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University of Otago Law Theses and Dissertations |
Last Updated: 16 September 2023
COMING TO A CONSENSUS: VECTOR GAS AND THE ADMISSIBILITY OF PREVIOUS NEGOTIATIONS IN CONTRACT INTERPRETATION
MELISSA JANE HAMMER
A dissertation submitted (in partial) fulfillment of the degree of Bachelor of Laws (Honours) at the University of Otago
October 2010
ACKNOWLEDGMENTS
To my supervisor, Jessica Palmer, thank you for your knowledge and enthusiasm in this topic and for making me feel on track with every visit.
To Sarah Simmers, Stuart Walker and Barry Allan, thank you for your contributions at my seminar, they were invaluable.
To my caring friends, those in 9N12, and the girls at Littlebourne, thank you for all your encouragement and support and for making me laugh when I needed it.
To Rowan, thank you for supporting me throughout my degree and for always being there to accompany me on well-needed breaks.
Finally, to my parents, thank you for your continual support and encouragement in all my endeavors and for allowing me to mess up your kitchen table throughout this process.
“There are times when an author is incompetent, and even intellectually and morally dishonest, if he fails to attack an often repeated statement of law...”
Corbin “The Interpretation of Words and the Parol Evidence Rule” (1965) 50 Cornell LQ 161
TABLE OF CONTENTS
INTRODUCTION
Suppose A and B enter into an agreement for the supply of gas. The agreement is the result of negotiations executed through written correspondence. Following conclusion of the agreement, the contracting parties dispute the meaning of a clause regarding price. A contends price was exclusive of transmission costs whereas B contends price was inclusive of transmission costs. Fortunately the pre-contractual correspondence sheds light on the meaning to be accorded to the clause. One would think this solves the dispute. However, previous negotiations are traditionally not admissible to aid in the interpretation of the agreement.
This scenario arose in the recent New Zealand Supreme Court decision, Vector Gas Limited v Bay of Plenty Energy Ltd1 and presented the Court with an opportunity to reconsider the rule excluding previous negotiations in a contract interpretation dispute. The rule can be stated as follows:2
The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear.
The House of Lords in Chartbrook Ltd v Persimmon Homes Ltd3 had recently confirmed the existence of the rule in the England. Lord Hoffmann in an extensive albeit obiter statement upheld the rule on the basis of pragmatic considerations. It may have been thought New Zealand would follow the House of Lords. However, three years prior the Supreme Court had demonstrated a more liberal approach than England and ended the ban on the admissibility of subsequent conduct in a contract interpretation dispute.
2 Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL) at 913.
3 [2009] UKHL 38; [2009] 1 AC 1101.
Unfortunately, the Supreme Court offered no consensus on the issue of the admissibility of pre-contractual negotiations. The bench delivered five very diverse judgments, indicative of the wide diversity of opinion concerning the core principles of contract interpretation. In Part One this paper addresses the general principles of contract interpretation. Contract interpretation although one of the most practically important areas of commercial law tends to be the most intractable. This Part also outlines the establishment and rationale of the exclusionary rule and the exceptions that have developed. Part Two will analyse the Supreme Court’s treatment of the exclusionary rule and its exceptions. Each judgment is evaluated to determine what consensus, if any, was reached regarding the admissibility of previous negotiations. In light of the decision the current state of the law will be considered to determine if previous negotiations are now taken to be admissible by lower courts and on what basis. The unfortunate conclusion is the existence of the rule is uncertain. The final part of this paper contends previous negotiations should be admissible, in principle and in practice, as relevant evidence in a contract interpretation dispute.
PART ONE: INTERPRETATION AND THE EXCLUSIONARY RULE
1.1 Contract Interpretation Principles
Dispute can occur when parties to an agreement have differing views on their legal rights and obligations. These differences must be settled through the process of interpretation.4 However, the process is not straightforward and there are fundamental divisions amongst commentators, judges and practitioners regarding the governing principles and rules. Broadly, the purpose of interpretation is to ascertain the meaning of a document in accordance with the parties’ intentions. The governing principles aim to operate under the central objective of contract law by giving effect to the reasonable expectations of honest men.5
Interpretation is to be achieved objectively; a feature deeply entrenched in the law of contract.6 This approach is said to serve the needs of commerce, providing certainty and predictability.7 The inquiry is into what a reasonable person, with all the background knowledge reasonably available to the parties at the time, would ascertain the document to mean.8 Under a strict version of the theory the courts task is commonly understood to be the ascertainment of the parties “presumed intent” through the external standard of reasonableness.9 The contracting parties are assumed to be reasonable men, devoid of their
4 The terms “interpretation” and “construction” are conventionally used interchangeably, but some consider construction to be a broader, distinct concept: Gerard McMeel “The Principles and Policies of Contractual Construction” in Andrew Burrows & Edwin Peel (eds) Contract Terms (Oxford University Press, Oxford, 2006) 27 at 32-33.
5 Lord Steyn “Contract Law: Fulfilling the Reasonable Expectations of Honest Men” (1997) 113 LQR 433.
6 David McLauchlan “Objectivity in Contract” [2005] UQLawJl 28; (2005) 24 UQLJ 479 at 488 and Hugh Collins “Objectivity and Committed Contextualism in Interpretation” in Sarah Worthington (ed) Commercial Law, Commercial Practice (Hart Publishing, Oregon, 2003) 189 at 189-190.
7 Yoshimoto v Canterbury Golf International Ltd [2000] NZCA 350; [2001] 1 NZLR 523 at [60].
8 Investors Compensation Scheme, above n2, at 912.
9 There are some fundamental issues as to the precise meaning of objectivity and the consequences of an objective test in regards to the actual intent of the parties. See later discussion at 2.2.A.i and 3.1.
personal quirks.10 The court embodies this impersonal author. As a consequence evidence of subjective intention is irrelevant to the inquiry.11 Subjective intention can be defined as inner, uncommunicated or concealed intention in the parties’ mind.
