Home | Cases | Codelfa Construction Pty Ltd v State Rail Authority of NSW

 

Key information

Court
High Court of Australia

Appeal from
Court of Appeal (NSW)

Trial
Supreme Court of New South Wales

Judge
Ash J

Arbitration
Decision of Arbitrator

Issues
Implied Terms
Frustration

Full case
AustLII

Case citator
LawCite

Australia

Codelfa Construction Pty Ltd v State Rail Authority of NSW

[1982] HCA 24; (1982) 149 CLR 337

 

In brief

Facts

The Commissioner for Railways (subsequently the State Rail Authority of NSW) accepted a tender by Codelfa to excavate tunnels for a railway line in NSW. The contract provided for Codelfa to complete works by certain dates and complete all work within 130 weeks. Codelfa commenced work, three shifts a day, seven days a week. The work was noisy and caused vibrations which led to several applications for injunction by local residents and Council. The injunction was granted with the result that Codelfa was reduced to working six days a week (no work on Sundays) and only two shifts a day. At the time of contracting it had been the common assumption of the parties that the work would not be subject to an injunction; this was based on faulty advice.

Codelfa claimed additional sums from the Commissioner to cover additional costs and lost profits associated with not being able to work 24/7 as anticipated. It argued that:

  • either there was an implied term as to the workable hours, which had been breached and would entitle Codelfa to claim damages; or
  • the contract had been frustrated by the injunctions and Codelfa should be entitled to recover on a quantum meruit

The matter first proceeded to an Arbitrator in accordance with the contract's Scott v Avery clause. An appeal to the Supreme Court of NSW followed, then to the Court of Appeal and ultimately to the High Court.

Held (in brief)

On the issue of an implied term

All members of the High Court agreed that there was no implied term; even if it could be supposed that a term was needed to give business efficacy to a contract, it was not at all clear what the parties would have agreed had they turned their mind to the matter. Consequently, there was no term that could be implied that was 'so obvious that it goes without saying'. In discussing the criteria for implication of terms, Justice Brennan (at para 20) referred - with approval - to the High Court's judgement in Secured Income Real Estate v St Martin's Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, at p 606 (per Mason J)

"(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that 'it goes without saying';

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract."

On the issue of frustration

The majority considered that the contract had been frustrated (Justice Brennan dissenting on this point). The question was whether the situation resulting from the injunctions was 'fundamentally different' from that contemplated by the contract. Based on the factual findings of the Arbitrator, Justice Mason stated [para 55]:

'... the performance of the contract in the events which have occurred is radically different from performance of the contract in the circumstances which it, construed in the light of surrounding circumstances, contemplated.'

 

Some more detail

Facts

Justice Brennan set out the facts leading to this dispute in his judgment; all quotes are from his Honour's judgment.

The Commissioner for Railways was a corporation created by the NSW Parliament and was appointed 'as the constructing authority for the Eastern Suburbs Railway in Sydney' [para 1]

One of the contracts associated with the construction was for 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, an underground excavation at the site of the Bondi Junction Station, the concrete lining of tunnels and some escalator shafts and the construction of the concrete roadbed.'

Codelfa's tender for this work was successful and an agreement was executed between them and the Commissioner (State Rail Authority of NSW subsequently took over the functions of the Commission). The contract incorporated several documents, including specifications and drawings, general conditions etc. The contract required Codelfa to commence work:

[para 5] 'within 60 days after being given notice to proceed. It was further required to complete certain stages of the work by particular dates and to complete all work within 130 weeks of the date of the notice to proceed. A programme of construction had to be prepared and subject to approved revisions it had to be adhered to. It was provided that time should be of the essence of the contract, but cl. G.44(7) gave a measure of protection to Codelfa if it should be delayed in performing the contract. That sub-clause provided:

"(a) The Commissioner shall not be entitled to cancel the Contract ... because of any delays in the completion of the works or the separable parts thereof owing to causes beyond the control or without the fault or negligence of the Contractor if:

(i) the Contractor shall notify the Engineer in writing of the cause of any such delay or default within ten days of the beginning thereof or within such further period as the Engineer shall grant for the receipt of such notice; and

(ii) on receipt of such notice from the Contractor under this sub-clause, the Engineer shall ascertain the facts and the extent of the delay, and extend the time for completing the works when, in the opinion of the Engineer, the findings of fact justify an extension.

