Dear Colleagues;

While I post with more hesitation than usual, given that neither contract law nor equity are my main areas of interest, I thought the recent decision of the High Court of Australia in Simic v New South Wales Land and Housing Corporation [2016] HCA 47 (7 December 2016) http://www.austlii.edu.au/au/cases/cth/HCA/2016/47  would be of interest to those who do know something of the areas. While I can’t be sure, it may be that this also represents French CJ’s final decision on a private law matter, as his Honour is due to retire early in the New Year.

In this case the respondent Corporation had engaged a builder, Nebax, to undertake construction. The Corporation’s practice was to require the issue of a “performance bond” in their favour to an amount presumably designed to cover their costs should the construction not be performed properly. The “bond” was in the nature of an unconditional undertaking from the ANZ bank to pay the beneficiary an amount of money when it was demanded. However, in organizing the bond, Simic acting for Nebax gave the wrong description of the Corporation to the ANZ. Instead of the bond being issued in favour of the Corporation by its proper name, it was issued in favour of a non-existent entity “New South Wales Land & Housing Department trading as Housing NSW ABN 45754121940”.

When the Corporation (presumably after some default on the part of Nebax) went to ANZ to ask for payment, the bank refused to pay as the names did not match. There were then two main issues : (1) could the bond be “construed” as meaning to refer to the Corporation? Or, if not (2) could the bond be rectified to represent the common intention of the various parties?

The lower courts had held that the bond could be construed to the refer to the “correct” party; the High Court here (a 5 member bench of French CJ, Kiefel, Gageler, Nettle and Gordon JJ) disagreed and held that the contract could not be so construed- the words were clear, they were just wrong, and the bank had no obligation to make further enquiries beyond the words used to find the identity of the beneficiary of the bond.

However, the High Court also all went on to hold that the bond could be rectified to represent the actual intention of the parties. Here there are comments which refer to a difference of approach between Australian law and UK law, or at least some suggested approaches under UK law. French CJ in particular refers to some remarks of Lord Hoffmann and suggests they do not represent the law of Australia:

 

[19] There has been debate in the United Kingdom about reliance upon the "real" as distinct from objectively attributed intentions of the parties in relation to the rectification of contracts[32]. One line of reasoning in the debate is that reliance upon an objectively ascertained common intention for the purpose of rectification serves to bring about coherence with the common law of contract[33]. In Chartbrook Ltd v Persimmon Homes Ltd[34], Lord Hoffmann's obiter remarks supporting a requirement for an objectively attributed common intention for the purposes of rectification commanded the assent of his colleagues. However, that objective test was not argued in this case and does not represent the common law of Australia as it presently stands. A change in the law would require full argument in a case in which the question was relevant to the outcome.

 

Kiefel J, who delivered another separate concurring judgment, also comments on these issues as follows:

 

[47] In Chartbrook, Lord Hoffmann suggested[72] that, in cases of rectification, "the terms of the contract to which the subsequent instrument must conform must be objectively determined in the same way as any other contract". The approach to which his Lordship referred was that applied under the common law to the interpretation of contracts, namely, "what an objective observer would have thought the intentions of the parties to be". His Lordship clearly considered a consistency of approach – to rectification and to interpretation – to be both warranted and necessary.

[48] Lord Hoffmann's view involves a departure from the traditional approach of the courts to rectification. Its utility has been questioned. It has been observed[73] that it is difficult to see why a prior agreement, objectively determined, should override the later instrument, unless it reflects the parties' actual intentions. The need for consistency which his Lordship thought desirable may also be questioned. Rectification is an equitable remedy which is concerned with a mistake as to an aspect of what an instrument records and with the conscience of the parties. The common law, on the other hand, deals with the interpretation of the words chosen by the parties to reflect their agreement and it does so pragmatically, by reference to considerations such as business efficacy.

[49] It is not necessary to express a concluded opinion on these and other matters to which Lord Hoffmann's view gives rise. Although that aspect of Lord Hoffmann's reasons commanded the assent of other members of the House of Lords, it was not necessary to the decision in Chartbrook. Moreover, whilst other aspects of the reasons in that case have been referred to in some recent decisions of this Court[74], his Lordship's view in this regard has not been the subject of any consideration. It was not the subject of argument in this appeal, which should be approached by reference to settled principle.

 

As someone not versed in the nuances of the debate, it seems that the issue is whether rectification is a search for the actual (ie to some extent “subjective”) intentions of the parties (which will still of course have to be evidenced by some external factors), or whether it can only be done where there is clear objective evidence of an agreement of some sort and other matters can be ignored. At any rate, it seems that the strong hints from the High Court here are that the former approach is the one Australian courts should take. It is perhaps significant that Kiefel J, of course, is about to become our next Chief Justice.

Regards

Neil

 

 

NEIL FOSTER

Associate Professor

Newcastle Law School

LLB/LLB(Hons) Program Convenor

Faculty of Business and Law

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