Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

COMMERCIAL LIST

S ECI 2019 4613

SIEMENS GAMESA RENEWABLE ENERGY PTY LIMITED (ACN 614 784 575)	Plaintiff
v
BULGANA WIND FARM PTY LTD (ACN 162 201 569)	First Defendant
NEOEN AUSTRALIA PTY LTD (ACN 160 905 706)	Second Defendant

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JUDGE:	RIORDAN J
WHERE HELD:	Melbourne
DATE OF HEARING:	29 and 30 January 2020 and 24 February 2020 (final written submissions)
DATE OF JUDGMENT:	20 March 2020
CASE MAY BE CITED AS:	Siemens Gamesa Renewable Energy Pty Limited v Bulgana Wind Farm Pty Ltd
MEDIUM NEUTRAL CITATION:	[2020] VSC 126

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CONTRACT – Whether ambiguity is a requirement for admissibility of surrounding circumstances – Written contract was ambiguous – Whether construction resulted in a commercial nonsense – Whether Court should weigh the commerciality of the agreement in construing terms – Absurdity not established – Whether negotiations were relevant for the purpose of determining the subject matter of the contract – The ‘true rule’ in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 considered.

PERFORMANCE SECURITIES – Whether the terms of the agreement between the parties prevent the defendant from calling on performance securities lodged under a construction contract – Whether such agreement unenforceable by reason of tri-partite finance agreement.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	J P Moore QC with C van Proctor	Clayton Utz
For the Defendant	D J Batt QC with J R Gurr	White & Case

TABLE OF CASES

Agricultural and RuralFinance Pty Ltd v Gardiner (2008) 238 CLR 570

Apple and Pear Australia Ltd v Pink Lady America LLC (2016) 343 ALR 112

B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227

Bacchus Marsh Concentrated Milk Co Ltd (in liq) v Joseph Nathan and Co Ltd (1919) 26 CLR 410

Canale v G W & R Mould Pty Ltd [2018] VSCA 346

Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101

Cherry v Steele-Park (2017) 96 NSWLR 548

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Commissioner of Taxation v Trustee for the Michael Hayes Family Trust [2019] FCAFC 226

Construction Forestry Mining Energy Union v Bovis Land Lease Pty Ltd [2008] FCA 1669

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640

Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471

Eureka Operations Pty Ltd v Viva Energy Australia Ltd [2016] VSCA 95

FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343

Fitzgerald v Masters (1956) 95 CLR 420

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603

Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149

Golf Australia Holdings Ltd v Buxton Construction Pty Ltd [2007] VSCA 200

Great Western Railway and Midland Railway v Bristol Corporation (1918) 87 LJ Ch 414

Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29

Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609

International Air Transport Association v Ansett Holdings Ltd (2008) 234 CLR 151

Jsam (AMC) Pty Ltd v Australis Marketing Corp (Int) Pty Ltd (Supreme Court of Victoria, Hayne J, 23 February 1995)

Karen Oltmann [1976] 2 Lloyd’s Rep 708

Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5

Lindsay-Owen v Winton Partners Funds Management Pty Ltd [2017] NSWCA 78

Lopes v Taranto [2018] VSCA 288

MAAG Developments Pty Ltd v Oxanda Childcare Pty Ltd(as trustee for the Oxanda Education Services Trust) [2018] VSCA 289

MacKinlay v Dairy Dew Pty Ltd (2014) WAR 247

Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181

Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633

MBF Investments Pty Ltd v Nolan (2011) 37 VR 116

McCourt v Cranston [2012] WASCA 60

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451

Pepe v Platypus Asset Management Pty Ltd (2013) 46 VR 694

Queensland Phosphate Pty Ltd v Korda [2017] VSCA 269

Quinn v Leathem [1901] AC 495

Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd (2012) 37 VR 486

Rosenhain v Commonwealth Bank of Australia (1922) 31 CLR 46

Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45

Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317

Shepparton Projects Pty Ltd v Cave Investments Pty Ltd (No 2) [2011] VSC 384

Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd [2019] VSC 771

Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd [2019] VSCA 318

Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85

Stratton Finance Pty Ltd v Webb (2014) 314 ALR 166

Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98

Tatts Group Ltd v Victoria [2014] VSC 302

Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) 48 WAR 261

Todd v Alterra at Lloyd’s Ltd (2016) 239 FCR 12

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165

Victoria v Tatts Group Ltd (2016) 328 ALR 564

Victoria v Tatts Group Ltd [2014] VSCA 311

Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604

WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd (2016) 341 ALR 467

XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215

Zhang v ROC Services (NSW) Pty Ltd (2016) 93 NSWLR 561

TABLE OF CONTENTS

Contractual arrangements................................................................................................................ 2

Dispute under the EPC Contract..................................................................................................... 2

The Second Agreement..................................................................................................................... 2

Issues for determination in this proceeding................................................................................. 2

Litigation history................................................................................................................................ 2

Whether the terms of the Second Agreement prevent the defendant from calling on the Performance Securities............................................................................................................... 2

Surrounding circumstances......................................................................................................... 2
30 September 2019 negotiations.................................................................................................. 2
Plaintiff’s submissions.................................................................................................................. 2
Textual considerations........................................................................................................ 2
Correspondence................................................................................................................... 2
The First Agreement............................................................................................................ 2
Commercial considerations................................................................................................ 2
Negotiations......................................................................................................................... 2

Defendant’s submissions............................................................................................................. 2
Textual considerations........................................................................................................ 2
Contextual considerations.................................................................................................. 2
Commercial nonsense......................................................................................................... 2

Principles of construction in commercial contracts................................................................. 2
Is there an ambiguity requirement?.................................................................................. 2
The true rule does not permit evidence of surrounding circumstances to identify ambiguity.................................................................................................................................... 2
The true rule has not been varied by subsequent decisions.......................................... 2

Conclusion...................................................................................................................................... 2

Whether the Second Agreement is unenforceable under the terms of the Consent Deed.. 2

Defendant’s submissions............................................................................................................. 2
Plaintiff’s submissions.................................................................................................................. 2
Conclusion...................................................................................................................................... 2

Orders................................................................................................................................................... 2

HIS HONOUR:

By amended originating motion filed 18 October 2019, the plaintiff applies, inter alia, for a permanent injunction restraining the first defendant (‘the defendant’) from making a demand pursuant to two unconditional bank guarantees, in relation to a disputed claim to delay liquidated damages (‘DLDs’) under the Engineering, Procurement and Construction Contract (‘EPC Contract’).

Contractual arrangements

The EPC Contract was executed by the plaintiff and defendant on 18 September 2017. It was amended by the Bulgana Green Hub Facility EPC Contract Deed of Amendment dated 16 March 2018.

The background to the EPC Contract sets out its purpose as follows:

1The [defendant] wishes to establish a facility comprising of a wind farm with an initial nameplate capacity of 194.04MW and, where the battery energy storage system option is exercise (sic), a battery energy storage system facility with a nameplate capacity of 21MW and energy storage capacity of 35MWh on the Site in the state of Victoria.

2 The [defendant] wishes to engage the [plaintiff] to perform the Works.
3The [plaintiff] has agreed to perform the Works in accordance with this Agreement.

Pursuant to cl 13.8(a) and schs 1 and 31 of the EPC Contract, if the plaintiff fails to reach practical completion of the works by the due date, it is liable to pay DLDs at the following rates until practical completion is achieved:

(a) $218,400 per day in respect of the ‘Main Works’; and
(b) $10,000 per day in respect of the ‘BESS Works’.

Pursuant to cl 13.8(d) of the EPC Contract, DLDs are immediately due and payable on the issue of a notice by the defendant and, under cl 13.8(e), the defendant is entitled to recover the amount of the DLDs:

(1) on demand from the plaintiff;
(2)by deducting the amount from any amount due by the defendant to the plaintiff for certified progress claims (‘progress payments’); or
(3)by deducting the amount from or calling on the Performance Security.

It is common ground that the defendant’s right to deduct DLDs from progress payments under cl 13.8(e)(2) is subject to the plaintiff’s right to progress payments under the Building and Construction Industry Security of Payment Act 2002 (Vic) (‘SoP Act’).[1]
[1]See s 48 of the SoP Act which provides that ‘[t]he provisions of this Act have effect despite any provision to the contrary in any contract’.

Pursuant to cl 25.1 of the EPC Contract, the plaintiff was required to provide two unconditional bank guarantees, both in the amount of 5% of the contract price.

In accordance with cl 25.1, the plaintiff provided two unconditional bank guarantees both dated 28 March 2018 with a combined value of $24,920,646.40 (‘the Performance Securities’).

By consent deed dated 18 March 2018 (‘the Consent Deed’) between the plaintiff, the defendant and the National Australia Bank Limited (‘the NAB’), the defendant agreed to grant a security interest over its right, title and interest in the EPC Contract in favour of the NAB. The deed was acknowledged to be for the benefit of the NAB. Clauses 3.1(e) and 3.2 of the Consent Deed provided as follows:

3.1(e)Subject to clause 3.2, the Contractor consents and acknowledges that the Borrower may not without the Security Trustee’s prior written consent:
(1)amend, vary, supplement, terminate, rescind, repudiate (otherwise than by breach) or accept the termination, rescission or repudiation of the Contract;
…

3.2Permitted amendments
The Borrower and the Contractor will not agree or consent to any amendment, waiver, release, variation or other change in the scope of the Contract or enter into any document or agreement in relation to the Contract which has the effect of amending, waiving, releasing, varying or supplementing the Contract without the Security Trustee's prior written consent, except:
(a)where the Borrower is deemed to take any action under the express provisions of the Contract or is otherwise bound to take some action or agree to some thing as a result of a decision of a court or of an expert or an arbitrator under the dispute resolution provisions of the Contract;

(b) where the amendment or variation:
(1)results in an additional cost of less than $500,000 and when aggregated with all other variations under the Contract, does not result in an aggregate additional cost exceeding $2,000,000; and
(2)does not materially impact on or materially alter the performance of the Works; or

(c)in respect of any amendment, variation or waiver of an immaterial, minor or inconsequential nature or to correct a manifest error,

provided that the Borrower must, promptly following the relevant amendment, variation or waiver (as applicable) under this clause 3.2, notify the Security Trustee of such amendment, variation or waiver and provide the Security Trustee with all relevant information as reasonably requested by it in connection with such amendment, variation or waiver.
The parties agree and acknowledge that if the Borrower does not obtain the Security Trustee's prior written consent in accordance with this clause 3.2, the relevant amendment, waiver, release or variation will be invalid and the Contractor and the Borrower will not be bound by such amendment, waiver release or variation.