Traditionally contract ascribed to a conservative literal approach to interpretation, embodied in the plain meaning and parol evidence rules. The parol evidence rule limits interpretation exclusively to the four corners of the document where a contract is in writing. Extrinsic evidence is inadmissible to “add to, vary, or contradict” the contract.12 The plain meaning rule prescribes that where the words of the contract are plain and unambiguous then extrinsic evidence in inadmissible to show the parties intended something different.13 Many practitioners and judges ascribing to a literalist approach claim there should be strict adherence to these rules.14 However, the rules have experienced demise in the last few decades with a shift away from literalist approaches adhering to the black letter of the contract.15 Numerous exceptions16 to the parol evidence rule have developed to such an extent some claim the rule is devoid of any substance.17 A lack of ambiguity is also no longer
10 Lord Hoffmann “The Intolerable Wrestle with Words and Meanings” (1997) 114 S Afr Law Journal 656 at 661-662; Steyn, above n5 at 433-434 claims reasonableness postulates community values and the law will not protect unreasonable expectations.
11 McLaren v Waikato Regional Council [1993] 1 NZLR 710 at 731.
12 Jacobs v Batavia and General Plantations Ltd [1924] 1 Ch. 827; Edwards v O’Connor [1991] 2 NZLR 542; See also Burrows, Finn & Todd Law of Contract in New Zealand (3rd ed, Wellington, LexisNexis NZ, Ltd 2007) at 156; Kim Lewison The Interpretation of Contracts (4th ed, London, Sweet & Maxwell, 2007) at 85-86.
13 Benjamin Developments Ltd v Robert Jones (Pacific) Ltd [1994] 3 NZLR 189 (CA).
14 See Richard Calnan “Construction of Commercial Contracts, Construction & Interpretation: A Practitioners Perspective” in Contract Terms, above n4 at 19; Don Holborow “Contract Interpretation” [2004] NZLJ 272.
15 See Yoshimoto, above n7, at [61]; Steyn, above n5, at 440.
16 Established exceptions to the rule include allowing parol evidence to show a collateral agreement; custom or trade usage; where the agreement was not intended to be the entire contract; or to show a contract is not yet in force due to a unfulfilled condition precedent.
17 McMeel “The Principles & Policies of Contractual Construction” above n4, at 45 proclaims “the parol
evidence rule is dead”. The UK Law Commission has concluded the rule no longer exists for all practical purposes. See Law of Contract: The Parol Evidence Rule, Report No 154, Cmnd 9700 (1986) at 2.7, 2.8, 2.45. Cf Robert Stevens “Objectivity, Mistake, and the Parol Evidence Rule” in Contract Terms, above n4, at 107 who prescribes the rule is still alive.
viewed as a barrier to the admission of extrinsic evidence.18 Rather the plain meaning rule is relegated to the proposition that where words have their natural and ordinary meaning, this is a strong indication they were used in that sense. Courts will not easily accept linguistic mistakes.19
Much of the change can be attributed to the modern approach expounded in Lord Hoffmann’s re-statement of contract interpretation principles in Investors Compensation Scheme (‘ICS’).20 His oft-cited five principles sought to assimilate the interpretation of contractual language with the interpretation of everyday language. He observed a fundamental change in the law with the rise towards a contextual approach to interpretation.21 Under a contextual approach language cannot be divorced from the context and the surrounding circumstances and “matrix of fact” will always be available to aid the court, subject to certain restrictions.22 This approach is closely aligned with a purposive interpretation, which requires the court to examine meaning in light of the contract’s purpose.23 An interpretation that contradicts or
18 See Pyne Gould Guinness Ltd v Montgomery Watson (NZ) Ltd [2002] NZEmpC 79; [2001] NZAR 789 at [29]; Starrenburg v Mortre Holdings Ltd [2004] NZCA 179; (2004) 21 NZTC 18,696 at [43]; Ansely v Prospectus Nominees Unlimited [2004] 2 NZLR
590 (CA) at [36].
19 Investors Compensation Scheme, above n2, at 913.
20 David Cabrelli “Interpretation of Contracts, Objectivity and the Elision of Consent Reached Through Concession and Compromise” (2010) U. of Edinburgh School of Law Working Paper No. 2010/06 at 3. Available at Social Science Research Network: http://ssrn.com/abstract=1556335. Cabrelli claims the decision established a presumptional shift, equivalent to a greater sub-conscious willingness to apply a contextual, rather than formal, literal analysis.
21 The change is said to derive from Prenn v Simmonds [1971] 1 WLR 1381 and Reardon Smith Line Ltd v
Hansen-Tangen [1976] 3 All ER 570.
22 For example, the context relied on must be known and reasonably available to both parties. See Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 at [49]. Further restrictions are exclusions of subjective intent and previous negotiations.
23 Ewan McKendrick “The Interpretation of Contracts, Lord Hoffmann’s Re-statement” in Commercial Law,
Commercial Practice, above n6, at 159 recognises ICS was more concerned with language than a purposive approach is, nonetheless courts and commentators tend to align the decision with this approach; Gerard McMeel “The Rise of Commercial Construction in Contract Law” (1998) LMCLQ 382; F Douglas, “Modern Approaches to the Construction and Interpretation of Contracts” (2009) 32 Aust Bar Review 158.
frustrates that purpose cannot be one held by a reasonable party.24 The interpretation must also be one that yields to commercial commonsense.25 The law does not require the court to give a meaning the parties did not intend. The New Zealand Court of Appeal adopted Lord Hoffmann’s principles in Boatpark v Hutchinson.26
However, not all greeted Lord Hoffmann’s re-statement with approval. His decision has attracted hostility for “upsetting the horses in the commercial paddock”.27 Essentially critics claim the principles expand the available matrix of fact and add to the high costs of litigation.28 They claim this leads to uncertainty29 and results in unfairness to third parties.30 Critics also object to allowing surrounding evidence to alter natural meaning, effectively permitting the court to impose its own view on the contract.31 They essentially believe in the inherent wisdom of the plain meaning and parol evidence rules.32
24 Prenn, above n21, at 1385; Collins, above n6, at 203, 205-206.
25 Investors Compensation Scheme, above n2, at 913; Antaios Cia Naviera SA v Salen Rederierna AB [1984] 3 All ER 229 at 233.
26 Boatpark Ltd v Hutchinson & Findlay [1999] 2 NZLR 74. The Court has been criticised for doing so without
regard for its affirmation of the plain meaning rule a mere six years earlier in Benjamin Developments. See McLauchlan “The New Law of Contract Interpretation” (2000) 19 NZLULR 147 at 148.