(b) . . .
(c) . . .
(d) The Engineer's findings of fact shall be final, conclusive and binding

on the Contractor". (at p396)


Following notice to proceed, Codelfa commenced work, operating three shifts a day. This 'generated considerable noise and vibration' [para 6] and involved, at times, stones and debris being blasted out of the area. Soon after the work commenced a resident of Woollahra sought an injunction and subsequently others did as well, including the local Council. Injunctions were granted which restrained Codelfa working between 10pm and 6pm each day and subsequently Codelfa also gave an undertaking not to carry out excavation work on Sunday [para 6].

Codelfa claimed from the Commissioner an additional sum to cover the additional costs incurred as a result of not being able to work three shifts a day, or work on Sunday and to recover foregone profits as a result of the change. It was argued that [para 7]:

'either a warranty should be implied in the contract for breach of which Codelfa should recover damages, or the contract should be held to have been frustrated by the issue of the injunctions and Codelfa should recover on a quantum meruit an amount which, assumedly, would be more than the price payable under the contract.'

The claim was submitted to arbitration.

Decision of Arbitrator

Findings of fact

The Arbitrator made certain findings of fact as follows. Briefly, he found that [para 29 of Mason J's judgment]

'that there was a common understanding ... that the works would be carried out on a three shift continuous basis six days per week and without restriction as to Sundays. He also found that the Authority had represented to Codelfa, and that it had accepted, that no injunction would be granted in relation to noise or other nuisance. He further found that the works could not be carried out in accordance with methods and programmes agreed between the parties unless Codelfa worked three shifts a day for six days a week.

The findings were set out in more detail in the judgment of Justice Mason at para 48 of his judgment (para 17 was contained in the judgment of Justice Aickin):

"14. The Parties to [the Contract] each entered into such Contract on the common and mutual understanding and on the basis that:

(a) the works the subject of the Contract should and would be carried out by the Contractor on a 3-shift continuous basis six days per week and without restriction as to Sundays, and

(b) the work to be performed was inherently of a noisy and disturbing nature and the work or substantial parts thereof was to be carried out in close proximity to areas of residential neighbourhood, and

(c) no Injunction or other Restraining Order could or would be granted against the Contractor in relation to noise or other nuisance arising out of the carrying on of the said works on such basis.

15. The matter mentioned in paragraph 14(c) was represented by the Principal to the Contractor and was accepted as the situation by the Contactor prior to and at the time of entering into the Contract. ...

16. The said works could not in fact be carried out by the Contractor in

accordance with methods and programmes agreed to by the parties and in accordance with the contractual stipulations as to time of performance unless the works were carried out on the basis mentioned in paragraph 14(a) hereof.

17. In view of the foregoing neither party foresaw the likelihood or possibility of any restrictions being imposed on the carrying out of the works on the basis mentioned in paragraph 14(a) by reason of Injunctions or Restraining Orders issued by the Court on grounds of noise or other nuisance arising out of the carrying out of the works.

18. Restraining Orders and Injunctions were in fact issued by the Court

on grounds of noise and other nuisance arising out of the carrying out of the works by the Contractor on the basis mentioned in paragraph 14(a) hereof the effect of which was (inter alia) to prohibit and preclude the works from being carried out by the Contractor on the said basis and to cause the Contractor to incur additional cost in the carrying out of the works.

19. The said works could not in fact be carried out by the Contractor in accordance with methods and programmes agreed to by the parties without substantial noise and other disturbances arising therefrom or in connection therewith by reason of the inherently noisy and disturbing nature of the work.'

On the issue of implied term

His Honour held that there was an implied term [set out at para 5 of Lord Aickin's judgment]:

"to the effect that upon the issuing of the Restraining Orders and Injunctions referred to in paragraph 18 the Principal would grant to the Contractor a reasonable extension of time for the completion of the works and would advise the Contractor of the fact of the grant of the extension of time within a reasonable period after the issuing of the Restraining Orders and Injunctions became known to the Principal or ought to have become known to the Principal."

On the issue of frustration

The Arbitrator 'felt precluded by law [based on an earlier decision of the Privy Council] from considering the question of frustration' (Justice Aickin, para 8).