Dispute under the EPC Contract

The underlying dispute arises in the following circumstances:

(a) The date for practical completion under the EPC Contract was 16 August 2019.
(b) The plaintiff failed to reach practical completion by that date.
(c)The plaintiff applied, under cl 13.3 of the EPC Contract, for an extension of the date for practical completion. The defendant denies that the plaintiff is entitled to an extension of time.
(d)On 3 October 2019 and 16 October 2019, the plaintiff gave dispute notices under cl 41.2 to the defendant.
(e)As the dispute remains unresolved, it has been referred to arbitration in accordance with cl 41.4 of the EPC Contract.

The Second Agreement

On 30 September 2019, after the defendant proposed to call upon the Performance Securities to satisfy the DLDs, the plaintiff and the defendant entered into an agreement (‘the Second Agreement’) in a letter signed by Richard Lim as company secretary/legal counsel for the plaintiff and countersigned by Vaughan Williams, legal director for the defendant. The letter stated as follows:

Dear Vaughan
Bulgana Green Hub Facility EPC Contract dated 18 September 2017 between Bulgana Wind Farm Pty Ltd (“BWF”) and Siemens Gamesa Renewable Energy Pty Ltd (“SGRE”) as amended by Deed of Amendment dated 16 March 2018 (“EPC Contract”)
Subject: Delay Liquidated Damages (“DLDs”)
We refer to the above matter and our telephone conversations between our two (2) organisations today.
Without the admission of any liability and reserving any rights SGRE may have, we confirm as follows:
1.BWF will continue to offset any DLDs against payments or any amounts due to SGRE for the above project.
2.Except in any process provided for in clause 41 of the EPC Contract, SGRE undertakes not to object to or oppose any such offset (other than for mathematical mistakes apparent in the DLDs calculations) and additionally will not exercise its rights under or in connection with the security of payment legislation in relation to this matter.
3.BWF will accordingly not exercise its rights to draw on the Performance Securities in its possession in relation to this matter. For the avoidance of doubt, BWF will not make a demand or claim under the Performance Securities before giving at least 5 business days prior written notice.

Please do not hesitate to contact me, if you have any queries or require further clarification.
Yours faithfully

Issues for determination in this proceeding

The issues for determination in this proceeding are as follows:

(a)Whether the terms of the Second Agreement prevent the defendant from calling on the Performance Securities.
(b)If yes to part (a), whether the Second Agreement is unenforceable under the terms of the Consent Deed.

Litigation history

By summons and originating motion filed 9 October 2019, and as amended 18 October 2019, the plaintiff sought, inter alia, an interlocutory injunction restraining the defendant from making a demand under the Performance Securities without the consent of the plaintiff.

On 27 November 2019, the trial Judge dismissed the plaintiff’s application for the injunction after determining the Second Agreement on an ‘as if’ final basis.[2]
[2]Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd [2019] VSC 771, applying Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98.

On 20 December 2019, the Court of Appeal allowed an appeal and set aside the final orders made by the trial Judge.[3] However, the Court of Appeal dismissed the plaintiff’s application for an interlocutory injunction. Accordingly, the matter was brought on for trial on 29 January 2020.

Whether the terms of the Second Agreement prevent the defendant from calling on the Performance Securities

[3]Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd [2019] VSCA 318.

In essence, the constructional issue raised in this proceeding is as follows:

(a) The plaintiff contends that the defendant agreed:

(i) not to call on the Performance Securities for payment of disputed DLDs; and

(ii) it would exercise its right to set-off those DLDs against progress payments.[4]

(b)The defendant contends that it only agreed to not call on the Performance Securities in relation to the DLDs that had been incurred in the period from 16 August to 31 August 2019 (‘August DLDs’), which would be set-off against the progress claim certificate dated 6 August 2019 (‘August Certified Claim’).
[4]The plaintiff conceded that any restraint under the Second Agreement only applied until resolution of the dispute relating to the DLDs.

Surrounding circumstances

By letter dated 17 May 2019 to the defendant, the plaintiff notified it of ‘a potential delay to the Date for Practical Completion as a result of overhead lines designs and inputs causing extremely high impedance on the whole Wind Farm reticulation’. The plaintiff contended that the high impedance was as a result of causes outside its area of responsibility.

By the August Certified Claim dated 6 August 2019, the Independent Certifier certified that the sum of $3,038,036 ($3,341,839.60 including GST) was payable to the plaintiff as a progress payment under the EPC Contract for the reporting period of May 2019.

By letter dated 12 August 2019 to the plaintiff, the defendant alleged that the delays resulting in the failure to reach practical completion by the due date were the responsibility of the plaintiff.

By letter dated 16 August 2019 to the defendant, the plaintiff enclosed an expert report from Accura Consulting dated 15 August 2019 (‘the Accura Report’), which concluded that the plaintiff was entitled to an extension of time of 251 working days and revised the date for practical completion to 23 July 2020.

By letter dated 23 August 2019 to the plaintiff, the defendant alleged that the plaintiff was responsible for the delays in reaching practical completion and asserted that the Accura Report was ‘fundamentally flawed’ and ‘manifestly inadequate’.

By letter dated 2 September 2019 to the plaintiff, the defendant notified that, pursuant to cl 13.8(d) of the EPC Contract, it intended to deduct the amount of the August DLDs ($3,494,400) from the August Certified Claim ($3,341,839.60).

By email of 3 September 2019 to the defendant, the plaintiff attached the progress report for August 2019 which relevantly forecast the revised practical completion date to 4 February 2020.

By emailed letter dated 5 September 2019 to the defendant, the plaintiff’s solicitors rejected the proposition that the plaintiff was liable for any DLDs and asserted that the defendant was indebted to the plaintiff for the August Certified Claim in the sum of $3,341,839.60 under the SoP Act. Accordingly, any deduction, set-off or demand on the Performance Securities would be ‘strenuously opposed’.

By letter dated 9 September 2019 to the plaintiff’s solicitors, the defendant reiterated its entitlement to DLDs under the EPC Contract and relevantly concluded:

It is not reasonable to expect the [defendant] to forego or fetter its rights to Delay Liquidated Damages. Particularly in circumstances where your client at present appears unwilling or unable to address, or articulate any cogent plan and timing to address, an issue as fundamental as the GPS impedance issue.
If your client has a reasonable proposal or preference regarding the [defendant’s] rights to recover Delay Liquidated Damages, including a preference as to whether the current amount is accepted to be set-off against payments otherwise due or recovered from security, or satisfied by some other means, then please provide written confirmation of your client’s position by 11am on 10 September 2019.
Subject to express agreement in writing to the contrary, the [defendant] expressly reserve all of its right to recover Delay Liquidated Damages from the [plaintiff] by any manner permitted under the EPC Contract or at law.

By letter dated 13 September 2019 to the plaintiff, the defendant formally notified that:

(a) pursuant to cl 13.8(d) of the EPC Contract, DLDs of $3,426,000 (being $3,276,000 relating to the Main Works and $150,000 relating to the BESS Works) as at 31 August 2019 were due and payable; and

(b) it intended to deduct such DLDs from the amount of the August Certified Claim of $3,341,839.60.

By letter dated 13 September 2019 to the defendant, the plaintiff’s solicitors stated that:

(a)any attempt to recover DLDs by not paying the August Certified Claim would be a breach of the EPC Contract; and
(b)if the amount of the August Certified Claim was not paid, the plaintiff would take steps to enforce its rights without further notice.

On 18 September 2019, there were two meetings between representatives of the plaintiff and of the defendant. There was some disagreement about the substance of the discussions at these meetings, but it was agreed that key personnel from each party would meet for the purposes of attempting resolution of the operational aspects of the project, which Mr Hertling, the managing director (technical) of the plaintiff, referred to as a ‘war room’. It was also agreed between Mr Hertling and Mr Francisci, a director of the defendant, that they would give each other a courtesy phone call prior to any ‘significant commercial communications’ or ‘drastic action’ being taken by either party.

On 19 September 2019, Mr Francisci telephoned Mr Hertling in accordance with their agreement of the previous day to inform him that he would shortly receive a letter from the defendant’s lawyers claiming DLDs.

By letter dated 19 September 2019 to the plaintiff, the defendant stated that DLDs of $3,426,000 were now due and payable for the period 16 August to 31 August 2019 and enclosed an invoice for that sum together with a demand for payment pursuant to cl 13.8(e)(1). The letter reserved the defendant’s right to recover from the plaintiff the amount of DLDs by any manner permitted under the EPC Contract or at law.

By letter dated 19 September 2019 to the plaintiff’s solicitors, the defendant’s solicitors responded to the plaintiff’s solicitors’ letters of 5 and 13 September 2019 with respect to the underlying operational issues.

By a progress claim certificate dated 24 September 2019, the Independent Certifier certified that the sum of $3,593,797 was payable to the plaintiff as a progress payment under the EPC Contract for the reporting period of August 2019.

By letter dated 25 September 2019 to Mr Hertling of the plaintiff, Mr Francisci of the defendant reconfirmed the standing commitment with respect to the ‘war room’ as discussed at the meeting of 18 September 2019.

On 30 September 2019, Mr Hertling returned a telephone call from Mr Francisci. Mr Francisci said that the defendant had decided to call on the Performance Securities in relation to the claim for DLDs. The balance of the conversation was the commencement of a negotiation (referred to below), which resulted in the following agreement in a letter dated 30 September 2019 executed on behalf of the plaintiff and the defendant (‘the First Agreement’):

Dear Vaughan
Bulgana Green Hub Facility EPC Contract dated 18 September 2017 between Bulgana Wind Farm Pty Ltd ("BWF") and Siemens Gamesa Renewable Energy Pty Ltd ("SGRE") as amended by Deed of Amendment dated 16 March 2018 ("EPC Contract")
Subject: Delay Liquidated Damages ("DLDs")
We refer to the above matter and our telephone conversations between our two (2) organisations today.
Without the admission of any liability and reserving any rights SGRE may have, we confirm as follows:
1. BWF will continue to offset any DLDs against payments or any amounts due to SGRE for the above project.
2.SGRE undertakes not to object to or oppose any such offset (other than for mathematical mistakes apparent in the DLDs calculations) and additionally will not exercise its rights under or in connection with the security of payment legislation in relation to this matter.
3.BWF will accordingly not exercise its rights to draw on the Performance Securities in its possession in relation to this project.

