Codelfa Construction Pty Ltd v State Rail Authority of NSW

The State Rail Authority engaged Codelfa Construction under a contract for services to excavate tunnels in the Eastern Suburbs allowing for the development of the Eastern Suburbs railway line. The works were to include "the excavation of two single track tunnels commencing at Edgecliff and running through Woollahra to Bondi Junction, an open cut excavation at the site of the Woollahra station, and an underground excavation at the site of the Bondi Junction station." supposedly providing crown immunity. within the contract, the parties started arbitration proceedings in 1976 to establish whether Codelfa Construction could recover the additional costs by reason of an implied term or alternatively if the contract was frustrated to recover the reasonable value of the services provided (quantum meruit). As the arbitration proceedings had no jurisdiction with regard to frustration of the contract, they dealt principally with the issue of an implied term in the contract. The arbitrator found that a term could be implied into the contract to the effect that the deadline could be extended if workable hours varied. Both parties issued summons in the Supreme Court of NSW to reach a determination on a number of questions raised in the proceedings. Codelfa Construction alleged that the contract had been frustrated and further alleged that an implied provision of the contract, to pay a reasonable sum for work performed, had not been met. The State Rail Authority's allegations were to the effect that Codelfa Construction was bound to complete the works. Following the arbitrator's decision, a case was commenced in the Supreme Court of New South Wales. In his judgment Justice Ash found that the contract had not been frustrated, instead he extended the implied term found by the arbitrator to also account for the understanding that work's could not continue where an injunction was granted. On appeal, Justices Reynolds, Glass and Samuels of the Court of Appeal varied Justice Ash's implied term but reached the same conclusion that an implied term could be found in the contract but that the contract was not frustrated. Codelfa Construction then appealed to the High Court challenging the finding regarding the action in frustration. The State Rail Authority cross-appealed on a number of grounds centrally challenging the court's assertion that a term could be implied into the contract. == The High Court decision ==

Construction According to the parol evidence rule, it can be said that where a contract is wholly in writing "verbal evidence is not allowed to be given of what passed between the parties, either before the written document was made, or during the time that it was in a state of preparation, so as to add to or subtract from, or in any manner to vary or qualify the written contract." In order to ascertain whether the contract is wholly or partly in writing the court will consider the oral statements which parties claim forms part of the final contract. On this point the law is uniform in Australia and the United Kingdom. The rationale behind contractual construction, as explained by J.W. Carter, is not to infer the subjective intentions of the parties or give meaning to a term of a contract consistent with those subjective understandings. Instead, the goal is to give meaning to the contract that is consistent with what a reasonable person in the position of the contracting party would have understood the term to mean. In implementing this principle, British and Australian courts have diverged in their allowance of extrinsic evidence which is said to form part of the "surrounding circumstances" of a contract when determining the meaning and effect of contractual terms. In English law courts may consider the "matrix of fact" surrounding the formation of the contract. The "matrix of fact" extends to the words and conduct of the contractual parties, common industry knowledge and any other factor which may have affected the reasonable person's understanding of the language of the contract. The Court will interpret the meaning of the contract in light of these circumstances. That is that "frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance called for would render it a thing radically different from that which was undertaken by the contract". Therefore, the critical issue which the court had to determine was whether the situation resulting from the grant of an injunction rendered the situation "radically different" from that which was contemplated at the time of contractual formation. On this point, Justice Aickin said: == Consequences ==

A number of decisions made by the High Court following Codelfa contradicted the 'true rule' including Maggbury Pty Ltd v Hafele Australia Pty Ltd, Pacific Carriers Ltd v BNP Paribas, and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd. Following this apparent shift in judicial opinion, numerous intermediate appellate courts and lower courts followed the principles established by Investors Compensation Scheme Ltd v West Bromwich Building Society. the court indicated that the decision remained good law in Australia. In that case, the High Court noted that ambiguity must first be established before referring to extrinsic evidence. The court held that the use of the term "may" introduced ambiguity into the contract, and could refer to an exhaustive or inexhaustive number of considerations. This has attracted criticism from many academics, the bench stated that Codelfa remained good law in Australia. Justices Gummow, Bell and Heydon noted that primary judges and intermediate appellate courts are ‘bound to follow that precedent' until the High Court holds otherwise. As an application for special leave is a procedural motion rather than a substantive hearing the statements of the bench did not establish a binding precedent. However, this application for special leave is notable for being published in the Australian Law Reports and representing the unambiguous judicial opinion of three justices of the High Court. Chief Justice French, as well as Justices Nettle and Gordon made clear that lower courts had been incorrect in identifying Western Export Services Inc v Jireh International Pty Ltd, and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd, This allows the contract to be read in light of circumstances that both parties agreed at the time of formation were relevant to the interpretation of terms. Legal scholars have noted that this is a significant area of law, in which a binding decision in favour of Investors Compensation Scheme Ltd v West Bromwich Building Society, supported the conclusion that Investors Compensation Scheme Ltd v West Bromwich Building Society, However, the Western Australian Supreme Court has stated that Codelfa remains good law in Australia in Technomin Australia Pty Ltd v Xstrata Nickel Australia Operations. ==References==