Tanzone Pty Ltd v Westpac Banking Corp

[2000] HCATrans 450

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S37 of 2000

B e t w e e n -

TANZONE PTY LIMITED

Applicant

and

WESTPAC BANKING CORPORATION

First Respondent

PERPETUAL TRUSTEE COMPANY LIMITED

Second Respondent

ARCHIE RAYMOND and MARY ANN RAYMOND

Third Respondents

Application for special leave to appeal

GLEESON CJ
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 13 OCTOBER 2000, AT 10.55 AM

Copyright in the High Court of Australia

___________________

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR D.J. HAMMERSCHLAG, for the applicant.  (instructed by Freehills)

MR R.B.S MACFARLAN, QC:   If the Court pleases, I appear with my learned friend, MR J.P.A. DURACK, for the first respondent.  (instructed by Allen Allen & Hemsley)

GLEESON CJ:   There is information from the Deputy Registrar that, as requested by me, she has notified the parties, or the legal representatives of the parties, that I hold some shares in Westpac.  I understand nobody objects to me sitting.  Yes, Mr Jackson.

MR JACKSON:   Your Honours, this application invites the Court to consider the approach to be taken to a question which arises in the construction of contracts.  In particular, I refer to the ambit of the so-called “absurdity rule” and by that I mean the rule expressed in Fitzgerald v Masters (1995) 95 CLR 420, if I could take your Honours to that. I wanted to refer to two passages where the rule is adverted to. One is at page 426 in the joint reasons of Chief Justice Dixon and Justice Fullagar and your Honours will see at the bottom of that page, the last two lines:

Words may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency.

The second statement of principle is at page 437 in the joint reasons of Justices McTiernan, Webb and Taylor where their Honours said about point 4 on the page:

It is trite law that an instrument must be construed as a whole.  Indeed it is the only method by which inconsistencies of expression may be reconciled and it is in this natural and common sense approach to problems of construction that

justification is to be found for the rejection of repugnant words, the transposition of words and the supplying of omitted words –

Now, it is one thing, as in Fitzgerald v Masters, to say that a word like “inconsistent” must, in a context, be treated as meaning, for example, not inconsistent but the present case goes far beyond that and, in our submission, far beyond the decided cases on construction.  Your Honours, I emphasise the words “on construction” because the temptation to elide construction and rectification can be great, in our submission, if not always fully recognised that it is being succumbed to.  This case, in our submission, raises the issue somewhat acutely because the applicant was not an original party to the lease and thus was not party to any communings or mutual understandings about it and the relationship between the applicant and the respondent is one governed purely by the terms of the instrument.

Now, I will give your Honours in just a moment the references to support what I am about to say but may I say that the general principle to be applied to construction questions is that the Court gives effect to the words used by the parties:

If the words used are unambiguous the Court must give effect to them, notwithstanding that the result may appear capricious…..or unjust.

Thirdly, that it is no part of a court’s function to make a new contract for the parties.  Could I give your Honours two references in that regard.  The first is the Court’s decision in Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99. I wanted to take your Honours first to what was said by Chief Justice Barwick at page 105. Your Honours will see the last paragraph on the page and his Honour said:

It may be granted that the computation of the amount of the annual figure according to the expressly stated formula in cl. 2 may produce results which may not commend themselves to a person seeking to achieve an actual or even approximately constant value of the licence fee.  But if that result is produced by the application of the words in which the parties have expressed themselves, it is no part of the function of a court –

I will not read out the remainder of the sentence.  Your Honours will see it set out there.  At page 107, about point 2 on the page in the second new paragraph, his Honour adverted to the fact:

Thus this is not a case of resolving ambiguity for, in my opinion, there is none.  To accept the respondent’s submission would require a radical change to be made in the language chosen by the parties to express their intention.

Justice Gibbs at page 109, about point 4 on the page – your Honours will see the passage commencing:

It is trite law that the primary duty of a court –

The passage goes through to the reference to Bottomley's Case about six or eight lines from the bottom of the page, but could I refer particularly to two observations of his Honour.  One is at about point 6 on the page where his Honour says:

If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different.  The Court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust.

Finally, Justice Stephen at page 114 in the passage commencing at about point 5 on the page, the paragraph commencing “I can discern no ambiguity”, going through to the end of the next paragraph. 