On the same day, after execution of the First Agreement, the parties entered into the Second Agreement set out in paragraph 11 above. It is not in dispute that the Second Agreement superseded the First Agreement.

30 September 2019 negotiations

Mr Hertling’s evidence of the conversation with Mr Francisci referred to in paragraph 34 was, in summary, as follows:

(a)Mr Francisci thanked Mr Hertling for returning his call and said that out of courtesy he was advising that the defendant had decided to draw on the Performance Securities.
(b)Mr Hertling said that this was not good news and asked whether there was anything that could be done to avoid it, because drawing on Performance Securities was a very serious matter for the plaintiff.
(c)Mr Francisci suggested that one of the potential options would be that they could offset the DLDs against progress payments.
(d)Mr Hertling said that he was between a ‘rock and a hard place’ because neither of the two options was desirable and the plaintiff believed that it was not liable for the DLDs. However, he said that if he had no other choice, the preferred option would be to offset DLDs against progress payments, rather than having the Performance Securities drawn upon. Mr Hertling also said that the plaintiff would agree under those circumstances that it would not initiate a claim under the SoP Act.
(e)Mr Francisci thanked Mr Hertling and asked whether this arrangement could be put in writing.

(f)       Mr Hertling then repeated the agreement saying:
(i)       no drawing of the Performance Securities;
(ii)      offsetting of DLDs against progress payments; and
(iii) the plaintiff would not initiate a claim under the SoP Act.
(g)Mr Hertling then said that he would ask Mr Lim, the plaintiff’s general counsel, to get in contact with the defendant’s counterpart, Mr Williams, to draw up an agreement to reflect those points.

Mr Francisci gave evidence that he asked Mr Williams to join him on the conversation with Mr Hertling and spoke on his mobile, which was on loud speaker. He did not inform Mr Hertling that Mr Williams was listening in. In summary, his evidence was as follows:

(a)Mr Francisci recapped the fact that the defendant had requested to set-off the August DLDs against progress payments, but the plaintiff had rejected that offer. The defendant had decided to call on the Performance Securities and he was offering the plaintiff a chance to ‘get back and accept the set-off’ in order for the defendant to not call on the security.
(b)Mr Hertling said that he would prefer the defendant not call on the Performance Securities and that he would rather a set-off.
(c)Mr Hertling concluded by saying that his team would get in touch with the defendant to formalise the agreement.
(d)Mr Francisci said it would have to be done fast to confirm the decision about calling on the Performance Securities.

Mr Williams, who was present with Mr Francisci during the conversation, in summary, gave evidence as follows:

(a)Mr Francisci said that he was calling in relation to the commercial stream. He also said that the defendant had written to the plaintiff in respect of the DLDs which had accrued and been invoiced, but that the plaintiff had not paid and their lawyers had referred the defendant to the SoP Act.
(b)Mr Francisci said that he was ‘taking it on his shoulders’ and was asking Mr Hertling whether he wanted to get back to the contractual mechanism of set-off rather than the defendant calling on the Performance Securities.
(c)Mr Francisci said that it was the defendant’s position that the plaintiff should have paid the invoiced DLDs.
(d)Mr Hertling said: ‘Thank you for the call, I’m between a rock and a hard place on this. We’d prefer that you didn’t call on our performance security.’
(e)Mr Hertling said: ‘Off the record, I don’t want to make a claim against you under the Security of Payments Act. We would prefer you don’t call on our performance security.’
(f)Mr Hertling said that both sides understood that if the defendant did not call on the Performance Securities, then the plaintiff would write to the defendant during the course of the day saying they disagreed about the merits but would agree to the defendant’s set-off.
(g)Mr Francisci said that it was necessary to get this resolved quickly, within 45 minutes, because he had to report internally about it.
(h)Mr Hertling said that he would ask Mr Lim to write to the defendant that day.
(i)Mr Hertling started to talk about the agenda for the workshop that was scheduled and Mr Francisci said to get Mr Lim to contact Mr Williams.

Mr Williams took a contemporaneous handwritten note of the substance of the conversation which was as follows:

Calling as a courtesy re commercial stream
Proposed to set off LD August. Invoiced.
Your legal have rejected + pointed SOP Act.
Our position is pay invoice or we will call on the security.
Wanted to know before I call security, you wanted to get back to set off mechanism
Taking it on my shoulders. If you agree to set off, not Δ of position, but if better for you if we don’t call on the security you could send a letter re set off + we stay w/in contract and no SofP Act claim. I wouldn’t activate security
Appreciate a rock + hard place. Don’t want you to call
Off the record said don’t want SOP Act. We have an understanding wld prefer set off to demand under g. Will ask Richard Lim to write that we disagree on merits, but would prefer you keep setting off instead of calling on our security.
Put Richard Lim in contact w/Vaughan.
Needs to be done in 45 minutes.
He to call RL -> to contact VW
Rohit working on the agenda for the workshop

He said that a glossary of his abbreviations was as follows:
SofP Act - the SoP Act;
Δ of position – change of position;
w/in – within;
g – guarantee, being the Performance Securities; and
w/- with.

Mr Williams also gave evidence of a conversation he had with Mr Lim at 12:20 pm. His diary note of that conversation was as follows:

Following call b/w Thomas + Laurent
Agree to set off against payments. Don’t want you to claim under security.
Will write to us about a dispute
Won’t take any SoP Act steps
Will want us to consider mediation
Draft to come in 30 minutes.

He said that all recorded statements were made by Mr Lim.

By email at 1:27 pm to Mr Lim, Mr Williams said:

Further to our call of earlier today, could you please let me know when to expect your draft letter re set off etc.?
The reason for chasing is because I need to have your letter acknowledging that we are continuing to set off (in lieu of a demand on the Bank Guarantee) before I can stand the people down.

By email at 2:25 pm to Mr Williams, Mr Lim attached a proposed form of letter (which was not produced to the Court).

By email at 2:40 pm to Mr Lim, Mr Williams said:

Thanks for resending the draft letter. Please find attached my few comments on the draft.
Please call me if you have any questions?

The attached marked up letter was as follows:

Bulgana Green Hub Facility EPC Contract dated 18 September 2017 between Bulgana Wind Farm Pty Ltd (“BWF”) and Siemens Gamesa Renewable Energy Pty Ltd (“SGRE”) as amended by Deed of Amendment dated 16 March 2018 (“EPC Contract”)
Subject: Delay Liquidated Damages (“DLDs”)
We refer to the above matter and our telephone conversations between our two (2) organisations today.
Without the admission of any liability and reserving any rights SGRE may have, we confirm as follows:
1.BWF will continue to offset any DLDs against payments or any amounts due to ~~invoices issued by~~ SGRE for the above project.
2.SGRE undertakes not to object to or oppose any such offset (other than for mathematical mistakes ~~made~~ apparent in the DLDs calculations) and additionally will not exercise its rights under or in connection with the security of payment legislation in relation to this matter.
3.BWF will accordingly not exercise its rights to draw on the ~~bonds~~ Performance Securities in its possession in relation to this project.
4.The parties agree to initiate the dispute resolution provision in the EPC Contract and in this regard, shall treat this letter as a notice under clause 41.2 of the EPC Contract.[5]

[5]The fourth paragraph had the following comment: ‘Neoen – Richard, whilst I understand the intent, as this point was not (on my instructions) specifically addressed between Thomas and Laurent I’d prefer to deal with it separately because to qualify as a Dispute Notice reasonable particulars are required (which are not included in this letter).’

By email at 3:01 pm to Mr Lim, Mr Williams said: ‘Noted – signed copy to follow by return.’

By email at 3:06 pm to Mr Lim, copied to Stephen Thompson of the defendant and Mr Francisci, Mr Williams said: ‘Please find attached a signed counterpart to your letter regarding Delay Liquidated Damages and off set.’ The attached signed counterpart was the First Agreement, the terms of which are set out in paragraph 34 above. Mr Williams gave evidence that when he signed the First Agreement he believed it to be consistent with the conversation he overheard between Mr Francisci and Mr Hertling.

By email at 3:30 pm to Mr Lim, Mr Williams said:

Further to my VM [voicemail], but at the end of paragraph 3 could we please add (for the avoidance of doubt) that we will not claim under the Performance Securities until further notice to SGRE (say 5 days notice). This is to deal with the scenario of unpaid DLD at the end of the project.

By text message at 3:40 pm to Mr Hertling, Mr Francisci said:

Hi Thomas, things took disappointingly longer than planned but I think the guys are getting there. Only one modification has to be made by [Mr Lim] and I need to confirm my position to HQ by 4:00pm so it's fundamental he does it in the next minutes. Thanks.

By text message at 3:43 pm to Mr Francisci, Mr Hertling said: ‘I just spoke to [Mr Lim] and he sent me the letter signed by him and [Mr Williams] a couple of minutes ago.’

By text message at 3:44 pm to Mr Hertling, Mr Francisci said: ‘This is the one that has to be modified (email of [Mr Williams] to [Mr Lim]).’

By text message at 3:47 pm to Mr Francisci, Mr Hertling said: ‘Just spoken to [Mr Lim]. He will call [Mr Williams] now.’

By text message at 4:53 pm to Mr Hertling, Mr Francisci said: ‘Nothing yet on my side …’

By text message at 5:00 pm to Mr Francisci, Mr Hertling said: ‘[Mr Lim] told me that he and [Mr Williams] are aligned.’

By email at 5:17 pm to Mr Williams, in response to Mr Williams’ email at 3:30 pm, Mr Lim attached the following revised draft letter with marked up amendments:

Bulgana Green Hub Facility EPC Contract dated 18 September 2017 between Bulgana Wind Farm Pty Ltd (“BWF”) and Siemens Gamesa Renewable Energy Pty Ltd (“SGRE”) as amended by Deed of Amendment dated 16 March 2018 (“EPC Contract”)
Subject: Delay Liquidated Damages (“DLDs”)
We refer to the above matter and our telephone conversations between our two (2) organisations today.
Without the admission of any liability and reserving any rights SGRE may have, we confirm as follows:
1.BWF will continue to offset any DLDs against payments or any amounts due to SGRE for the above project.
2.Except in any process provided for in clause 41 of the EPC Contract, SGRE undertakes not to object to or oppose any such offset (other than for mathematical mistakes apparent in the DLDs calculations) and additionally will not exercise its rights under or in connection with the security of payment legislation in relation to this matter.
3.BWF will accordingly not exercise its rights to draw on the Performance Securities in its possession in relation to this project. For the avoidance of doubt, BWF will not make a demand or claim under the Performance Securities:
a.until all claims pursuant to payment milestones under the EPC Contract have been submitted;
b.if dispute resolution process concerning DLDs, variations and extensions of time have been commenced and is ongoing under clause 41; and
c.BWF has given to SGRE at least 5 business days prior written notice.