27 See Steyn “The Intractable Problem of the Interpretation of Legal Texts” 25 Sydney Law Rev 25 at 9;
Christopher Staughton “How Do the Courts Interpret Commercial Contracts?” (1999) 58 CLJ 303; National Bank of Sharjah v Dellborg [1997] EWCA Civ 2070 per Saville LJ. Also see discussion of the hostility in McKendrick, above n23; Lord Bingham “A New Thing Under the Sun? The Interpretation of Contracts and the ICS Decision” (2008) 12 Edinburgh L. Rev 374. Cf McLauchlan “The New Law of Contract Interpretation” above n26, at 164-65 who considers the decision to be conservative.
28 Staughton, above n27, at 307; National Bank of Sharjah, above n27.
29 Staughton, above n27, at 306-307; Calnan, above n14, at 18-20; Holborow, above n14, at 272.
30 Alan Berg “Thrashing Through the Undergrowth” (2006) 122 LQR 354 at 359.
31 National Bank of Sharjah, above n27; Calnan, above n14, at 18.
32 McLauchlan “Interpretation and Rectification: Lord Hoffmann’s Last Stand” [2009] 3 NZ Law Review 431 at 432.
1.2 Establishment of the Rule
Before outlining the establishment of the rule excluding prior negotiations for the purpose of interpretation, it is necessary to consider the concept of prior negotiations. Prior negotiations can be defined broadly as any conduct or circumstances, which shed light on the agreement, prior to the formal contract.33 The only prohibition is they must not solely constitute evidence of subjective intent. This paper takes the view a contract is a self-imposed voluntary obligation. A contract may be a formal, comprehensive written document, but also could be a more elusive agreement between parties.34 There may not be one single moment when contractual responsibility comes into being and mutual intentions crystallise.35 Rather the whole transaction should be examined in light of intention. The orthodox rules of offer and acceptance may be foregone for a more global approach to ascertaining agreement.36
The roots of the exclusionary rule can be traced to Lord Blackburn where he proclaimed “a court must look to the formal deed alone”.37 He considered the purpose of a formal contract was to put an end to the disputes which would inevitably arise if one relied on the verbal negotiations of the parties. A century later Lord Wilberforce affirmed previous negotiations
33 For example, prior negotiations could include previous drafts, correspondence, letters, or file notes.
34 Catherine Mitchell Interpretation of Contracts, Current Controversies in Law (Routledge-Cavendish, UK, 2007) at 12-14. Most modern scholars with an appreciation of social sciences regard agreement in this manner. They consider that to take the written agreement as the ultimate expression of the will of the parties may lead to variance with the realities of the agreement. If you reject the plain meaning rule in favor of a contextual approach, you are essentially rejecting the idea that contracts are just formal texts.
35 Gerard McMeel “Prior Negotiations and Subsequent Conduct – The Next Step Forward for Contractual
Interpretation” (2003) 119 LQR 272.
36 Boulder Consolidated Ltd v Tangere [1980] 1 NZLR 560 (CA). See discussion of the approach in Burrows, Finn & Todd, above n12, at 35-36. Paterson, Robertson & Duke, Principles of Contract Law (3rd ed, Lawbook Co, Sydney, 2009) at 28-29 also recognise that the traditional doctrines of offer and acceptance may be unsuited to the some transactions as this classical formation is based on the idea of an identifiable moment of formation. 37 Inglis (A&J) v Buttery (1878) 3 App Cas 552. Blakely & Anderson v De Lambert [1959] NZLR 356 adopted these principles in New Zealand.
were not admissible.38 More recent affirmation can be found in ICS. Lord Hoffmann determined the matrix of fact included “absolutely anything which would have affected the way in which the language of the document would have been understood by the reasonable man”.39 However, principle three excludes previous negotiations from the available matrix of fact.40 The rule has been affirmed in New Zealand on countless occasions.41
1.3 Rationale of the Rule
This section explores the rationale underlying the exclusionary rule, manifested in the pragmatic objections to abandoning the rule. Lord Hoffmann considered the exclusion was justified by “reasons of practical policy”.42 He reasserted this in Chartbrook whereby he proclaimed previous negotiations were capable of raising practical questions different from those created by other forms of background.43
Lord Wilberforce considered the reason for excluding evidence of previous negotiations was not one of technicality or convenience but simply because they are “unhelpful”.44 The inherent nature of negotiations mean the parties’ positions are changing and divergent until
38 Prenn, above n21, at 1384-1385. The New Zealand Court of Appeal approved this decision in Buckley & Young Ltd v Commissioner of IRD [1978] NZCA 22; [1978] 2 NZLR 485. The Court found there were sound reasons for refusing to admit evidence of negotiations.
39 Investors Compensation Scheme, above n2, at 912. Following criticism of the breadth of this principle Lord
Hoffmann clarified in Bank of Credit and Commerce International SA, above n22, at [39] that “absolutely anything” meant there is no conceptual limit as to what can be regarded as background, but this must be relevant material. McKendrick “Interpretation of Contracts and the Admissibility of Prior Negotiations” (2005) 17 SAcLJ 248 at 252 considers this does little to reduce the width of the principle.
40 Investors Compensation Scheme, above n2, at 913. See the text of the principle in the Introduction.
41 See for example Moreton & Craig v Montrose Ltd ([1986] 2 NZLR 496; Hawkers v Vickers [1991] 1 NZLR 399; Air New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218 (CA); Globe Holdings Ltd v Floratos [1998] 3 NZLR 331.
42 Investors Compensation Scheme, above n2, at 913.
43 Chartbrook, above n3, at [38].
44 Prenn, above n21, at 1384.
consensus is reached, which can often be at the very last minute. It is not easily discernible which statements merely reflect the parties’ aspirations, or which exemplify provisional consensus and possibly what the contract ‘actually’ means.45 Throughout the negotiations each party varies their position, making concessions, ultimately trying to gain the balance of the advantage in the final deal.46 Evidence of what has gone before will therefore be of little value.47 Parties will often adopt words that are unlikely to need examining, but which each hoped, in the event of dispute, would be interpreted in their favor.48 If previous negotiations are admissible it is argued parties will be tempted to take advantage of circumstances that subsequently occur.49 The purpose of the formal contract is to therefore end disputes inevitably arising if the matter were left to negotiations.50
Time and expense is a practical objection operating at different levels of the contractual process. Firstly, it is contended if previous negotiations are admissible, fundamental change will result in the negotiating process. More time will need to be spent articulating positions and in pronouncing intentions. It is argued there is the risk of experienced negotiating parties making self-serving statements in the hope of influencing interpretation if dispute does arise.51 More extensive file notes, and even minutes of negotiation meetings, may need to be
45 Chartbrook, above n3, at [38]; Mitchell, Interpretation of Disputes, above n34, at 82.
46 Mitchell, ibid.
47 Calnan, above n14, at 18; Staughton, above n27, at 306; Bingham, above n27, at 389 considers any detailed consideration of the exchanges will lead to excessive emphasis on what the parties wanted to agree and too little on their actual agreement.