Held (Trial - Justice Ash)

Implied term

Justice Ash held that a 'term should be implied in the contract which excused the Contractor from performance in accordance with the terms of the contract in the events which happened.' (para 9 of Justice Aickin's judgment)

In addition to the term as implied by the Arbitrator (set out above), Justice Ash held that the following should be implied (set out at para 14 of Justice Brennan's judgement)

". . . that the works, the subject of the contract, could be carried out by the contractor on a three-shift continuous basis six days per week and without restriction as to Sunday and that no injunction or other restraining order would or could be granted against the contractor in relation to noise or other nuisance arising out of the carrying out of the said works on such basis."

Frustration

Justice Ash concluded that the contract had not been frustrated.

Held (Court of Appeal)

Implied term

The Court of Appeal held that there was an implied term upon which Codelfa could rely. The couched it in these terms (para 14 of Justice Brennan's judgement)

"If the Contractor is prevented from executing the works on the basis of a three shift continuous operation six days per week without restriction as to Sundays by the terms of an injunction granted to restrain any nuisance caused by the inherently noisy or disturbing nature of any work performed in accordance with the Contract (including any requirements made by the Engineer ///) the Commissioner within a reasonable period thereafter shall grant and notify to the Contractor a reasonable extension of time in respect of any delays in the completion of the works thereby occasioned and shall indemnify the Contractor against any additional costs or expenses thereby reasonably incurred."

Did not consider it necessary to consider the issue of frustration.

Held (High Court)

Justice Stephen

On the issue of the implication of a term in the contract, Justice Stephen agreed with Justice Mason

On the issue of the application of the doctrine of frustration, his Honour agreed with what was said by Justices Mason and Aickin.

Justice Mason

Implied term

Noted the appellant's claim that a term needed to be implied to give business efficacy to the contract - to make it workable. In relation to implication of terms generally, his Honour stated (my emphasis)

[para 5] The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties' actual intention; the implication of a term is designed to give effect to the parties' presumed intention.

[para 6] For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question.

[para 7] Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. ...

[para 8] The basis on which the courts act in implying a term was expressed by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939) 2 KB 206, at p 227 in terms that have been universally accepted: "Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. . . " (at p347)

His Honour then outlined the conditions necessary for implying a term as set out by the majority in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40

'(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that 'it goes without saying';

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract.'

In relation to this case his Honour questioned the Court of Appeal's conclusion that it was 'legitimate to take into account the common beliefs of the parties as developed and manifested during their antecedent negotiations'. [para 10]. His Honour noted that the ' broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument ... Although the traditional expositions of the rule did not in terms deny resort to extrinsic evidence for the purpose of interpreting the written instrument, it has often been regarded as prohibiting the use of extrinsic evidence for this purpose. ...' [para 11]

After citing a number authorities discussing the admissibility of extrinsic evidence as to surrounding circumstances, his Honour continued (my emphasis):

[para 22] 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. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. ...

[para 23] It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

[para 24] Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.

[para 25] There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances. ...

[para 26] The importance of this evolution of the law as it affects the construction of contracts is that it centres upon the presumed, rather than the actual, intention of the parties. Once it is accepted that in the construction of the contract account is taken of the presumed intention of the parties it naturally follows that account should also be taken of their presumed intention when the court is called upon to decide whether a term is to be implied. The existence of the remedy of rectification and the purpose which it serves makes it obvious that the actual intention of the parties cannot constitute the basis of an implied term.

[para 27] However, it is equally obvious that in making the inquiry whether a term is to be implied the court is no more confined than it is when it construes the contract. For the implication of a term is an illustration of the process of construction, ...

In relation to the implication of a term in this case, his Honour stated:

[para 29] The implication of the term found by the Court of Appeal rests on findings made by the Arbitrator based on circumstances surrounding the making of the contract, including evidence of the discussions between the parties which preceded entry into the contract. Thus the Arbitrator found that there was a common understanding (described as a "belief" by the Court of Appeal) that the works would be carried out on a three shift continuous basis six days per week and without restriction as to Sundays. He also found that the Authority had represented to Codelfa, and that it had accepted, that no injunction would be granted in relation to noise or other nuisance. He further found that the works could not be carried out in accordance with methods and programmes agreed between the parties unless Codelfa worked three shifts a day for six days a week.