At 5:20 pm there was a telephone conversation between Mr Francisci and Mr Hertling.

(a) In summary, Mr Hertling gave the following evidence:
(i)Mr Francisci said that he could not understand why the lawyers had not completed the agreement because ‘it can’t be that difficult to put three sentences into a piece of paper’.
(ii)Mr Hertling said that the agreement was, once again, that the defendant would not draw against the Performance Securities, the plaintiff would allow the defendant to offset the DLDs against the progress payments and that the plaintiff would not initiate a SoP Act claim. The three sentences are what the agreement is all about.
(iii)Mr Francisci said he would text the exact words to Mr Hertling.
(iv)Mr Francisci agreed that the agreement comprised the three points outlined by Mr Hertling earlier in the conversation.

(b) In summary, Mr Francisci gave the following evidence:
(i)Mr Francisci said that it was very frustrating that the last draft coming from the plaintiff’s team had incorporated lots of changes that twisted the agreement. He said that Paris [France] was waking up and that he needed to communicate with his management.
(ii)Mr Francisci denied that Mr Hertling had confirmed that the agreement comprised the three elements claimed by Mr Hertling.

By email at 5:23 pm to Mr Lim, Mr Williams, in response to the email sent at 5:17 pm, said:

Thanks for your message, but new paragraphs 3(a) and (b) are not acceptable. For example, the final payment milestone will come too late.
I've attached a revised final draft for your approval, which we need to resolve ASAP.

The attached draft letter deleted paragraphs 3(a) and (b) and provided only that:
For the avoidance of doubt, BWF will not make a demand or claim under the Performance Securities before giving at least five business days prior written notice.

By text message at 5:39 pm to Mr Hertling, Mr Francisci stated: ‘this is the proposed text’, but by text message at 5:41 pm Mr Hertling noted that there was ‘nothing attached?’

By text message at 5:49 pm to Mr Hertling, Mr Francisci set out the text as it ultimately appeared in the Second Agreement.

By text message at 6:07 pm to Mr Hertling, Mr Francisci said: ‘Okay by you? Can we conclude?’

By text message at 6:08 pm to Mr Francisci, Mr Hertling said: ‘[Mr Lim] will send the draft to [Mr Williams] now and we should be done.’

By text message at 6:11 pm to Mr Hertling, Mr Francisci said: ‘Did you send the above text to [Mr Lim]? He now says he’s trying to get to you. I am standing next to [Mr Williams].’

By text message at 6:12 pm to Mr Francisci, Mr Hertling said: ‘I just spoke to him and send him the exact text.’

By text at 6:14 pm to Mr Hertling, Mr Francisci said: ‘Ok. I’ll wait on.’

By email at 6:29 pm to Mr Williams, Mr Lim said: ‘Apologies All! For the sake of consistency and as confirmed by [Mr Williams], this is the final and agreed version.’

By email at 6:34 pm to Mr Lim, Mr Williams said: ‘Thanks: I’ve attached a countersigned version of the final terms of the letter.’

Plaintiff’s submissions

The plaintiff submitted as follows.

(a)The central issue of construction is determining the ‘matter’ to which the first sentence of cl 3 of the Second Agreement refers.
(b)The ‘matter’ is the defendant’s claim to disputed DLDs arising out of the plaintiff’s failure to achieve practical completion by the date specified in the EPC Contract. The defendant may recover disputed DLDs solely by way of set-off against the plaintiff’s entitlement to progress payments.
(c)The Second Agreement should be construed objectively by reference to its text and context. Both support the plaintiff’s construction of ‘matter’. The Second Agreement is not ambiguous, nor does it amount to a commercial nonsense, so it is not permissible to look at surrounding circumstances.

Textual considerations

The word ‘matter’ refers to DLDs generally, not just August DLDs. When the word first appears in the Second Agreement it refers to the subject line which is simply ‘Delay Liquidated Damages’. The subject line does not specifically mention August DLDs. Nor is there any mention of August DLDs elsewhere in the Second Agreement. The word ‘matter’ should be read consistently throughout the Second Agreement to refer to DLDs generally.

The word ‘matter’ in cl 2 of the Second Agreement is forward looking. It applies to DLDs beyond August. The parties agree that the first half of cl 2 is forward looking. The second half of the clause, which contains the word ‘matter’, is also forward looking because:

(a)clause 2 is one sentence; and
(b)the second half of the clause, which concerns the non-exercise of SoP Act rights, is tied to the first half of the clause which concerns non objection to set-off.

The second sentence of cl 3, which allows the defendant to call on the Performance Securities with written notice, is consistent with the plaintiff’s construction of ‘matter’. It allows the defendant to call on the Performance Securities for matters other than disputed DLDs, such as undisputed DLDs, whether by agreement or by determination at arbitration.

Correspondence

Objectively known facts in the parties’ correspondence are admissible. The defendant made clear in earlier correspondence that it would continue to claim disputed DLDs and its claim was not confined to August DLDs.

The First Agreement

The Second Agreement superseded the First Agreement made earlier the same day. The First Agreement is admissible for, and informs, the construction as follows:

(a)The First Agreement was broader than the Second Agreement, preventing the defendant from calling on the Performance Securities at all. In particular:
(i) the First Agreement did not refer to August DLDs;
(ii)the covering email attaching the First Agreement also did not refer to August DLDs; and
(iii)clause 3 of the First Agreement referred to ‘this project’, the plain meaning of which prevents the defendant from calling on the Performance Securities generally.

(b)The purpose of the Second Agreement was to confine the scope of the First Agreement to only prevent the defendant from calling on the Performance Securities in respect of disputed DLDs. Had the parties intended to further confine the Second Agreement to August DLDs, they would have done so.
(c)The Second Agreement was not uncommercial. It was a better deal than the First Agreement, which entirely prevented the defendant from calling on the Performance Securities.

Commercial considerations

The plaintiff’s construction is more commercially sensible than the defendant’s construction for the following reasons:

(a)If, as the defendant contends, the defendant is only prevented from calling on the Performance Securities in respect of August DLDs, the Second Agreement would be over in an instant, because the parties knew that within a few days, the September DLDs, which exceeded the plaintiff’s entitlement to progress payments by $3 million, would be called on.
(b)The plaintiff’s construction gives the defendant a commercial advantage. It means the defendant is not out of pocket paying the plaintiff their entitlements (because it can apply a set-off) and does not reduce the amount of the Performance Securities (leaving them intact for other purposes).

Negotiations

The parties’ negotiations are inadmissible. However, if admissible, they nevertheless support the plaintiff’s construction.

The email from the defendant’s lawyer to the plaintiff’s lawyer after the First Agreement was executed explained that the proposed second sentence in cl 3 dealt ‘with the scenario of unpaid DLDs at the end of the project’. The reference to unpaid DLDs could not be referring to disputed DLDs because the words ‘at the end of the project’ would be meaningless. It is therefore a reference to the prospect of the defendant being owed undisputed DLDs at the end of the project, consistent with the plaintiff’s construction.

The defendant rejected the plaintiff’s proposed wording of cl 3 which would have prevented a claim under the Performance Securities (a) until all milestone claims had been submitted; (b) if a dispute resolution process for DLDs had been commenced and was ongoing; and (c) the defendant had given 5 days’ notice. The reason for rejection was that ‘the final payment milestone will come too late’. This reason for rejection is consistent with the plaintiff’s construction, which would allow the defendant to call on the Performance Securities other than for disputed DLDs prior to the conclusion of any dispute resolution process.

Defendant’s submissions

The defendant submitted as follows.

(a)Ambiguity is not a requirement before extrinsic evidence of surrounding circumstances is admissible.
(b)Evidence of the negotiations is admissible for the purpose of identifying the subject matter of the contract.
(c)There is patent ambiguity on the face of the Second Agreement, including as to the identity of the ’matter’ referred to and the potential inconsistency between the first and second sentences of cl 3.
(d)The proper construction of the Second Agreement, in light of the text and as understood in its objective commercial context, is as follows:
(i)Clause 1 and the first part of cl 2 deal with DLDs generally (being a promise by the defendant to continue to offset DLDs against payments and a promise by the plaintiff not to object to any such offset).
(ii)The second sentence of cl 3, as to notice, also has general and ongoing effect.
(iii)The second part of cl 2 and the first sentence of cl 3 have a more limited and immediate effect, to regulate the parties’ existing and pressing entitlements as at 30 September 2019, such that the plaintiff would not exercise its right under the SoP Act in respect of the August Certified Claim and the defendant would not exercise its right to access the Performance Securities in respect of the August DLDs; and
(iv)Thereafter, the other, more general provisions of the Second Agreement would apply to regulate the order in which the defendant would exercise its continuing rights to recover unpaid DLDs.

Textual considerations

Ambiguity arises from the first sentence of cl 3 in relation to the meaning of the words ‘this matter’. Such ambiguity arises from:

(a)the language of the first sentence (i.e. the identity of the ‘matter’ in respect of which the right to draw on the Performance Securities will not be exercised); and
(b)the potential inconsistency between the first and second sentences of cl 3 (an undertaking not to call on the Performance Securities in relation to the ‘matter’, as against a requirement to give five days’ notice before making a call).

The reference to ‘this matter’ is a reference to August DLDs. This follows from the fact that:

(a)The subject matter of the Second Agreement is ‘Delay Liquidated Damages’. The only delay liquidated damages that had been demanded and that were due and payable at the time of the Second Agreement were the August DLDs.
(b)Clause 3 contains the words: ‘rights to draw on the Performance Securities in its possession.’ The only rights the defendant had to draw on the Performance Securities at the time of the Second Agreement were in relation to the August DLDs.

Contextual considerations

The Second Agreement must be read in light of the foundational commercial setting in which it was entered into, including the content of the preceding correspondence and telephone calls.

The parties were aware that there would be a demand on the Performance Securities that day if no resolution was reached. Accordingly, the Second Agreement was executed to resolve this ‘imminent crisis’ and ‘pressing issue’.

The Second Agreement short-circuited the ‘merry-go-round’, namely:

(a) the defendant attempting to set-off DLDs against the plaintiff’s progress payment;

(b) the plaintiff making a claim under the SoP Act; and

(c) the defendant calling on the Performance Securities in any event.