48 Hoffmann “The Intolerable Wrestle with Words and Meanings,” above n10, at 668.
49 Collins, above n6, at 195 considers the possibility of parties’ asserting a different intention to that formed to take advantage of the dispute arisen; Catherine Mitchell “Contract Interpretation: Pragmatism, Principle and the Prior Negotiations Rule” ( 2010) 26 Journal of Contract Law 134 at 147 recognises there is a danger in parties deliberately generating interpretation disputes on the basis of what was said in negotiations.
50 A&J Inglis, above n37, at 577.
51 Lord Hoffmann in Chartbrook, above n 3 at [38]; Chartbrook Ltd v Persimmon Homes Ltd [2008] EWCA Civ
183 at [111] per Collins LJ; McKendrick “Interpretation of Contracts and the Admissibility of Prior Negotiations” above n39, at 264.
taken. These recordings, however, are unlikely to solve the inherent problem, as each party’s notes will be embedded with their own interpretation of the negotiations. It is also suggested fundamental change will need to result in the drafting of documents, whereby aims, expectations, intentions, objections and understandings will need to be included.52
Time and expense is also claimed to affect the ability of a practitioner to advise on the meaning of a document. They will be required to regard all the pre-contractual material, which will often be voluminous.53 This will result in more cost and time to the client and results in general inefficiency and inconvenience for the client and lawyer in practice.
Finally, the objection applies to litigation. Time, effort, and examination in the discovery process will increase with the growth in extrinsic evidence.54 Both judges and practitioners will need to deal with large amounts of evidence, ultimately extending the length of hearing.55 The court will no longer be able to construe a document simply by reading it against a background of undisputed facts.56 For many practitioners who regarded ICS with hostility, this is a further burden which is unwelcomed.57 It is also argued the number of interpretation disputes will increase with parties’ having more scope for challenge. This in effect wastes time and expense on attempts to relieve parties from clearly contracted obligations and diverts useful economic activity into pointless litigation. 58
52 This is the ‘VOWEL’ approach to drafting suggested by Dunedin practitioner Stuart Walker, Partner, Anderson Lloyd.
53 Berg, above n30, at 360.
54 J Spigelman, “From Text to Context: Contemporary Contractual Interpretation” (2007) 81 ALJ 322 at 344; Staughton, above n27 at 307.
55 See Calnan, above n14, at 18, who is not optimistic that the courts can regulate themselves in respects of this
increased evidence.
56 Hoffmann, above n10, at 668. Further oral evidence and cross-examination will be required.
57 David McLauchlan “Contract Interpretation: What is it About?” [2009] SydLawRw 1; (2009) 31 Sydney Law Review 5 at 63-37 observes counsel in New Zealand appear to agree there needs to be an overhaul of civil procedure, regarding the discovery process and case management. Any proposals to extend the range of materials admissible are therefore not welcomed.
58 Holborow, above n14, at 274.
The effect on third parties is a significant practical objection to the admission of previous negotiations. In the contemporary commercial world third parties are often involved in transactions.59 Interpretation, however, focuses on the parties to the contract, scarcely regarding third party interests. Critics claim the fiction that contracts are addressed to the original parties should be abandoned as in practice contracts are drafted so those with little knowledge of the background can use them.60 Third parties take their position on the face of the contract and are not privy to negotiations or context, thus it is argued there is no logic in insisting interpretation should be in light of all the background. This is deemed to be unfair and furthermore increases the risk and costs for these parties if the clear words of the contract can be overridden with evidence of negotiations.61 The exclusionary rule is said to protect their interests.62
Certainty is a desirable goal for commercial transactions and parties’ should be able to enforce their promises with a high degree of predictability.63 It is anticipated pre-contractual material will increase the scope for disagreement over the meaning of a contract.64 Consequently, the outcome of litigation will be harder to predict, resulting in inability to advise at the preliminary stage. It will no longer be sufficient to provide the lawyer with the contract and summary of the commercial background.65 More detailed correspondence will be
59 Spigelman, above n54, at 335. Third parties could include those assigned or acquiring the benefit of the contract, future parties and their advisors once primary advisors or management have moved on, financiers, guarantors and liquidators.
60 Berg, above n30, at 359.
61 National Bank of Sharjah, above n27; Holborow, above n14, at 274.
62 See Chartbrook Ltd v Persimmon Homes Ltd [2007] 1 All ER (Comm) 1083 per Briggs J at [35-37].
63 Chartbrook, above n3, at [35]; Calnan, above n14, at 18; Bingham, above n27, at 388; Spigelman, above n54, at 323.
64 Chartbrook, above n3, at [37]. Lord Hoffmann considers the more one allows conventional meaning to be
displaced by inferences drawn from the background, the less predictable the outcome is likely to be.
65 Berg, above n30, at 358.
required. Furthermore, lawyers will need to qualify their advice with a caveat that unknown facts could supersede their advice.66 Any uncertainty created at this stage is undesirable considering in practice the majority of cases will not reach court.67 Such uncertainty and indecisiveness relates back to inefficiency objections.
This is a theoretical objection rather than a practical consideration. It is maintained previous negotiations undermine the objective theory as they do not constitute objective facts as other surrounding circumstances do.68 Negotiations are considered to be “drenched in subjectivity”,69 and it is not easy to distinguish between subjective intent and objective evidence within negotiations.70 Civil law, in contrast to the English theory of objectivity, regards the parties’ intentions as a subjective fact and therefore relevant to their subjective theory of contract.71 Commentators warn against simply transposing rules based on one philosophy of contract onto another, as the practical consequences differ.72 Previous negotiations, as a revelation of intention, are admissible for the purpose of interpretation in civil law. The common law, however, requires intent to be presumed as a matter of law, in regard to the reasonable observer, rather than an inquiry into the parties’ actual intent.
66 Holborow, above n14, at 274.
67 Calnan, above n14, at 19.
68 Chartbrook, above n3, at [38]; Bingham, above n27, at 389.
69 Chartbrook, above n3, at [38] per Lord Hoffmann; Cf Cabrelli, above n20, at 14 who regards this as a rather blunt and simplistic approach.