[para 30] The first question is whether, in the light of the principles as I have explained them, it was legitimate to look to this material on the issue of implication of a term. I think it was. The discussions which generated these findings were not negotiations about the terms of the contract. ... The relevant discussions were ... directed to the question of price. Their object was to enable Codelfa to inform itself of what was involved in the work and to cost it so as to arrive at a price for inclusion in its tender. The consequence is that the discussions did not have the character of negotiations in the course of which the parties gradually evolved the terms of a bargain ultimately embodied in written form. Had the discussions been of that kind then ... recourse to them would have been prohibited for the purpose of interpreting the contract by reference to the parties' actual intentions as expressed before entry into the contract. As it was, the relevant discussions reflect neither the preliminary consensus that merged into the written contract, nor statements made during the course of negotiations indicative of the unilateral intentions of each party. Instead the evidence revealed a matter which was in the common contemplation of the parties yet was not a contractual provision actually agreed upon for the simple reason that it was a matter of common assumption.

His Honour then considered whether or not it was possible to identify a term 'so obvious that it goes without saying' into the contract. In particular, his Honour noted the difficulty of determining what the parties would have agreed, had they turned their mind to the issue:

[para 31] To say that the maintenance of three eight hour shifts a day for six days a week was a matter of common contemplation between the parties is not enough in itself to justify the implication of a term. Lord Atkin's example of the sale of a painting believed by both seller and buyer to be the work of an old master (Bell) (1932) AC, at p 226 is a striking illustration. It must appear that the matter of common contemplation was necessary to give the contract business efficacy and that the term sought to be implied is so obvious that it goes without saying.

[para 32] In this case the problem, as I see it, lies not so much in saying that the implication of a term is necessary to give business efficacy to the contract, as in concluding that the particular term to be implied is so obvious that "it goes without saying".

...

[para 35] ... there remains an insurmountable problem in saying that "it goes without saying" that had the parties contemplated the possibility that their legal advice was incorrect and that an injunction might be granted to restrain noise or other nuisance, they would have settled upon the term implied by the Court of Appeal or that implied by the Arbitrator and by Ash J at first instance. I doubt whether the fiction of treating the parties as reasonable and fair makes the problem any the less difficult. This is not a case in which an obvious provision was overlooked by the parties and omitted from the contract. Rather it was a case in which the parties made a common assumption which masked the need to explore what provision should be made to cover the event which occurred. In ordinary circumstances negotiation about that matter might have yielded any one of a number of alternative provisions, each being regarded as a reasonable solution.

...

[para 37] My reluctance to imply a term is the stronger because the contract in this case was not a negotiated contract. The terms were determined by the Authority in advance and there is some force in the argument that the Authority looked to Codelfa to shoulder the responsibility for all risks not expressly provided for in the contract. It is a factor which in my view makes it very difficult to conclude that either of the terms sought to be implied is so obvious that it goes without saying.

On this point his Honour concluded that, if Codelfa is entitled to any relief it would be 'more appropriately founded on the doctrine of frustration than on the implication of a term'.

 

Frustration

His Honour referred to a number of authorities on the law of frustration and indicated he agreed with the approach adopted by Lord Reid and Lord Radcliffe in Davis Contractors.

[para 39] 'Lord Reid said that the task of the court is to determine "on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances", "whether the contract which they did make is . . . wide enough to apply to the new situation: if it is not, then it is at an end" (1956) AC, at pp 720-721 . Later he described frustration as "the termination of the contract by operation of law on the emergence of a fundamentally different situation" (1956) AC, at p 723 .

[para 40] 'Lord Radcliffe (1956) AC, at p 729 said:

". . . frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. . . . It was not this that I promised to do."

His Lordship, noting that special importance attaches to an unexpected event, observed "There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for".'

His Honour noted, however, that [para 41]:

'... to express a preference for this view of frustration as against the theory of the implied condition and other suggested bases is not to cast doubt on the authority of earlier decisions. This is of critical importance because the earlier cases provide many illustrations of the proposition that a contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist or be available, neither party undertaking responsibility in that regard, and that common assumption proves to be mistaken ...

His Honour observed that, while the assumption in such cases must be found in the contract,

[para 42] 'it is legitimate to look to extrinsic evidence in the form of relevant surrounding circumstances to assist us in the interpretation of the contract, unless its language is so plain that recourse to surrounding circumstances would amount to no more than an attempt to contradict or vary the terms of the contract'.