The Second Agreement is not a ‘stand-alone’ agreement, but rather an adjustment measure, which effects the rights provided for by the EPC Contract. As such, it has to be read together with the EPC Contract and the Consent Deed. Clause 3.2 of the Consent Deed is a powerful objective indicator that the Second Agreement is not to be construed as contended for by the plaintiff.

The defendant’s construction is supported by the following surrounding circumstances known to each party:

(a) Pursuant to the EPC Contract, the defendant was entitled to recover DLDs under the Performance Securities, despite any dispute as to entitlement.

(b) It is objectively unlikely that the parties would have intended to:

(i)fundamentally alter the allocation of risk under the EPC Contract; or
(ii)materially amend the terms of the EPC Contract in breach of the Consent Deed.

(c) DLDs are defined in the EPC Contract as ‘the liquidated damages payable under clause 13.8’, which provides in sub-cl (d) that DLDs only become payable upon the issue of a demand. At the time of the Second Agreement, only a demand for the payment of August DLDs had been issued.

(d) The wind farm the subject of the EPC Contract was project financed, which required the defendant to meet its debt servicing obligations either from revenue (after practical completion) or the payment of DLDs.

(e) The plaintiff had failed to achieve practical completion by the stipulated date and therefore the defendant would not receive revenue from the export of power to the grid. Further, the defendant’s representative had rejected the plaintiff’s extension of time claims and the Accura Report.

(f) The earliest date that the plaintiff had forecast practical completion to be achieved was 4 February 2020, nearly six months after the contractually agreed date, in circumstances where the defendant had minuted the fact that it did not agree with the content of the plaintiff’s monthly reports over the previous months.

(g) The defendant had, prior to 30 September 2019, consistently asserted an entitlement to recover the DLDs in accordance with the EPC Contract and the plaintiff had repeatedly stated that it would not make payment of the DLDs.

(h) As at 30 September 2019, the plaintiff only had a present entitlement to commence an action under the SoP Act in relation to the August payment sum which had been certified on 6 August 2019.

(i) As at 30 September 2019, the only DLDs due and payable were the August DLDs which had been demanded on 19 September 2019. It was those DLDs in respect of which Mr Francisci threatened to make a call on the Performance Securities.

(j) At 5:17 pm on 30 September 2019, the plaintiff advanced a form of agreement which would have prevented the defendant from making a claim under the Performance Securities. At 5:23 pm, the defendant unequivocally rejected that proposal. This is admissible as ‘specific information as to the genesis of’ the Second Agreement and may properly be taken into account in construction of the Second Agreement.[6]

(k) The urgency surrounding the Second Agreement is consistent with the threat of an imminent call on the Performance Securities which only related to the August DLDs. There was no evidence of other claims to which the Performance Securities might apply.

[6]Cherry v Steele-Park (2017) 96 NSWLR 548, 569 [91]–[92] (‘Cherry’) quoting International Air Transport Association v Ansett Holdings Ltd (2008) 234 CLR 151, 160 [8] (Gleeson CJ).

Commercial nonsense

The plaintiff’s construction would result in a ‘commercially absurd’ or ‘nonsensical outcome’. So far as another construction of the Second Agreement is available, the Court should adopt that construction.

The defendant was in a contractually strong position under the EPC Contract. The EPC Contract contains an unequivocal risk allocation regime, permitting the defendant to have recourse to the Performance Securities in respect of a claim for DLDs. This right was undisputed.

It is objectively and inherently inconceivable that, following a short courtesy phone call, the defendant would agree to abandon its best means of recovering the DLDs.

Principles of construction in commercial contracts

To construe the terms of a commercial contract, the Court asks ‘what a reasonable businessperson would have understood those terms to mean’.[7] To answer that question, ‘the reasonable businessperson [is] placed in the position of the parties’,[8] and the Court applies the following principles:
[7]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656-7 [35] (French CJ, Hayne, Crennan, and Kiefel JJ) (‘Woodside’); Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116 [47] (French CJ, Nettle and Gordon JJ) (‘Mount Bruce’).
[8]Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ) (‘Ecosse’).

(a) The terms are construed objectively and the subjective intentions of the parties are irrelevant.[9]
[9]Ibid.

(b) The objective approach requires reference to the text and its ordinary meaning, together with:

(iii) the context, being the entire text of the contract including matters referred to in the text; and

(iv) the purpose.

These matters will ordinarily be identified by reference to the contract alone,[10] but evidence of mutually known objective background circumstances relevant to the purpose is admissible ‘no matter how clear the “ordinary meaning” of the words’.[11] Identification of purpose may allow admission of evidence of the genesis of the transaction, the background, the context and the market in which the parties are operating.[12]
[10]Eureka Operations Pty Ltd v Viva Energy Australia Ltd [2016] VSCA 95, [45]-[47] (Santamaria, Ferguson and McLeish JJA); Mount Bruce (2015) 256 CLR 104, 116 [46]-[48] (French CJ, Nettle and Gordon JJ); Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29, 50 [76] (McLure P, with whom Newnes JA and Le Miere J agreed) (‘Hancock’).
[11]Lopes v Taranto [2018] VSCA 288, [66]-[72] (Kyrou, McLeish and Hargrave JJA), quoted with approval in Canale v G W & R Mould Pty Ltd [2018] VSCA 346, [45] (Whelan and McLeish JJA with whom Tate JA agreed). Cf Hancock (2012) 45 WAR 29, 50 [76] where the Western Australian Court of Appeal took the contrary view.
[12]Mount Bruce (2015) 256 CLR 104, 116-7 [46], [49] (French CJ, Nettle and Gordon JJ).

(c) Unless a contrary intention appears in the contract, the court is entitled to approach the task of interpretation on the assumption that the parties intended to produce a commercial result, and should construe it so as to avoid a commercial nonsense.[13] However, the court does not weigh the commerciality of the agreement, and business commonsense is a topic on which reasonable minds may differ.[14]
[13]Woodside (2014) 251 CLR 640, 656-7 [35] (French CJ, Hayne, Crennan, and Kiefel JJ).
[14]Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, 198 [43] (Gleeson CJ, Gummow and Hayne JJ) (‘Maggbury’).

(d) If, after completion of this process, the language used in the contract ‘is ambiguous or susceptible of more than one meaning’, then evidence of surrounding circumstances external to the contract (‘surrounding circumstances’) is admissible to assist with interpretation of the contract (‘the ambiguity requirement’).[15]
[15]Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352 (Mason J) (‘Codelfa’). The ambiguity requirement, namely, the proposition that ambiguity is a precondition to consideration of surrounding circumstances, is controversial. My reasons for adopting this view are set out in paragraphs 89 to 109 below.

(e) Surrounding circumstances are:

events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating.[16]

(f) However, ‘evidence of the parties’ statements and actions reflecting their actual intentions and expectations’ is inadmissible.[17] Although evidence of prior negotiations is admissible to establish objective background facts known to both parties and the subject matter of the contract, evidence of negotiations reflective of actual intentions and expectations is not receivable.[18]

(g) Post contractual conduct is inadmissible to construe the terms of the contract.[19] However, the parties’ subsequent communications may be relevant to determine whether the parties intended to enter into a binding contract.[20]

[16]Mount Bruce (2015) 256 CLR 104, 117 [50] (French CJ, Nettle and Gordon JJ).

[17]Ibid.

[18]Codelfa (1982) 149 CLR 337, 352 (Mason J); Golf Australia Holdings Ltd v Buxton Construction Pty Ltd [2007] VSCA 200, [28] (Nettle and Redlich JJA, with whom Neave JA agreed). As Gordon J said in Construction Forestry Mining Energy Union v Bovis Land Lease Pty Ltd [2008] FCA 1669, [15]: ‘the back-and-forth of the parties in concluding the transaction’ is not considered in construing the document.

[19] FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, 350.

[20] Queensland Phosphate Pty Ltd v Korda [2017] VSCA 269, [37] (Tate, Beach JJA and Sifris AJA).

Despite the above rules, evidence of surrounding circumstances may be admissible to establish that:

(a) an expression has a particular meaning in business custom or usage;[21]

(b) a particular interpretation was either rejected[22] or accepted[23] by the parties; or

(c) the contract should be rectified.

[21] Rosenhain v Commonwealth Bank of Australia (1922) 31 CLR 46, 53 (Knox CJ, Gavan Duffy and Starke JJ).

[22]Jsam (AMC) Pty Ltd v Australis Marketing Corp (Int) Pty Ltd (Supreme Court of Victoria, Hayne J, 23 February 1995) 20-1; Codelfa (1982) 149 CLR 337, 352-3 (Mason J).

[23]Karen Oltmann [1976] 2 Lloyd’s Rep 708, 712 (Kerr J); B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227, 235-6 (Kirby P); Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149, [182] (Einstein J); cf Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, [47] (Lord Hoffman).

Further, at common law, a court may supply, omit or correct words to avoid absurdity or inconsistency.[24]
[24]Fitzgerald v Masters (1956) 95 CLR 420, 426-7 (Dixon CJ and Fullagar J); MAAG Developments Pty Ltd v Oxanda Childcare Pty Ltd(as trustee for the Oxanda Education Services Trust) [2018] VSCA 289, [53]-[55] (McLeish, Hargrave JJA and Almond AJA); Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317, [6]-[10] (Leeming JA).
Is there an ambiguity requirement?

The ‘true rule’ was stated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales, as follows:

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.[25]

[25](1982) 149 CLR 337, 352 (emphasis added).

There is extensive learned judicial and academic writing on the question of whether the true rule requires ambiguity as a precondition to the admissibility of evidence of surrounding circumstances.[26]
[26]See, eg, Thomas Prince, ‘Still Defending Orthodoxy: The New Front in the War on Codelfa’ (2018) 46 Australian Bar Review 156; Tiphanie Jane Acreman, ‘The Long Road to a Wide Ambiguity Gateway’ (2016) 42 Australian Bar Review 12; John Eldridge, ‘Contracts: Construction – “True Rule” in Codelfa Construction v State Rail Authority (NSW) - No Requirement of Ambiguity before Regard is had to Surrounding Circumstances’ (2018) 92 Australian Law Journal 249, J D Heydon, Heydon on Contract (Lawbook Co, 2019) 346-8 [9.460]-[9.490]; 367-407 [9.800]-[9.1540].