70 The exclusionary rules for previous negotiations and subjective intent are often declared together and some
have acknowledged difficulty in discerning whether these are two different restrictions or more closely related. See Mitchell, Interpretation of Contracts, above n34, at 78; McMeel, ‘Prior Negotiations and Subsequent Conduct’ above n35 at 274. Cf Chartbrook, above n62, at [24] per Briggs J who considers although plainly linked, they are distinct.
71 Catherine Valcke “On Comparing French and English Contract Law – Insights From Social Contract Theory”
(2008) available at http://ssrn.com/abstract=1328923; Stefan Vogenour “Interpretation of Contracts: Concluding Observations” in Contract Terms, at 129-130.
72 Chartbrook, above n3, at [39]. See Vogenour, above n71, at 135.
1.4 Boundaries of the Rule
The rule is not one of absolute exclusion and evidence of negotiations may be admissible for other purposes. Lord Hoffmann admits the boundaries of the exclusionary rule are “in some respects unclear”.73 This section will consider established exceptions to the rule.74 The exception to establish objective background facts and the Karen Oltmann decision fall within interpretation, whereas rectification and estoppel by convention are indirect exceptions to the rule operating outside interpretation. Rectification and estoppel are considered to be “legitimate safety devices” which will in most cases prevent the exclusionary rule from causing injustice.75
It is considered the rationale underlying the rule has no application where evidence of previous negotiations is admitted, not to provide a gloss on the terms, but rather to establish the parties’ knowledge of the circumstances with reference to which they used the words in the contract.76 The inquiry is not into intention but into meaning as a guide to intention.77 In order to ascertain the meaning of the language the court must be aware of the objective background circumstances. The circumstances include the commercial purpose of the contract, knowledge of the genesis of the transaction, the context and market in which the parties were operating.78 These surrounding facts must be objectively ascertainable; known
73 Investors Compensation Scheme, above n2, at 913. He noted that it was not the occasion to explore them.
74 There are also more particular exceptions to the rule but these do not relate to interpretation in general and thus will not be addressed in this paper. For example, negotiations are admissible in an action for misrepresentation; in order to determine whether a contract exists; or, in Australia, following Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, per Mason J, they are admissible to prove a refusal to include deleted terms.
75 Chartbrook, above n3, at [47].
76 Bank of Scotland v Dunedin Property Investment Co Ltd (1998) SC 657 at 665; Prenn, above n21, at 1384- 1385.
77 Blakely, above n37, at 367; Eastmond v Bowis [1962] NZLR 954 at 959.
78 Reardon Smith, above n21, at 574.
by both parties, and must not constitute evidence of intention.79 This exception also subsumes the subject-matter exception, whereby pre-contractual material is admissible to identify the subject-matter of the contract.80
Rectification is an equitable remedy81 applying where the terms recorded in a parties’ agreement do not accurately represent the parties’ agreed terms. The court can alter the document to correctly reflect and give effect to the parties’ intentions.82 The mistake can be one of fact, legal meaning or to the effect of terms, as long as it is one in the recording of the agreement, not during the negotiations.83 Rectification can operate where the mistake is common or unilateral.84 Rectification for common mistake requires a continuing common intention, outwardly manifested and evidenced with clear and convincing proof.85 There must be a mistake in the recording of the agreement to the extent the parties’ common intent is not adequately recorded. The requirements for unilateral mistake vary significantly as it operates where one party makes a mistake and the other party knows of this mistake, but does not communicate it. The mistake need not be in the recording of the agreement but could be during the negotiations. The action rests on the unconscionability of the non-mistaken party
79 Eastmond, above n77, 959-960.
80 Bank of NZ v Simpson [1900] UKLawRpAC 6; [1900] AC 182 (PC) at 187-189. The decision cites MacDonald v Longbottom [1859] EngR 635; (1859) 1 E&E 977 where evidence was admissible to prove that “your wool” meant not only wool produced by the plaintiff but also that produced on a neighboring farm; Codelfa, above n74, at 352.
81 Preserved by the Contractual Mistakes Act 1977, s5(2)(b). The Contractual Mistakes Act 1977 does not apply
to mistakes of interpretation, s6(2)(a).
82 Burrows, Finn and Todd, above n12, at 291. Chetwin, Graw & Tiong, Introduction to the Law of Contract in New Zealand (3rd ed, Thomson Brookers, Wellington, 2006) at 246.
83 Andrew Burrows “Construction and Rectification” in Contract Terms, above n4, at 85.
84 There is some controversy regarding the availability of unilateral mistake in New Zealand after the Court of Appeal in Tri-Star Customs & Forwarding Ltd v Denning [1998] NZCA 261; [1999] 1 NZLR 33 rejected a claim for unilateral mistake. The Court held unilateral mistake is inconsistent with the Contractual Mistakes Act 1977 as it renders s6(1)(a)(i) otiose. This reasoning however, has been questioned. See Chetwin, Graw & Tiong above n82, at 250- 252; Burrows, Finn & Todd, above n12, at 294.
85 Westland Savings Bank Ltd v Hancock [1987] 2 NZLR 21 at 9.
in allowing the mistaken party to insist the contract be upheld on the basis of their understanding.86
The inquiry differs from interpretation where the court construes what the document means. Under rectification, the meaning of the document is already ascertained but the parties’ are permitted to depart from that meaning where it defeats actual intention.87 Evidence of previous negotiations, as a revelation of intention, is logically available to prove the assertion that the recorded agreement does not reflect the parties’ intention.88 Rectification does not offend the objective theory as the contract is amended either in reference to another text, or common intention objectively ascertained.89 However, it must be noted there is some overlap between interpretation and mistake. A mistake can be corrected through interpretation if it is clear on its face and clear what correction ought to be made.90 The background can be considered for this purpose, but the exclusionary rule precludes previous negotiations.
Estoppel by convention is a form of common law estoppel91 founded upon mutual assent to a particular state of affairs, the truth of which has been assumed by convention as the basis of
86 Burrows, above n83, at 88.
87 Calnan, above n14, at 19.
88 Attorney General v Dreux Holdings Ltd (1996) 7 TCLR 617 (CA); See McKendrick “Interpretation of Contracts and the Admissibility of Previous Negotiations” above n39, at 269.
89 Hoffmann, above n10, at 667; Chartbrook, above n3, at [60-63]. The inquiry is not into inner minds but
outward facts. Cf with Robert Stevens, above n17, at 101 who claims objectivity is qualified for mistake.
