High Court reconfirms object commercial purpose test for construction of contracts

This is a summary of a High Court decision made in the case of Ecosse Property Holdings Pty Ltd v Dee Gee Nominees Pty Ltd [2017] HCA 12 in dispute of a contract that restricted the sale and purchase due to planning restrictions.

Facts

The parties had entered into a long-term lease (99 years) for land, in circumstances where they were unable to effect a sale and purchase due to planning restrictions. The following amendments were made to a clause governing the payment of rates, taxes and other outgoings in the relevant lease agreement (clause 4):

“AND [the Lessee] will pay all rates taxes assessments and outgoings whatsoever which during the said term shall be payable by the tenant in respect of the said premises.”

The appellant argued that the above clause required the lessee to pay all rates, taxes and outgoings in respect of the land, whilst the respondent argued that the modifications to the clause only obliged the lessee to pay for imposts that were levied on it in its capacity as a tenant.

Neither party disputed during proceedings before the Court of Appeal (Vic) that the amendments left clause 4 ambiguous, and neither party objected to reference being made to the deleted words for the sake of interpreting clause 4.

Decision

A majority (4-1) of the High Court conceded that, prima facie, the clause was ambiguous and either the appellant’s or the respondent’s interpretations were plausible.1 As such, their Honours favoured interpreting the clause by reference to what a reasonable person in the position of the parties would have interpreted clause 4 (including its deleted words) to mean in light of the circumstances known at the time that the agreement was executed (objective test).2

The majority ultimately accepted the appellant’s construction of clause 4, and overturned the decision of the Court of Appeal. As part of their interpretation of clause 4 through the objective test, their Honours placed great emphasis on understanding the apparent commercial purpose of the lease. Reference was made to clause 13, which set out the intention of the parties to the lease:

‘in circumstances in which the parties were unable to convey a freehold estate in the land, they had chosen instead to convey a leasehold estate for almost a century for a fixed sum.’3

As such, the commercial purpose of the lease was to ‘recreate’ conditions (including a fixed value consideration of $70000 for the 99-year lease with no future adjustment) that would have otherwise existed if the land had been sold. Their Honours concluded that, as the lease purported to place the lessor as close in position to that of a vendor of land, the liabilities in clause 4 would have otherwise been transferred to a (quasi-) purchaser upon transfer of title. Therefore, the lessee was required to pay all rates, charges and obligations for the period of the lease.4

Nettle J dissented, preferring a construction of clause 4 that only considered the language used by the parties in light of the circumstances in which the contract was made.5 With reference to the strikeout of “excepting land tax”, “Landlord or” and “but a proportionate part…”, his Honour agreed that the proper interpretation of clause 4 was to oblige the lessee to only pay for imposts that were levied on it in its capacity as a tenant. His Honour did not view the ‘commercial approach to construction’ as ‘a licence to alter the meaning of a term that is ‘clear and fairly susceptible of one meaning only.’6

Implication

A possible implication of this case is establishing a High Court precedent in interpreting ambiguous clauses; greater weight will be placed on the presumed commercial purpose of an agreement than the language used and adopted by parties to the agreement. Nettle J was particularly critical of the majority’s approach, citing that the court ‘is not authorised under the guise of construction to make a new contract for the parties at odds with contract to which they have agreed.’7

This post was written by Julien Rosendahl, Graduate, Brisbane.

Endnotes

  1. Ecosse Property Holdings Pty Ltd v Dee Gee Nominees Pty Ltd [2017] HCA 12, at [15].
  2. Ibid, at [16].
  3. per Kiefel, Bell, Gordon JJ at [18].
  4. Ibid, at [25-26].
  5. per Nettle J, at [98].
  6. Id.
  7. Ibid, at [98].

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