Opinions have been expressed to the effect that the true rule does not incorporate an ambiguity requirement, on the basis that:

(a) a proper reading of the true rule does not incorporate an ambiguity requirement at least for the purpose of identifying an ambiguity; and/or

(b) an ambiguity requirement is inconsistent with decisions of the High Court following Codelfa.[27]

[27]Maggbury (2001) 210 CLR 181, 188 [11] (Gleeson CJ, Gummow and Hayne JJ); Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461-2 [22] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179 [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Agricultural and RuralFinance Pty Ltd v Gardiner (2008) 238 CLR 570, 583 [38] (Gummow, Hayne and Kiefel JJ); Woodside (2014) 251 CLR 640, 656-7 [35] (French CJ, Hayne, Crennan and Kiefel JJ); Victoria v Tatts Group Ltd (2016) 328 ALR 564 (French CJ, Kiefel, Bell, Keane and Gordon JJ) (‘Tatts Group’); Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; Ecosse (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ).

In none of the cases cited in footnote 27 does the High Court specifically refer to the question of whether there is an ambiguity requirement. However, the High Court has directly commented on the precedential status of Codelfa in the following decisions.

In Royal Botanic Gardens and Domain Trust v South Sydney City Council,[28] the majority confirmed that courts should continue to follow Codelfa and rejected the proposition that decisions of the House of Lords, which had not referred to Codelfa, should be preferred to it. Their Honours stated:

[R]eference was made in argument to several decisions of the House of Lords, delivered since Codelfa but without reference to it ... It is unnecessary to determine whether their Lordships there took a broader view of the admissible ‘background’ than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court. Until that determination is made by this Court, other Australian courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa.[29]

[28](2002) 240 CLR 45 (Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne and Callinan JJ) (‘Royal Botanic Gardens’).

[29]Ibid 62-3 [39] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ).

When refusing an application for special leave in Western Export Services Inc v Jireh International Pty Ltd, Gummow, Heydon and Bell JJ said that Codelfa did establish that it was essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances, and that subsequent decisions of the High Court should not be read to the contrary:

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 [Franklins Pty Ltd v Metcash Trading Ltd] 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.
Acceptance of the applicant's submission, clearly would require reconsideration by this court of what was said in [Codelfa] by Mason J, with the concurrence of Stephen and Wilson JJ, 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.
The position of Codelfa, as a binding authority, was made clear in the joint reasons of five justices in [Royal Botanic Gardens] and it should not have been necessary to reiterate the point here.
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.[30]

[30](2011) 282 ALR 604, 605 [2]-[5] (‘Jireh’) (citations omitted).

In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,[31] French CJ, Nettle and Gordon JJ relevantly confirmed that:
[31](2015) 256 CLR 104 (French CJ, Kiefel, Bell, Gageler, Keane, Nettle and Gordon JJ).

(a) Codelfa still represents the law in Australia and surrounding circumstances cannot be considered to contradict an unambiguous expression in the contract;

(b) surrounding circumstances can be considered if there is a ‘constructional choice’, namely, an ambiguity;

(c) whether surrounding circumstances can be considered to identify the existence of a constructional choice was not raised on appeal; and

(d) Jireh did not have precedential status.

Their Honours said:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. 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.
…
These observations are not intended to state any departure from the law as set out in [Codelfa] and [Woodside]. We agree with the observations of Kiefel and Keane JJ with respect to [Jireh].[32]

[32]Ibid 116-17 [46]-[49], [52] (citations omitted).

Bell and Gageler JJ confirmed the same matters, stating that:

(a) the appeal did not raise the ambiguity requirement question;
(b)Codelfa remains the binding authority, a point made in Royal Botanic Gardens[33] and Jireh;[34] and
(c)Jireh, being the refusal of a special leave application, was not a binding authority.[35]

[33](2002) 240 CLR 45, 63 [39] (Kirby J).

[34](2011) 282 ALR 604, 605 [2]-[5].

[35]Mount Bruce (2015) 256 CLR 104, 134 [118]-[119].

Kiefel and Keane JJ also said that the question of whether surrounding circumstances were admissible to identify whether there was an ambiguity in a contract did not arise on appeal.[36] However, their Honours also opined that Mason J’s reasons in Codelfa did not say whether surrounding circumstances could be considered to identify ambiguity. With respect to Jireh, they said:

The ‘ambiguity’ which Mason J said may need to be resolved arises when the words are ‘susceptible of more than one meaning’. His Honour did not say how such an ambiguity might be identified. His Honour’s reasons in Codelfa are directed to how an ambiguity might be resolved.
In reasons for the refusal of special leave to appeal given in Western Export Services Inc v Jireh International Pty Ltd, reference was made to a 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 the object of the transaction. There may be differences of views about whether this requirement arises from what was said in Codelfa. This is not the occasion to resolve that question.
It should, however, be observed that statements made in the course of reasons for refusing an application for special leave create no precedent and are binding on no one. An application for special leave is merely an application to commence proceedings in the Court. Until the grant of special leave there are no proceedings inter partes before the Court.[37]

[36]Ibid 133 [113].

[37]Ibid 132-3 [110]-[112] (citations omitted).

Mount Bruce establishes that Codelfa still represents the law in Australia. In my opinion, the true rule as expressed by Mason J in Codelfa, requires ambiguity as a gateway to examining extrinsic evidence of surrounding circumstances, because:

(a) the true rule does not permit evidence of surrounding circumstances to identify ambiguity; and

(b) the true rule has not been varied by subsequent decisions of the High Court.

The true rule does not permit evidence of surrounding circumstances to identify ambiguity

It is argued that, even if the true rule incorporates an ambiguity requirement, it does not prevent evidence of surrounding circumstances being admitted to identify if there is ambiguity.[38] With respect I do not agree with this conclusion for the following reasons:
[38]See, eg, Todd v Alterra at Lloyd’s Ltd (2016) 239 FCR 12, 28-9 [74]-[75] (Beach J); Mount Bruce (2015) 256 CLR 104, 132 [110] (Kiefel and Keane JJ).

(a) Mason J specifically identified the competing views about whether evidence of surrounding circumstances could be admitted to raise an ambiguity.[39] His Honour noted that in Great Western Railway and Midland Railway v Bristol Corporation:[40]
[39]Codelfa (1982) 149 CLR 337, 350.
[40](1918) 87 LJ Ch 414 (‘Great Western Railway’).

(v) Lords Atkinson and Shaw ‘took the view that evidence of surrounding circumstances was not admissible to raise an ambiguity for in their opinion that would be to contradict or vary the words of the written document’;[41] but
[41]Codelfa (1982) 149 CLR 337, 350, citing Great Western Railway (1918) 87 LJ Ch 414, 418-9, 424-5.

(vi) Lord Wrenbury stated the contrary view that ‘extrinsic evidence [was] receivable to raise and resolve an ambiguity’.[42]
[42]Ibid citing Great Western Railway (1918) 87 LJ Ch 414, 429.

In my opinion, on a true reading, Mason J accepted the view of Lords Atkinson and Shaw,[43] and consistent with their views, concluded that surrounding evidence was ‘not admissible to contradict the language of the contract when it has a plain meaning’.[44]
[43]J D Heydon, Heydon on Contract (Lawbook Co, 2019) 360-1 [9.690].
[44]Codelfa (1982) 149 CLR 337, 352.

(b) If in all cases evidence of surrounding circumstances was admissible to identify whether there was ambiguity in a contract, it would undermine the purpose of the parol evidence rule, being to:

(i) preserve ‘finality in written instruments’;[45] and
[45]Bacchus Marsh Concentrated Milk Co Ltd (in liq) v Joseph Nathan and Co Ltd (1919) 26 CLR 410, 451-2 (Higgins J).
(ii)avoid ‘difficult, time-consuming, expensive and problematic’[46] consideration of extraneous material on the basis that the parties should be held to the written contractual words, which appear plain on their face.
[46]Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, 483 [35] (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ).

(c) If the contractual words are unambiguous on their face, the admission of surrounding evidence can only be to contradict such plain meaning, which Mason J said was impermissible.[47]
[47]Codelfa (1982) 149 CLR 337, 352, adopting the statement of Lords Atkinson and Shaw in Great Western Railway (1918) 87 LJ Ch 414, 418-9, 424-5.

(d) The Courts of Appeal in Western Australia[48] have stated the current law in Australia as being that the:

practical limitation flowing from the Codelfa true rule is that surrounding circumstances cannot be relied on to give rise to an ambiguity that does not otherwise emerge from a consideration of the text of the document as a whole, including whatever can be gleaned from that source as to the purpose or object of the contract.[49]

[48]Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) 48 WAR 261, 270 [37], 271 [45] (McLure P, with whom Newnes JA agreed), 299 [215]-[216] (Murphy JA); following Hancock (2012) 45 WAR 29, 50 [76] (McLure P, with whom Newnes JA and Le Miere J agreed). See, also, McCourt v Cranston [2012] WASCA 60, [22]-[23] and MacKinlay v Dairy Dew Pty Ltd (2014) WAR 247, 260 [54].

[49]Hancock (2012) 45 WAR 29, 50 [76] (McLure P, with whom Newnes JA and Le Miere J agreed).

Similarly, in Victoria, in Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd, the Court of Appeal referred to the above passages from Royal Botanic Gardens and Jireh and held that the statements made by Mason J in Codelfa as to the true rule remain good authority.[50]
[50](2012) 37 VR 486, 502 [50] (Warren CJ, Harper JA and Robson AJA). Cf MBF Investments Pty Ltd v Nolan (2011) 37 VR 116, 165-7 [197]-[202] (Neave, Redlich and Weinberg JJA).

In Pepe v Platypus Asset Management Pty Ltd,[51] Neave JA and Hollingworth AJA, with whom Buchanan JA agreed, confirmed that the true rule limiting the admission of evidence of surrounding circumstances should be followed until the High Court reconsiders and revises it.
[51](2013) 46 VR 694, 700 [25] (Buchanan, Neave JJA and Hollingworth AJA).

In Apple and Pear Australia Ltd v Pink Lady America LLC,[52] Tate JA undertook detailed consideration of the authorities about the applicability of the ambiguity requirement,[53] and declined to follow the conclusion of Leeming JA in Mainteck that evidence of surrounding circumstances was admissible to identify ambiguity. Her Honour said:

With great respect to Leeming JA, the premise upon which his Honour in Mainteck arrived at the view that, following Woodside, evidence of surrounding circumstances, external to the contract, was admissible in the construction of commercial contracts, and in particular, was admissible to raise, and not only to resolve, an ambiguity, is not to be accepted as a prevailing principle given that it was not confirmed by Mount Bruce.[54]
[52](2016) 343 ALR 112 (Tate, Ferguson and McLeish JJA).
[53]Ibid 139-55 [91]-[139].
[54]Ibid 154-5 [136].