90 East v Pantiles (Plant Hire) (1981) 263 EG 61 per Brightman LJ. In New Zealand see Rattrays Wholesale Ltd v Meredyth-Young & A’Court Ltd [1996] NZHC 1837; [1997] 2 NZLR 363 (HC) per Tipping J. This was recently confirmed in Chartbrook, above n3 at [25] where Lord Hoffmann considered there was no limit to the amount of red ink the court could use. Mitchell “Contract Interpretation: Pragmatism, Principle and the Prior Negotiations Rule” above n49, at 153 remarks it is unfortunate this is termed “correction of mistake” through interpretation as it implies the court has determined the parties could not have meant what they said. It is better to say the court recognised the terms were doubtful and could have been more clearly expressed in order to achieve their intended purposes.
91 The common law estoppel could be estoppel by representation of a fact, promissory estoppel, or proprietary estoppel.
the parties’ relationship.92 Where the parties have acted upon the agreed assumption it would be unfair for one to resile from that assumption, thus the other is entitled to relief. The New Zealand Court of Appeal summarised the requirements in National Westminster Finance.93 Tipping J determined the parties must proceed on the basis of an underlying assumption of fact or law. Each must, to the knowledge of the other, have expressly or implicitly94 accepted the assumption as true for the purpose of the transaction. Each party is entitled to act in reliance upon the assumption. If one party would suffer detriment from the other being allowed to resile from the assumption, then it would be unconscionable to allow the other to do so and they will be estopped from denying the assertion.
Evidence of previous negotiations is admissible under estoppel as the inquiry goes to the correctness of underlying facts, rather than to the construction of terms.95 The evidence is not used to determine meaning, but rather to establish it would be inconsistent to rely on the terms recorded. Reliance on previous negotiations is justified to demonstrate the parties’ mutual assumption as to the interpretation to be given.96 Estoppel does not offend against the objective theory as the contract is construed objectively and rather a party is prevented from enforcing certain rights on the grounds his previous words or conduct make it inequitable to do so.97
The private dictionary principle prescribes parties can agree to an unconventional or special meaning, a meaning which words cannot linguistically bear, for the purpose of their
92 Feltham, Flochberg, Leech Spencer Bower: Estoppel by Representation, 4ed (Reed Elsevier UK Ltd, London, 2004) at 7, 180.
93 National Westminster Finance Ltd v The National Bank of NZ Ltd, CA 159/92, 30 March 1993.
94 The estoppel may operate by an express term of the contract, where the parties have expressly agreed they will take certain facts to be true, or more commonly parties may be precluded on the basis of a common assumption adopted as the factual basis of the contract. See Paterson, Robertson & Duke, above n36, at 170.
95 Air New Zealand Ltd, above n41 at 234.
96 Burrows, above n83, at 88.
97 Hoffmann, above n10, at 667.
contract.98 For example, they may agree that “buy” really means “sell”.99 Evidence may be adduced to support the argument that the words of the contract should bear that intended unconventional meaning in accordance with the parties’ private code.100
An additional exception to the exclusionary rule may be said to arise from the decision of Kerr J in Karen Oltmann.101 Kerr J admitted evidence of previous negotiations despite the ban in Prenn. The principle derived from the case is as follows:102
If a contract contains words which, in their context, are fairly capable of bearing more than one meaning, and if it is alleged that the parties in effect negotiated on an agreed basis that the words bore only one of two possible meanings, then it is permissible for the Court to examine extrinsic evidence relied upon to see whether the parties have in fact used the words in one sense only, so that they have in effect given their own dictionary meaning to the words as a result of their common intention.
The state of this exception is somewhat unclear as in effect the decision undermines the rationale of the rule.103 There is widespread debate about whether the decision evidences the private dictionary principle. Some claim it is an illegitimate exception.104 Others accept the
98 This is said to be akin to the principle by which a linguistic usage in a trade may be proved. See Chartbrook,
above n3, at [45].
99 For some reason the parties may wish to keep their dealings secret. See McLauchlan ‘Contract Interpretation: What is it About?’ above n57, at 18-20.
100 Chartbrook, above n3, at [45].
101 Partenreederei M.S Karen Oltmann v Scarsdale Shipping Co Ltd (The Karen Oltmann) [1976] 2 Lloyd’s Rep. 708. The facts involved an agreement whereby the charterer was given “the option to redeliver the vessel after 12 months trading, subject to giving three months notice”. There was dispute over “after” and whether this meant “on the expiry of 12 months” or “anytime after 12 months trading”.
102 Ibid at 712.
103 Steyn “The Intractable Problem of the Interpretation of Legal Texts” above n27, at 10; Steyn “Written Contracts: To What Extent May Evidence Control Language?” CLP 23 at 29; McLauchlan, “Contract Interpretation: What is it About?” above n57, at 16.
104 See Lord Hoffmann in Chartbrook, above n3, at [45-46]. He considered the principle does not evidence the
private dictionary meaning as there was no unconventional usage of “after”. See also Berg, above n30, at 355, 360 who considers it is not a true exception to the exclusionary rule, but instead evidence of a collateral or side
validity of the principle but face difficulty in trying to analyse the decision in more orthodox terms. The New Zealand Court of Appeal in Air New Zealand Ltd endorsed the decision noting it had “the ring of estoppel by convention”.105 Other commentators have suggested the principle should be re-evaluated as rectification.106 This is despite Kerr J’s view that rectification is not available where the principle applied as the choice of words would not result from any mistake, but rather would reflect the meaning both parties intended.107 McLauchlan on the other hand considers the principle to be in accordance with commonsense.108 He further contends the exception should not be confined to situations of ambiguity, nor should it be limited to actual common intent but also where one party has reasonably led the other to believe that they had accepted the meaning.109
1.5. Conclusion
This part has aimed to introduce the governing principles of contract interpretation, highlighting the shift to a contextual approach. The exclusionary rule established long before the shift in emphasis, has survived against the tide due to the policy considerations underpinning the rationale of the rule. However, the rule is not one of absolute exclusion, and
agreement to meaning. Cf McLauchlan, “Contract Interpretation: What is it About?” above n57, at 17 who has attacked this reasoning as artificial.
105 Air New Zealand Ltd, above n41, at 223-224. While prepared to accept the decision as good law, the Court
found the evidence was equivocal and did not establish express assent. See also McKendrick “Interpretation of Contracts and the Admissibility of Pre-Contractual Negotiations” above n39, at 271 who notes the principle “appears to resemble estoppel by convention”.