Now, as can be seen from the passage from Justice Stephen’s observations, that case was, in a sense, speaking very broadly, factually, something, in a sense, an obverse of this were money was not able to be recovered even though it might have been thought that the parties intended that it should be done.  Could I also give a very recent reference and I do not think I need perhaps to go to the passage but if one sees Johnson v American Home Assurance Co (1998) 192 CLR 266 at 273, paragraph 19, where Justice Kirby was endeavouring to summarise various principles to be applied in relation to insurance policies. He say about halfway down page 272:

no court is authorised, under the guise of construction, to make a new contract for the parties which is at odds with the terms of the contract to which they have agreed to.

And, at the end of that paragraph:

If, in those words, there is only one meaning, a court may not reject it simply because it regards the result as unfair or otherwise undesirable.

Justice Hayne, who spoke for the majority of the Court in the case, at page 284, paragraph 40, at the end of that paragraph, just spoke of the basic principle being that the extent of colour provided by a policy:

is determined by the words of the policy.

Now, I am sorry I have taken a moment in relation to the general approach to construction but if one takes the present case one sees that the actual words, “and operation of the clause in question” are, in our submission, very clear.  Your Honours can see the clause at pages 51 and 52.  Could I say several things about the application to the clause of the “absurdity test”?  The first is this that if one is testing a provision by reference to its potentially absurd commercial results a factor of some relevance, as the primary judge said, is that senior officials of the first respondent did not so regard it.  Your Honours will see that at page 14, paragraph 34.                His Honour said:

While extraordinary results were shown on the evidence to arise on the assumption of particular inflation rates, that is not sufficient to carry the day.  The review clause is workable, it is effective, and it is not contrary to any other provision of the lease.  Perhaps the strongest evidence that it is not absurd is the reaction of those in Westpac Private Bank where they were asked to approve an advance against the property –

et cetera.

GLEESON CJ:   What was that?

MR JACKSON:   What he means by that, your Honours, goes back to page 8, paragraphs 17 to 20 and what happened was that the property was advertised for sale, subject to the lease, and your Honours will see at the top of page 9 that a barrister and a solicitor were contemplating putting in a bid, they applied for finance to Westpac.

GLEESON CJ:   But all this is predicated on the rough accuracy of what appears on the bottom of page 8 in inverted commas, is it not?

MR JACKSON:   No, it goes a little further than that, your Honour, with respect, because what happened was ‑ ‑ ‑

GLEESON CJ:   If that is what people thought this meant, that is:

8% or CPI whichever is greater.”

Then, on your construction, it does not mean anything even remotely like that.

MR JACKSON:   No, I am sorry, your Honour.  Your Honour will see halfway through paragraph 18 on page 9 and going through to page 10 that the precise potential operation of it was put to the bank.

McHUGH J:  

not less than 62% ‑ ‑ ‑

MR JACKSON:   Yes, put to the bank and the bank was prepared to lend money, saying, as your Honours will see at the bottom of page 9, “the quality of the tenant” and the money available, to put it shortly.  That is one point.  The second point we would seek to make about the provision in relation to absurdity is that it by no means necessarily has an operation which is bizarre.  Now, there are two calculations that are relied upon by the respondent which are in the book in the last two pages, pages 1089 and 109, and, of course, if one adopts, as they do ‑ ‑ ‑

GLEESON CJ:   Does this mean that if we granted special leave to appeal the issue before this Court would be whether or not we agreed with the Court of Appeal that this result was absurd?

MR JACKSON:   No, your Honour, what it would – well, I mean, in the end of course, but ‑ ‑ ‑

GLEESON CJ:   It does not sound like a special leave question.

MR JACKSON:   Your Honour, what I am seeking to say is that what the Court of Appeal has done has been to give the notion of absurdity a wider operation than it should have and in doing so has disregarded, with respect, the limitations imposed by the ordinary canons of construction.  What we seek to say is essentially what the Court of Appeal has done has been to treat construction as rectification.

McHUGH J:   But did not the court look at it in terms of a mistake, that the words expressed in those last three lines of clause 2.02(i) were so absurd that it was obvious there had been a mistake.