The true rule has not been varied by subsequent decisions

The New South Wales Court of Appeal[55] and the Full Court of the Federal Court[56] have concluded that, because decisions of the High Court subsequent to Codelfa have proceeded on the basis that there was no longer an ambiguity requirement, the true rule has been restated,[57] clarified[58] or possibly ‘abandoned’.[59]
[55]Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 616-18 [14]-[18] (Allsop P), 623-4 [52]-[53] (Giles JA), 630 [90] (Campbell JA) (‘Franklins’); Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633, 653-6 [73]-[86] (Leeming JA, with whom Ward and Emmett JJA agreed) (‘Mainteck’); Cherry (2017) 96 NSWLR 548, 566-568 [76]-[83] (Leeming J, with whom Gleeson and White JJA agreed).
[56]Stratton Finance Pty Ltd v Webb (2014) 314 ALR 166, 173-4 (Allsop CJ, Siopis and Flick JJ); Commissioner of Taxation v Trustee for the Michael Hayes Family Trust [2019] FCAFC 226, [32] (Steward J, with whom Griffiths and Derrington JJ agreed).
[57]See, eg, Franklins (2009) 76 NSWLR 603, 673 [286] (Campbell JA)
[58]See, eg, Zhang v ROC Services (NSW) Pty Ltd (2016) 93 NSWLR 561, 580 [79] (Leeming JA).
[59]J D Heydon, Heydon on Contract (Lawbook Co, 2019) 387 [9.1180] observes that in Mainteck (2014) 89 NSWLR 633, 653 [71] (Leeming JA) the New South Wales Court of Appeal ‘seemed to suggest that the “true rule” had been abandoned’ in Woodside.

In my opinion, the High Court has not overruled implicitly, or otherwise, the statement of Mason J in Codelfa, for the following reasons:

(a)Although the decisions of the High Court referred to in footnote 27 do not refer to the ambiguity requirement, in none of them was it argued that the Court should not have regard to evidence of surrounding circumstances. Accordingly, it should not be inferred that the High Court intended to abolish or ‘clarify’ the true rule. To do so runs counter to the observations made by Earl of Halsbury LC in Quinn v Leathem about the propositions for which a judgment stands:
[O]ne is … that every judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found. The other is that a case is only an authority for what it actually decides.[60]

(b)As observed by Murphy JA in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd, ‘a case as significant as Codelfa in the operation of the commercial law in Australia for over 30 years is unlikely to have been impliedly overruled’.[61]
(c)The Victorian Court of Appeal, in the decisions referred to above in paragraphs 101 and 102, have stated that the Court must continue to apply the law as stated by Mason J in Codelfa until otherwise directed by the High Court. With respect, even if I was at liberty to do otherwise, I would accept this as the current state of the law in Australia for the reasons stated by Tate JA in Apple and Pear.[62]

[60][1901] AC 495, 506. See, also, J D Heydon, Heydon on Contract (Lawbook Co, 2019) 390 [9.1200].

[61](2014) 48 WAR 261, 299 [215] (Murphy JA).

[62](2016) 343 ALR 112.

In Apple and Pear, after reviewing the relevant authorities, Tate JA rejected the assertion that Mount Bruce was authority for the proposition that ‘the universal contextual dependence of the meaning of contractual terms … requir[es] reference to events or circumstances beyond the contract’.[63] Her Honour said:

In my view, it follows from what was said in Mount Bruce that it would be wrong to conclude that the High Court has endorsed an approach to the construction of commercial contracts, whereby the surrounding circumstances, including, relevantly, pre-contractual negotiations, can invariably be relied upon to assist construction.
…
It is not in dispute that this Court must follow the precepts of the High Court. While this Court may, as a matter of judicial comity, extend deference to the observations made by other intermediate appellate courts with respect to their understanding of principles enunciated by the High Court, it is ‘bound directly’ by what the High Court has said and ‘is not bound indirectly by another court’s interpretation of what the High Court said’.[64]

[63]Ibid 154 [136].

[64]Ibid 155 [137], [139] (citations omitted); citing Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609, 631 [98] (Leeming JA).

Ferguson and McLeish JJA agreed with Tate JA and stated that the Court was bound to apply the ambiguity requirement as stated by Mason J in Codelfa until the High Court said otherwise. However, Ferguson and McLeish JJA did not consider it necessary to address the question of whether surrounding evidence was admissible to identify ambiguity, because the issue was not raised on appeal.[65]
[65]Ibid 178-9 [231]-[232].

In Zhang v ROC Services (NSW) Pty Ltd,[66] Leeming JA said that ‘little [was] to be gained from analysing [the] reasoning [of Tate JA in Apple and Pear] in any detail’ because no reference was made to Victoria v Tatts Group Ltd.[67] In his Honour’s opinion, the High Court in Tatts Group clarified that the true rule did not include an ambiguity requirement.[68]
[66](2016) 93 NSWLR 561.
[67]Ibid 580-1 [80], citing Victoria v Tatts Group Ltd (2016) 328 ALR 564 (‘Tatts Group’).
[68]Ibid 580 [79], quoting WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd (2016) 341 ALR 467, 478 [59] (Barrett AJA). See, also, Cherry (2017) 96 NSWLR 548, 566 [79] (Leeming JA).

With respect, I do not consider that Tatts Group[69] impacts on the reasoning of Tate JA in Apple and Pear for the following reasons:
[69](2016) 328 ALR 564.

(a) Although in Tatts Group there was no reference to the ambiguity requirement, the agreement in dispute specifically referred to the 1991 Act (as defined), to which the Court had regard for the purpose of construing the agreement. Because the constructional choice was resolved by reference to the 1991 Act, being a matter referred to in the text of the contract, reference to surrounding circumstances was not necessary.[70]
[70]Ibid 575 [51]-[53], 580 [75], 581 [84]. See, also, Thomas Prince, ‘Still Defending Orthodoxy: The New Front in the War on Codelfa’ (2018) 46 Australian Bar Review 156, 157-9.

(b) In fact, at trial and in the Court of Appeal of Victoria, the case had been conducted on the agreed basis that:

(vii) ‘[r]eference can only be made to the surrounding circumstances for the purpose of resolving the meaning of language which is ambiguous or susceptible to more than one meaning’;[71] and
[71]Victoria v Tatts Group Ltd [2014] VSCA 311, [91]-[93] (Nettle, Osborn and Whelan JJA).

(viii) the language was ambiguous.[72]

These issues were not the subject of contest in the appeal to the High Court.

(c) The proposition that the Court proceeded without reference to Codelfa because it was not in issue on appeal, rather than the Court intended to implicitly clarify the true rule, is supported by the fact that Codelfa was not even cited in the Court’s reasons. It is most unlikely that the High Court would have intended to resolve the ‘important question on which intermediate courts of appeal are currently divided’[73] without reference to that question or Mason J’s statement in Codelfa.

[72] Tatts Group Ltd v Victoria [2014] VSC 302, [37] (Hargrave J).

[73]Mount Bruce (2015) 256 CLR 104, 134 [118] (Bell and Gageler JJ).

In Cherry v Steele-Park, Leeming JA opined that the High Court decision in Simic v New South Wales Land and Housing Corporation[74] similarly supported the proposition that the High Court had rejected the ambiguity requirement.[75] With respect, the passages relied upon[76] purported to do no more than apply the principles stated in Mount Bruce and Woodside, which for reasons set out above did not establish that surrounding circumstances were admissible for the purpose of identifying ambiguity.[77]
[74](2016) 260 CLR 85 (French CJ, Kiefel, Gageler, Nettle and Gordon JJ).
[75](2017) 96 NSWLR 548, 567 [80]-[82].
[76](2016) 260 CLR 85, 95 [18] (French CJ), 111 [78] (Gageler, Nettle and Gordon JJ).
[77]See Thomas Prince, ‘Still Defending Orthodoxy: The New Front in the War on Codelfa’ (2018) 46 Australian Bar Review 156, 157-9.

Conclusion

In my opinion, reference to the Second Agreement as a whole, together with the EPC Contract and the SoP Act, both of which are referred to in the Second Agreement, demonstrate that the purpose of the Second Agreement was to resolve a dispute between the parties relating to the defendant’s claims for DLDs and the Performance Securities, and the plaintiff’s claims for progress payments.

I accept the defendant’s submission that the precise subject matter of the Second Agreement is unclear and the subject reference of the Second Agreement, being ‘Delay Liquidated Damages (“DLDs”)’ is susceptible of more than one meaning.

Reference to the surrounding circumstances demonstrates that the subject of the discussions between the parties in the lead up to the Second Agreement included both:

(a) the defendant’s entitlement on a continuing basis to enforce disputed DLDs following the date for practical completion stipulated in the EPC Contract by:

(i) set-off against progress payments; and/or
(ii) claims on the Performance Securities;
(‘the General Dispute’); and

(b) the defendant’s entitlement to enforce the disputed August DLDs in September 2019 by:

(i) set-off against the August Certified Claim; and/or
(ii) claims on the Performance Securities;
(‘the August Dispute’).

For convenience, I repeat the operative part of the Second Agreement with notations in bold:

1. BWF will continue to offset any DLDs against payments or any amounts due to SGRE for the above project [Cl 1].
2. SGRE undertakes not to object to or oppose any such offset (other than for mathematical mistakes apparent in the DLDs calculations) [Cl 2(a)] and additionally will not exercise its rights under or in connection with the security of payment legislation in relation to this matter [Cl 2(b)].
3. BWF will accordingly not exercise its rights to draw on the Performance Securities in its possession in relation to this matter [Cl 3].

In my opinion, a reasonable businessperson in the position of the parties would have understood the subject matter of the Second Agreement to be the General Dispute, for the following reasons:

(a) There is no reference in the subject or the terms of the Second Agreement which purports to limit the DLDs or the certified progress payments to those that had accrued in August 2019.

(b) The defendant’s contention that the Second Agreement was limited to the August Dispute is inconsistent with cl 1, which plainly made provision for a continuing right to offset future claims for DLDs against future certified progress payments.

(c) It is essential to the defendant’s contention that the words ‘in relation to this matter’ in cl 3 refer only to the August Dispute. The same words appear in cl 2(b) and, if they are read as limited to the August Dispute, an inherent inconsistency appears in the Second Agreement as follows:

(ix) Clause 1 relates to the offset of continuing and future liabilities for progress payments.