His Honour then observed that, while the event giving rise to frustration is normally one which 'supervenes after the making of the contract':

[para 43] 'in principle there is no reason why a mutual assumption arising from a mistaken view that an activity is immune from injunctive relief should not attract the principle of frustration. No doubt it is more difficult in such a case to show that the grant of injunctive relief was not foreseen or could not reasonably have been foreseen, but if that can be shown then the doctrine of frustration should apply. The injunction is a supervening event though it does not stem from any alteration in the law.' (my emphasis)

His Honour noted that an 'unusual element in the present case is that the parties appear to have received, accepted and acted on erroneous legal advice that the contract work could not be impeded by the grant of an injunction to restrain noise or other nuisance, advice which was based on an erroneous interpretation' of the law (para 45).

His Honour observed (at para 46) that, while the doctrine of frustration was 'closely related to the concept of mutual mistake', in general relief for 'mutual mistake is confined to mistakes of fact, not of law':

[para 46]: 'If the common contractual assumption is of present fact it is a case of mutual mistake; if the assumption is of future fact it is a case of frustration... the distinction being that in one case the contract is void ab initio and in the other it is binding until the assumption is falsified. Here the mistake is not one of present fact; it is either a mistake as to future fact or a mistake of law. Even if it be a mistake of law, this is not, I think, fatal to the application of the doctrine of frustration. The unsatisfactory distinction between a mistake of fact and one of law has not so far been carried over into frustration and I see no reason to further complicate the doctrine by invoking this distinction. ...

Applying these principles, his Honour described the critical issue as being:

[para 47] 'whether the situation resulting from the grant of the injunction is fundamentally different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances. The contract itself did not require that the work be carried out on a three shift continuous basis six days a week without restriction as to Sundays. But it required completion of the works within 130 weeks. And Codelfa with its tender had submitted a construction programme which involved a three shift continuous basis six days a week. By cl. S.6 of the specifications Codelfa was required to submit a revised programme of work to the Engineer for his determination within thirty calendar days of the issue of a notice to proceed under the contract. This Codelfa did. Again it made provision for the method of operation already mentioned. It was accepted by the Engineer.

His Honour then noted the findings of the Arbitrator (extracted above) and continued, observing that the submission of the work program and subsequent specifications, provided a link between the contract and antecedent discussions to enable the Court to conclude that:

[para 49] the contract contemplated that completion would be achieved within the time stipulated by the method of work already mentioned, it being assumed that it could not be disturbed by the grant of an injunction.

His Honour rejected the Authority's argument that this was inconsistent with certain terms in the Contract [para's 50-51] and discusses some of the clauses raised by the Authority in this respect. He continued [at para 55]:

'There is, of course, no inconsistency between the conclusion that a term cannot be implied and the conclusion that events have occurred which have brought about a frustration of the contract. I find it impossible to imply a term because I am not satisfied that in the circumstances of this case the term sought to be implied was one which parties in that situation would necessarily have agreed upon as an appropriate provision to cover the eventuality which has arisen. On the other hand I find it much easier to come to the conclusion that the performance of the contract in the events which have occurred is radically different from performance of the contract in the circumstances which it, construed in the light of surrounding circumstances, contemplated.' (my emphasis)

His Honour then addressed the issue of whether the Arbitrator (provided for in the contract's Scott v Avery clause) retained jurisdiction to hear the matter and concluded he did and that the matter should be referred back to him (para 65).

Instead we should follow the course of remitting the matter to the Arbitrator so that he can exercise the jurisdiction which has hitherto been denied him. (at p366)

[para 66] '... the findings so far made by the Arbitrator go a long way towards a conclusion that the contract has been frustrated. Naturally they stop short of that because the issue was taken from him ... Consequently, he did not consider whether performance of the contract in the changed circumstance was fundamentally different from the performance contemplated by the contract. That is something that remains for him to consider, although, having regard to the view I have taken of his findings, I cannot think that it will cause him much difficulty.'

His Honour then considered the issues of the contract's Rise and Fall Clause (para 69 - his Honour agreed with Aickin J on this issue) and the Arbitrator's Power to Award Interest (paras 70-79) and the Power to Award Compound Interest (para's 80-84) before concluding at para 85.

Justice Aickin

Implied term

His Honour noted that it was possible to imply terms into standard form contracts, however it will be difficult than would be the case for negotiated contracts [para's 12-13].

