Confirming Codelfa: Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45

The matter of Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 was an application for special leave in the High Court of Australia. The matter concerned the construction of a letter of agreement concerning the Gloria Jeans franchise. The issue on appeal was a leading decision by Macfarlan JA in the New South Wales Court of Appeal to the effect that a court should not disregard unambiguous language in an agreement even where to do so would result in a more commercial operation of the agreement.

The High Court (comprised of Gummow, Heydon and Bell JJ) dismissed the application for special leave, referring to the decision of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337. In Codelfa, Mason J said at p352 the following of the Court admitting evidence of the surrounding circumstances:

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. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

The High Court's decision to dismiss the application for special leave is short, and I have set out an extract below (citations omitted):

1. GUMMOW, HEYDON AND BELL JJ. This is an application for special leave to appeal from a decision of the New South Wales Court of Appeal, in which Macfarlan JA gave the leading judgment. The dispute concerned the construction of cl 3 of a "Letter of Agreement" concerning the franchising in Australia of Gloria Jean's Gourmet Coffee Stores. In the passage in which he found error in principle in the reasons of the primary judge, his Honour said:

"A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted."

His Honour added that the primary judge appeared:

"to have acted on the basis that the provision would make more sense from a commercial point of view"

if it were construed as the primary judge did construe that provision. These statements by Macfarlan JA since have been applied by the New South Wales Court of Appeal in Miwa Pty Ltd v Siantan Properties Pte Ltd.

2. The primary judge had referred to what he described as "the summary of principles" in Franklins Pty Ltd v Metcash Trading Ltd. The applicant in this Court refers to that decision and to MBF Investments Pty Ltd v Nolan as authority rejecting the requirement that it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and object of the transaction. The applicant also refers to statements in England said to be to the same effect, including that by Lord Steyn in R (Westminster City Council) v National Asylum Support Service.

3. Acceptance of the applicant's submission, clearly would require reconsideration by this Court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by Mason J, with the concurrence of Stephen J and Wilson J, to be the "true rule" as to the admission of evidence of surrounding circumstances. Until this Court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.

4. The position of Codelfa, as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council and it should not have been necessary to reiterate the point here.

5. We do not read anything said in this Court in Pacific Carriers Ltd v BNP Paribas; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd; Wilkie v Gordian Runoff Ltd and International Air Transport Association v Ansett Australia Holdings Ltd as operating inconsistently with what was said by Mason J in the passage in Codelfa to which we have referred.

6. However, the result reached by the Court of Appeal in this case was correct. Further, even if, as the applicant contends, cl 3 in the Letter of Agreement should be construed as understood by a reasonable person in the position of the parties, with knowledge of the surrounding circumstances and the object of the transaction, the result would have been no different. Accordingly, special leave is refused with costs.