(x) Therefore cl 2(a), being the plaintiff ‘undertakes not to object to or oppose any such offset’, must also relate to future liabilities.

(xi) However, on the defendant’s submission, cl 2(b), being the plaintiff ‘additionally will not exercise its rights under or in connection with the security of payment legislation’, only relates to the August Certified Claim.

It is accepted that a term allowing a set-off against a certified claim is not a valid defence to a SoP Act claim. Accordingly, a promise not to exercise SoP Act rights with respect to the August Dispute, but not with respect to future offsetting claims, would render cls 1 and 2(a) meaningless with respect to any entitlement to offset after the August Certified Claim.

In my opinion, the plaintiff’s interpretation is to be preferred because:

(a) it gives meaning to cls 1 and 2(a);

(b) Clauses 1 and 2(a) indicate that the purpose of the Second Agreement was to provide a mechanism for offsetting future DLD claims against future certified progress payments and there is nothing in the Second Agreement which indicates a contrary intention; and

(c) the defendant’s contention requires a strained construction where cl 2(a), being the first part of the sentence, relates to the future claims, but cl 2(b), being the second part of the same sentence, relates only to the August Dispute.

Counsel for the defendant submitted that there is little or no business commonsense in the defendant agreeing to forego its rights in the future to claim for unpaid DLDs under the Performance Securities in exchange for a right of set-off.

A court should be very wary before applying the so-called ‘business commonsense’ test and should not weigh the commerciality of the agreement.[78] What constitutes business commonsense ‘may itself be a topic upon which minds may differ’[79] and ‘bad bargains are not of themselves “unbusinesslike”’.[80]
[78]Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5, [27]-[38] (Basten JA, with whom Giles and Tobias JJA agreed).
[79]Maggbury (2001) 210 CLR 181, 198 [43] (Gleeson CJ, Gummow and Hayne JJ).
[80]Lindsay-Owen v Winton Partners Funds Management Pty Ltd [2017] NSWCA 78, [20] (Payne JA).

The current case is a paradigm example of why a court should not engage in the exercise of determining whether, as a matter of business commonsense, the defendant would not have entered into an agreement on the terms which I have found to be consistent with the words chosen by the parties.

The defendant contends that it would not make business sense to forego rights to claim for unpaid DLDs under the Performance Securities, which total nearly $25 million.

However, a reasonable person in the position of the defendant could conceivably consider that such an agreement was in its commercial interests for a number of reasons including:

(a)the progress claims due under the EPC Contract, to be offset against the DLDs, totalled $20,251,246,[81] even though the final payment of $13,619,413 plus GST was not payable until practical completion, which would not occur until 2020;
(b)offsetting DLDs against progress payments would maintain the amount available under the Performance Securities for other claims that might arise under the EPC Contract;
(c)not claiming under the Performance Securities may preserve its relationship with the plaintiff on whom it relied for completion of the project; and
(d)the liability for the DLDs was disputed and calling for payment under the Performance Securities might only allow the defendant to hold the funds until arbitral determination of the plaintiff’s extension of time claims.

[81]Being the total of the August Certified Claim $3,038,036, the September certified claim $3,593,797 and the final payment $13,619,413 (amounts excluding GST).

I make no findings about the above matters and only set out possible explanations to highlight why:

(a) the assessment of business commonsense must be approached cautiously; and

(b) it is inappropriate to embark on an assessment of the relative commerciality of the competing constructions, particularly when the resolution of such assessment would require reference to extensive contested evidence.

I accept that the subject matter of the EPC Contract is ambiguous. Accordingly, regard can be had to the negotiations referred to above, but only to the extent that they identify:

(a) background facts known to both parties; and

(b) the agreed subject matter of the EPC Contract.

The negotiations do not assist in identifying the subject matter of the Second Agreement. In particular, there is no reference to the Second Agreement only relating to the August Dispute. In my opinion, the defendant’s submissions regarding the negotiations relate to the subjective motivations of the parties and are inadmissible.

Notwithstanding the inadmissibility of the evidence of negotiations, the First Agreement is admissible as part of the surrounding circumstances.[82] Apart from the fact that the parties agreed to enter into an agreement on varied terms, one should not speculate about the parties’ reasons for adopting the words in the Second Agreement. I accept the defendant’s submission that the First Agreement does not throw any light on the objective intentions of the parties in entering into the Second Agreement.
[82]Shepparton Projects Pty Ltd v Cave Investments Pty Ltd (No 2) [2011] VSC 384, [18].

The defendant relied on others matters as supporting the commercial improbability of it agreeing to resolve the General Dispute, including the following:

(a) The urgency demanded by Mr Francisci was said to be consistent with the Second Agreement only relating to the August Dispute.

I consider that this evidence was ‘reflective of [the defendant’s] actual intentions and expectations’ and was therefore ‘not receivable’.[83] In any event, the urgency in respect of which the defendant insisted that a resolution be reached to avoid calling on the Performance Securities with respect to the August DLDs did not indicate that the subject matter of the Second Agreement was more likely to be the August Dispute rather than the General Dispute.
[83]Codelfa (1982) 149 CLR 337, 352 (Mason J).

(b) At the time of the Second Agreement, only the August DLDs had accrued.

I consider the fact that only the August DLDs had accrued does not make it uncommercial for the parties to intend to resolve the General Dispute. The terms of the Second Agreement and the surrounding circumstances show the parties were concerned about the General Dispute.

(c) The parties would not have intended to breach the Consent Deed.

I do not consider this a matter on which any significance can be placed for the purpose of construing the Second Agreement for the following reasons:

(xii) There was no evidence that the parties:

A. raised the issue of whether either the First Agreement or the Second Agreement was in breach of the Consent Deed;

B. had formed any belief that either agreement would breach the Consent Deed; or

C. had any mutual understanding of the consequence of any breach.

(xiii) For the reasons set out below, on a plain reading of the Consent Deed, both agreements were permitted variations.

With respect to the submissions based on absurdity, as Macfarlan JA observed in Jireh International Pty Ltd v Western Exports Services Inc, there is a distinction between a finding of absurdity of operation, in the sense that ‘something must have gone wrong with the language’,[84] and a finding that a contract would have an uncommercial or unbusinesslike operation if given a particular meaning.[85]
[84][2011] NSWCA 137, [63] quoting Maggbury (2001) 210 CLR 181, [43].
[85]Ibid [64] cited in Apple and Pear (2016) 343 ALR 112, 142 [100] (Tate JA, with whom in this respect Ferguson and McLeish JJA agreed).

For the reasons stated above in paragraphs 116 to 121, the defendant’s contentions fall well short of establishing absurdity in the former sense.

Whether the Second Agreement is unenforceable under the terms of the Consent Deed

The Consent Deed relevantly proscribes amendments and variations to the EPC Contract except in limited circumstances, including where the amendment or variation:

(a)results in an additional cost of less than $500,000 and when aggregated with all other variations under the EPC Contract, does not result in an aggregate additional cost exceeding $2 million; and
(b)does not materially impact on or materially alter the performance of the works;
(‘the Clause 3.2(b) Exception’).

Defendant’s submissions

On behalf of the defendant, it was submitted that, although the Second Agreement fell within the ambit of the Clause 3.2(b) Exception, it nonetheless constituted a breach of cls 3.1(e) and 3.2 because the Clause 3.2(b) Exception is ‘concerned with and can only reasonably be understood as being costs arising from changes or variations within the scheme of works agreed to by both parties under the EPC Contract’ for the following reasons:

(a)The chapeau to cl 3.2 refers to ‘change in the scope of the Contract’ but the Clause 3.2(b) Exception does not cover amendments which do not have a monetary effect on the cost of the works.
(b)To apply the plaintiff’s construction would mean that the Clause 3.2(b) Exception would permit all amendments which did not alter the cost of the works, no matter how significant in nature, including amendments to warranties, indemnities, insurances, design obligations, notice provisions, suspension rights, termination rights, confidentiality terms, payment timing, intellectual property rights, events of default etc.

Plaintiff’s submissions

On behalf of the plaintiff it was submitted that the Second Agreement was not precluded by the Consent Deed for the following reasons:

(a)The Second Agreement merely deferred a call on the Performance Securities in relation to DLDs in exchange for valuable consideration and therefore did not have ‘the effect of amending, waiving, releasing, varying or supplementing the Contract’.
(b)If there was an amendment to the EPC Contract, it was permitted by the Clause 3.2(b) Exception because the Second Agreement did not result in additional costs of more than $500,000 and did not impact on the performance of the works.
(c)Any effect on the EPC Contract was minor because it did not affect the final rights and obligations in relation to its subject matter, which will be determined in arbitration and did not affect the defendant’s cash position.

Conclusion

The defendant’s contention that the entry by the parties into the Second Agreement was not enforceable by reason of it being in breach of the Consent Deed is a positive claim which would ordinarily be brought by counterclaim or otherwise in a proceeding. However, the parties proceeded on the basis that this claim should be determined as part of the claim raised by the plaintiff’s originating motion.

In my opinion, cl 3 of the Consent Deed and in particular cl 3.2(b) is unambiguous and not susceptible of more than one meaning. Clause 3.2 precludes any amendment to the EPC Contract with three stand-alone exceptions, each expressed in the alternative. The Second Agreement falls within the ambit of the Clause 3.2(b) Exception because it does not result in an additional cost of $500,000 nor does it materially impact or alter the performance of the works.

The defendant’s contention requires the insertion of words which would limit the Clause 3.2(b) Exception such as where the amendment or variation relates to the ‘scheme of works agreed to by both parties under the EPC Contract’. There is no basis for reading the Clause 3.2(b) Exception as being so limited.

Because I consider that cl 3.2(b) is unambiguous and is not susceptible of more than one meaning, I do not consider it permissible to have regard to the surrounding circumstances. However, reference to the surrounding circumstances and the ‘business commonsense’ considerations relied on by the defendant would not be sufficient to allow the Court to redraw the Consent Deed, as contended for by the defendant. I consider this an example of where reference to allegedly ‘commercially unlikely consequences’ does not permit a departure from the language the parties in fact used.[86]
[86]XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215, [78] (Gleeson JA, with whom Bell P and Emmett AJA agreed).

In the circumstances, it is not necessary to consider the consequences if the Second Agreement had been in breach of the Consent Deed.

Orders

Accordingly, I propose to give judgment for the plaintiff. I will hear the parties on the appropriate orders.

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[2020] VSC 126

20 March 2020