His Honour referred to the 'officious bystander' test for implication of a term and noted that the question of what, if any, term ought to be implied, must be 'considered as at the date of the contract and with reference to the significance of possible events' (para 15)

Applied to this case (at para 14):

The possible answers to the officious bystander seem to me to be a matter for speculation and are not a matter about which I can feel sufficient certainty to warrant the implication of a term.

 

Frustration

His Honour described Codelfa's claim as follows (para 17):

'... that the grant of the injunction had such a drastic effect upon its construction programme, both physically and financially, that it was transformed into an obligation radically different from that which it had undertaken on the common erroneous understanding.'

On the law of frustration, his Honour noted:

[para 20] '... The doctrine is now generally expressed as depending on changes in the significance of the obligations undertaken and the surrounding circumstances in which the contract was made.'

His Honour referred to a number of authorities and, in particular, accepted the law as stated by Justice Stephen in Brisbane City Council v Group Products Pty Ltd [1979] HCA 54 (pages 159-163). His Honour continued:

[para 25] There is one further comment to be made on the judgment of Stephen J. in the Brisbane City Council Case. He quoted from Lord Radcliffe the following passage: "... it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for" ...

Applying this test, his Honour concluded that the contract in this case was 'frustrated by the grant of the injunction prohibiting work on the tunnels between the hours of 10 pm and 6 am' (para 28)

[para 30] It is plain on the findings of the Arbitrator that both parties proceeded upon the assumption that the works could be lawfully completed within the specified time by continuous work on a three-shift basis for six days a week. The situation became one in which it was impossible to perform the contract in accordance with its terms, impossible because court orders restrained the mode of performance, which was held to constitute a nuisance, but which was critical to the completion of the works within the time allowed.

And further:

[para 36] In my opinion the grant of the injunction produced frustration in the true sense of that term. It had become unlawful to perform the work in a manner which would have complied with the requirement of the contract, a requirement well known to both parties. The fact that both parties to the contract had an understanding of the law which led them to believe that the performance of the contract on the three-shift basis could not be interfered with by any private or public litigant seeking to restrain a nuisance caused by the performance of the work, does not prevent the application of the doctrine of frustration.

His Honour then considered the operation of the rise and fall clause in this case (from para 39), the issue of the jurisdiction of the arbitrator (para's 55-56) and the matter of interest (from para 57)

Justice Wilson

His Honour agreed with Justices Mason and Aickin that 'in the circumstances of this case the correct conclusion is not that a term must be implied in the contract but that the grant of an injunction on 28 June 1972 restraining the contractor in the manner of execution of the work may well have frustrated the contract...' His Honour adopted the reasoning of Justices Mason and Aickin in relation to these conclusions.

Justice Brennan

His Honour first observed that the injunctions had been granted on the basis that 'the noise and other disturbances exceeded what was justifiable having regard to the enterprise on which Codelfa was engaged. (para 10)

Implied term

His Honour noted that (para 15) the 'implication of a term thus falls to be considered upon the terms of the written contract' and the

'meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used. ... Both the internal and extrinsic context in which a word or phrase is used may throw light upon the meaning with which the parties must be taken to have used it, though an extrinsic fact known to only one of the contracting parties can shed no light upon the meaning with which that word or phrase was used by the other or others.'

His Honour continued (on the issue of extrinsic evidence):

[para 17] 'The necessary foundation for the creation of contractual rights and obligations is the agreement of the parties, and their agreement is equally necessary to vary those rights and obligations prior to discharge. A term implied in a contract is stamped with a contractual character because it is a part of the contract. It cannot derive that character from extrinsic circumstances which do not evidence a contract. ... where the term propounded is said to be implied in a contract, that term must inhere in its express terms, and reference to extrinsic circumstances is permissible only to construe the contract and to understand its operation.

...

[para 18] Although the necessity for the term to be implied must appear from and in the express terms of a contract, not from extrinsic circumstances, those circumstances may aid in ascertaining the meaning of the express terms and in identifying the matters to which they relate. The meaning and operation of the express terms, thus established, are the sole foundation for implying a term which the parties have not expressed. ...