106 See Chartbrook, above n62, at [41-42] per Lord Briggs; Burrows, above n83, at 95; and Lewison, above n12,
at 76.
107 Karen Oltmann, above n101, at 712. See also Lord Nicholls “My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 578 at 586, and McLauchlan, “Contract Interpretation: What is it about?” above n57, at 21-23 who considers there was no mistake in intention.
108 McLauchlan “Common Assumptions and Contract Interpretation” (1997) 113 LQR 237 at 240-241. On his
view it would be wrong for pre-contractual negotiations to be inadmissible when they evidence actual common intention of the parties.
109 Ibid, at 243-245; McKendrick ‘Interpretation of Contracts & the Admissibility of Previous Negotiations’
above n39, at 271 also criticises the principle on these grounds and considers the decision should represent a wide principle whereby negotiations are admissible whenever such evidence proves to be reliable and helpful.
exceptions have developed throughout. The next part considers the Vector decision and its application of interpretation principles and the exclusionary rule.
PART TWO: THE VECTOR DECISION
This part is divided into three sections. Section one outlines the background to the Vector proceedings. Section two analyses the five Supreme Court judgments in relation to substantive themes drawn from the decision. Finally, this part will consider the status of the law post-Vector and whether previous negotiations are now admissible, in light of recent lower court decisions.
In 1995 Vector Gas and Bay of Plenty Energy (‘BoPE’) entered an agreement regarding the supply of gas to BoPE for an eleven-year period. Vector terminated the agreement early in 2004. BoPE subsequently challenged the validity of this termination. The parties began negotiating the possibility of a replacement agreement. Vector proposed to continue to supply gas at $6.50 per GJ, exclusive of transmission costs.110 BoPE subsequently rejected this offer, due to the “severity in price discrepancy”, and proposed they negotiate an interim agreement until the validity of the agreement was determined.111 This was to act as a substitute for BoPE obtaining an interim injunction with an undertaking to pay damages in the event the proceedings were unsuccessful. In the proposal BoPE summarised the parties’ positions noting Vector had gas to supply at $6.50 per GJ. Vector replied by offering to continue to supply gas on the terms of the 1995 agreement, provided that BoPE undertook to pay “the difference between the price in the 1995 Agreement and $6.50 per GJ” in the event that BoPE’s proceedings were unsuccessful.112 BoPE subsequently accepted this proposal on 15th October 2004. Unfortunately, neither party specified whether price was inclusive or exclusive of transmission costs. Five days later Vector sought an amended undertaking for a price
110 Bay of Plenty Electricity Ltd v Vector Gas Ltd HC Wellington CIV-2004-485-2287, 3 August 2007 at [116]. This occurred on September 24th 2004.
111 Ibid. This letter was dated October 5th 2004.
112 Ibid. October 8th 2004.
exclusive of costs.113 BoPE refused to give this, so Vector counterclaimed for an order in the High Court.
In order to fully understand the dispute the following factors must be known. Price under the 1995 agreement was inclusive of transmission costs. Market price at the time of the interim agreement was $6.68 per GJ, exclusive of transmission costs. If $6.50 were inclusive of costs, Vector would be losing approximately $3 million. Furthermore, it was accepted by both that if Vector had elected to rely on BoPE’s undertaking upon applying for an interim injunction then it would have expected to recover the full price of gas at market price, inclusive of transmission costs.114
Vector argued references to ‘$6.50 per GJ’ in letters subsequent from their first proposal became shorthand reference for price only.115 Counsel argued it was necessary to consider the relevant factual matrix, being the context of the proceedings, the market price of gas, and the prior correspondence. It submitted the correspondence was admissible under the objective background fact exception and the private dictionary principle.116 The submissions ultimately asserted that BoPE’s interpretation flouted commercial commonsense.117 BoPE argued the appropriate place to start in determination of the dispute was the agreement reached on 15th October.118 However, if it were open to the Court to consider the negotiations it maintained there was no consensus that price was to be exclusive of transmission costs.119 Rather the basis of pricing changed with their rejection of the replacement agreement and proposal of
113 Bay of Plenty Electricity Ltd, above n110, at [117].
114 As discussed in Vector Gas Limited v Bay of Plenty Energy Ltd [2010] NZSC 5 at [110] per Wilson J, under Rule 7.54, High Court Rules BoPE would have had to sign an undertaking that they would compensate “for any damage sustained through the injunction”.
115 Supreme Court Transcript, SC 65/2008, 23 June 2009 at 9. Counsel for Vector submitted ‘$6.50 per GJ’ was
shorthand reference for ‘$6.50 per GJ, plus transmission at cost’.
116 Cf with BoPE who submitted that any consideration of the earlier correspondence was inevitably a consideration of subjective intentions. See Supreme Court Transcript, at 64.
117 Ibid, at 45-47.
118 Ibid, at 65-67.
119 Ibid, at 62.
the interim agreement.120 They further submitted their interpretation did not flout business commonsense as the agreement worked perfectly well; rather Vector had made a bad bargain.121
BoPE was subsequently unsuccessful at trial. The High Court found in favour of Vector on both the issue of termination, and interpretation of the interim agreement. Harrison J thought it was unlikely Vector would agree to an arrangement whereby BoPE was in a better position than if it had given an undertaking in court.122 He was satisfied a clear distinction had been drawn from the outset and at all relevant times the parties were referring to a price exclusive of costs. In subsequent references BoPE did not challenge or break down the figure to indicate otherwise.123
The Court of Appeal differed and found in favour of BoPE. They considered Vector’s proposal on 8th October, to continue to supply gas in the interim, was a new and distinct offer and thus there was no need to look earlier in the chain.124 The Court concluded it was plain the letter was inclusive of cost.125 They considered that even if prior negotiations were relevant there was difficulty in Vector’s shorthand reference argument due a clear rejection from BoPE in response to the replacement agreement.126 They observed that, at most, a mistake seemed to have occurred but rectification had not been pleaded.127
The Supreme Court unanimously overturned the Court of Appeal’s decision and came to the conclusion that price was exclusive of transmission costs. This, however, is where any
120 This involved an assertion that a reference to $6.50 per GJ on the first page of the letter was inclusive of costs, but a subsequent reference to $6.50 per GJ was exclusive of costs. See Supreme Court Transcript, above n115, at 73-75.