MR JACKSON:   Your Honour, that would really take me to the third point I wanted to mention about absurdity.  If I could pass over the second for the moment, but the third point is – and this is why we say, in a sense, there has been a confusion of construction and rectification - that the alteration proposed by the Court of Appeal was not self-evidently the only possible way of altering the clause if there was to be some alteration of it.  What I mean by that is that what was done by the Court of Appeal was to apply its formula to the rent at the start of each two-year period, that is, to the rent which had been increased by the 8 per cent by subclause (i).

Your Honours, an alternative approach, equally open, one might think, just looking at the concepts involved, would have been to apply the formula as it is to the initial rent, that is, the initial rent not escalated by reference to the rent calculated in accordance with clause 8 in which case quite different financial results are arrived at, but the point we seek ‑ ‑ ‑

McHUGH J:   But the difference between – and the rent under subclause (i), “8% compounded annually” and what you could get under subclause (ii), and given that this lease was entered into on 15 March 1985 is just extraordinary.

MR JACKSON:   Could I just say in relation to that that at the time - and this appears from the documents that one sees at page 101, if you take the CPI figures which had existed in the three quarters before the option agreement was entered into, what you find is that in one of those quarters there had been actually a drop in the index but the operation of the clause compares, taking in the figures of that time with the figures that would be arrived at by the operation of the 8 per cent clause in 2.02(i), in any event.  Your Honour can see that.  I referred to page 101 which sets out the various CPI figures.  What you will see then is that at page 102, paragraph 5, it refers to annexure D and applies the CPI figures covering a number of relevant periods and the figures that are arrived at are set out on page 103 as being the total rent payable over the term.

Now, the highest of those is 3.786 million which, your Honours, is not very different from the figure at the top of page 102 which is the total rent payable if you just apply the 8 per cent compounding referred to in subclause (i).  That is why we seek to say, your Honours, that the operation of the clause was one, if one looked at the provisions in being at the time, was one that is not particularly dramatic at all.

GLEESON CJ:   Mr Jackson, the principle in Fitzgerald v Masters cannot be confined to cases where you can remedy the situation, to use a neutral word, by inserting one word or by deleting one word.

MR JACKSON:   I do not suggest that, your Honour.

GLEESON CJ:   So that in between ABC v APRA, on the one hand, and Fitzgerald v Masters on the other, there must be questions of degree and the judgment that was made by the Court of Appeal in the present case all turned upon a question of degree, did it not?

MR JACKSON:   Well, with respect, it turned on the adoption of a view as to what was – and one is talking about, of course, a question of construction.  I mean, it is clear what the result of the clause, as stated, is, and this really is the third point I was seeking to mention before.  If it be that it was possible to say this clause is expressed in this way but that is obviously an error and it must mean something else, then it may well be that that is a case to which one can the absurdity clause arises.  But, if one goes to the particular case one can see that that is not he only possible way in which the issue might have been dealt with.

May I seek to indicate what I am saying in that regard by taking your Honours back to the clause at page 51.  Now, so far as subclause (ii) is concerned, at the top of page 52, what the Full Court did was to apply the formula that it devised to the amount of the rent immediately payable pursuant to the review date.  What I was seeking to say was this that an equally open approaching, making the assumption there was an error, would be to apply the formula as it is to the initial rent. What I mean by that is that if one looks at subclause (ii) and it deletes the words “immediately prior to the Review Date” and instead inserts “at the commencement of the lease” one would arrive at an equally open possibility and one which would arrive at different results because of the non-application of the terms of the increases contemplated by paragraph (i).

The point I am seeking to make about it is that what would be the right answer is something to be determined, if at all, by the application of any question of rectification and if there is more than one right answer, however the actual words might be expressed, then, in our submission, it is not the case to be determined by reference to a question of absurdity.

GLEESON CJ:   We do not need to hear you, Mr Macfarlan.

The decision of the Court of Appeal in the present case turned on the application of well‑settled principles to the facts and circumstances of the particular case.  Those principles admit of judgment on questions of degree and the view of the Court of Appeal as to the degree here involved was a view that was open to it.  The case does not warrant a grant of special leave and the application is refused with costs.

AT 11.15 AM THE MATTER WAS CONCLUDED