' concern was to protect the lessor from financial disadvantage from the transaction; and
(f) the only financial disadvantage to the lessor which the parties identified related to additional expense which it would or might incur immediately or in the future."
112In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5, the question at issue was the interpretation of provisions relating to the mode of determination of the rent in a lease entered into by two public authorities in order to provide public facilities in Sydney. The facilities in question were the Domain parking station and the underground footway leading to it.
113In Colonial's submissions, it was pointed out that in Royal Botanic Gardens, as is the case in the present proceedings, the covenant being interpreted related to the amount of rent payable. But in our opinion this decision by the High Court is distinguishable. The reason for this is that in Royal Botanic Gardens assignment of the lease was not provided for, so far as can be discerned from the report, and was unlikely to have been permissible, having regard to the special nature of the transaction.
114In its decision at [62], after quoting paragraph [151] of Campbell JA's judgment in Phoenix, the Tribunal said:-
62 The Sublease was a registered lease, it was a long term lease for ten years with a ten year option and was assignable. Following Campbell JA in Phoenix, there are only very limited pointers to assist in construction. None of the background knowledge regarding the negotiations or the details of the agreement between the parties can be examined if not evident from the face of the documents itself. Consequently, the evidence from the witnesses for Toga and Colonial regarding the inconsistency of approach with respect to rent free periods in year one of the Sublease and year one of the Option Lease and the Harris Letter would not be available to people who it would reasonably be foreseeable in the future were to construe the Option Lease.
115On the grounds set out above, our inclination is to agree with this reasoning. For the purposes of construing the Sublease, the admissible evidence of 'surrounding circumstances' does not include evidence about the parties' pre-lease negotiations because these fall within the category of 'background circumstances that are the particular, private knowledge of the people who entered the lease' (to quote from Campbell JA in Phoenix at [154]).