His Honour continued (on the issue of criteria for implication of terms):

[para 20] ... If it appears from the written contract that a term is to be implied, there are conditions which any proposed term must satisfy. They were stated by the majority judgment in B.P. Refinery ... and adopted by Mason J with the concurrence of the other members of this Court in Secured Income Real Estate v St Martin's Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, at p 606. Those conditions are:

"(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that 'it goes without saying';

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract."

Applied to the present case his Honour concluded (at para 21) that there was 'no necessity for the implication of a term' and therefore the criteria were not satisfied (in fact, his Honour observed that the only one of these conditions arguably satisfied was the 'reasonable and equitable' requirement (para 25)). His Honour continued:

[para 23] 'The contract reveals no lacuna which must be filled to make it work. It works perfectly well. It is a case of a contractor who promised to complete work within a time which was too short having regard to the hours during which it was lawful to work and the speed at which the construction team was capable of working. It was not an express term of the contract that Codelfa would work three shifts a day and, having regard to the environment in which the works were to be performed, Codelfa could not lawfully have promised that it would do so. Codelfa's promise to complete the works was a promise to do so lawfully. It was not an express term of the contract that Codelfa would not be restrained by injunction if it committed an actionable nuisance. ... No doubt the Commissioner and Codelfa shared a mistaken belief that Codelfa would be able to work three shifts a day lawfully, or at least without liability to restraint by injunction .... That mistake could not give rise to an implied term. If, at the time when the parties were signing the contract, the officious bystander had asked what did they intend in the event of the issue of an injunction restraining work during the night shift, they would have replied: "We have thought of that. It cannot happen." They cannot be presumed to have agreed upon a term inconsistent with their common belief.'

 

Frustration (dissenting on this point)

In response to the claim that the contract was frustrated when the first injunction was ordered, his Honour stated:

[para 29] '... it cannot be said that when the parties discovered that Codelfa was amenable to the ordinary jurisdiction of the court to restrain a public nuisance a fundamentally different situation was created to which the contract did not apply. The correction in the minds of the parties of their common legal error produced no new situation either in fact or in law: it merely revealed to the parties the mistake under which they laboured when they entered into the contract. The discovery of a mistake as to a legal restriction which at all material times affects the manner in which a contract might be performed is a different thing from a supervening circumstance which arises in the course of its performance and affects the circumstances in which the contract is to be performed.'

His Honour then referred (at para 30) to the comments of Viscount Simon in British Movietonews Ltd v London and District Cinemas Ltd (1952) AC 166, at p 185, on the limits of the doctrine of frustration:

"It is of the utmost importance that the action of a court, when it decides that in view of a supervening situation the rights and obligations under a contract have automatically ceased, should not be misunderstood. The suggestion that an 'uncontemplated turn of events' is enough to enable a court to substitute its notion of what is 'just and reasonable' for the contract as it stands, even though there is no 'frustrating event,' appears to be likely to lead to some misunderstanding. The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate - a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point - not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation."

His Honour then referred (at para 30) to the judgment of Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3 (1956) AC 696, at p 729, who stated that frustration occurs:

"... whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do."

Applying this test, his Honour noted it was (at para 31):

'... necessary to refer to the contract to ascertain what Codelfa was bound to perform and then to inquire whether performance in the changed situation affected by the supposed frustrating event is within the contractual promise. Codelfa was bound to complete the contract works within the time agreed or extended in accordance with cl. G.44(7), and it is clear that the three-shift basis for doing the work could not lawfully be persisted in once the noise and vibrations attendant upon the excavations began. Yet Codelfa had agreed to perform the contract according to its terms irrespective of its difficulty. On what supervening circumstance could it rely to say "non haec in foedera veni"? ...'

[para 32] 'The injunction was not a supervening alteration of the law which made illegal the further performance of the contract in the manner stipulated therein. The circumstances in which Codelfa was bound to perform the contract works did not change on 28 June 1972. Prior to that time - though the parties may not have known it to be so - Codelfa was required to avoid the commission of an actionable nuisance in performing the contract, and the injunction required it to avoid the commission of an actionable nuisance in performing its contract after that time. The circumstances in which performance was called for were no different from those which affected the performance of the contract from the time when it was made. The injunction limiting working hours did no more than enforce judicially a limitation by which Codelfa was already legally bound. ...'

His Honour concluded that the appeal in the frustration action was rightly dismissed.

His Honour then considered the issue of the rise and fall clause, the application of the Scott v Avery (arbitration) clause and the issue of interest.

 

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