121 Ibid, at 98-99.
122 Bay of Plenty Energy Limited, above n110, at [128-131]. He was persuaded both parties were aware of the market price, which was to be determined in isolation as transmission costs varied with location.
123 Ibid, at [130].
124 Bay of Plenty Electricity Ltd v Vector Gas Ltd [2008] NZCA 338 at [91]
125 Ibid, at [92].
126 Ibid, at [96].
127 Ibid, at [97].
overall consensus in the judgment ends. Each member of the bench delivered a separate judgment that differs in approach to contract interpretation and to the admissibility of prior negotiations. In brief, Blanchard J determined the issue through interpretation on a ‘commercially sensible’ basis, without the use of previous negotiations. He then admitted previous negotiations under the subject-matter exception to reinforce his interpretation. Tipping J decided the outcome as an issue of interpretation, which included use of the relevant previous negotiations. In the alternative he characterised the decision as estoppel by convention. McGrath J upheld the ban on previous negotiations and decided the case based on estoppel. Wilson J determined previous negotiations are admissible in the available matrix of fact where there is ambiguity; or where the decision flouts commercial commonsense; or where estoppel applies. He decided the case on the basis of commercial commonsense, or alternatively estoppel. Gault J, in the shortest judgment of the bench, agreed with the reasons of Blanchard J and simply determined the dispute with reference to the correspondence, and without reference to contract interpretation principles.
2.2 Analysis of Vector
Each judgment in Vector took care to ensure the objective approach was maintained. Whether previous negotiations are admissible or not, each Judge was staunch in asserting that subjective intent128 is irrelevant evidence in contract interpretation.129 It does, however, become apparent from the judgment that there are issues as to the precise meaning of objectivity and the consequences of applying an objective test.130 There is wide consensus as
128 The inner or uncommunicated intent of the parties. See discussion in Part 1 at 1.1.
129 See Blanchard J at [14], Tipping J at [28], and McGrath J at [76]. However, Wilson J comments at [129] “whether the test is objective or subjective, assistance can be derived from evidence of previous negotiations”. It is likely the reference to ‘subjective’ is not a suggestion that subjective intent is relevant to our jurisprudence, but rather a reference to the subjective approach taken in civil law jurisdictions to which his Honour was comparing the common law.
130 Jeremy Johnson “Contract: Missed Opportunity?” [2010] NZLJ 50 at 52-53; Thomas J in v Wholesale
Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37; [2008] 1 NZLR 277 (SC) at [90] recognises often these distinctions are
to what objective contractual intention is not.131 It is not concealed intention in inner minds, which this paper terms subjective intent. There is, however, disagreement as to whether outward objective manifestations of actual intent constitute subjective intent.132 On a strict detached objective approach the interpreter is primarily concerned with the objective meaning of the words recorded in the final agreement. The court presumes intention by ascertaining the meaning that the document would convey to a reasonable person with all the background knowledge of the parties.133 Actual intent, even where objectively ascertainable, is irrelevant. Previous negotiations as a revelation of actual intent therefore constitute inadmissible ‘subjective’ intent.134 A more expansive theory of objectivity focuses on objectively ascertaining the parties’ intention. The inquiry is into what a reasonable and informed person in the position of the parties would consider the parties intended the words of their contract to mean.135 Actual mutual intent can be accommodated under this objective approach where it is outwardly expressed, and does not constitute subjective inner intention. It follows from this that objective evidence of mutual intent within the negotiations is admissible.
not appreciated by those discussing the objective theory. See McMeel ‘The Rise of Commercial Construction in Contract Law’ above n23, at 386 and his discussion of Lord Steyn’s differing articulations of the objective approach in his judgments.
131 Valcke, above n71, at 10-11.
132 This paper takes the stance actual mutual intent can be accommodated if it is objectively ascertainable. For example, where actual intent is manifested outwardly in a draft agreement, or correspondence between the parties. See later discussion in 3.1
133 Investors Compensation Scheme, above n2, at 912-913. Reaffirmed in Chartbrook, above n3, and quoted by
Vector, above n1, at [61] per McGrath J. See McLauchlan ‘New Law of Contract Interpretation’ above n26, at 165 who provides a discussion on the ICS decision as representing the strict theory.
134 McLaren, above n11, at 731; Stevens, above n17, at 102; Collins, above n6, at 189; Hoffmann, above n10, at
661-665.
135 See McLauchlan “Objectivity in Contract” above n6, at 494. At 492 McLauchlan argues it would be a contradiction if a reasonable person in the position of the parties did not give language the meaning the parties intended.
Tipping J demonstrated an approach that was concerned to establish the parties’ actual intent, objectively ascertained.136 His Honour started with the premise that the ultimate objective in contract interpretation is to establish the meaning the parties intended their words to bear.137 This is in accordance with the approach taken by the Supreme Court in other decisions whereby the parties’ objective intent was found to act as a reliable guide to meaning.138 His Honour considered previous negotiations were relevant in determining actual intent, and admitting them as evidence would not offend the objective theory as subjective intentions are inadmissible.139
Wilson J’s judgment is, to some extent, contradictory. His approach reflected strict objectivity by placing prominence on the literal meaning of the words to presume the parties’ intent.140 Despite this, his Honour was content to admit evidence of previous negotiations. The difficulty is compounded where he claimed previous negotiations could be used to “presume the parties’ intent”.141 With respect to Wilson J the use of previous negotiations will facilitate discerning the parties’ actual intent, as opposed to presumed intent, consistent with the more expansive objective theory. His judgment does, however, recognise that subjective intention constitutes undeclared intent, what was thought instead of said, which must be excluded.142
136 Note that Blanchard J does not directly address the objective theory in his judgment, but like Tipping J does seem to support the more expansive approach whereby the reasonable person must be in the position of the parties. See Vector, above n1, at [7][10].
137 Ibid, at [19]. “the necessary inquiry therefore concerns what a reasonable and properly informed third party
would consider the parties intended the words of their contract to mean”.
138 See Gibbons, above n130, where the Court held subsequent conduct was a reliable guide to the parties’ actual objective intention. See more specifically the comments of Tipping J at [63] and Thomas J at [79] [95] [97]. See also Totara Investments Limited v Crismac Limited and Ulster Limited [2010] NZSC 36 at [31] where the Court held contract interpretation of boilerplate provisions must not lead to distortion of the objective intention of the parties.
139 Vector, above n1, at [19][20][27]. Lord Hoffmann himself in Chartbrook, above n3, at [33] has recognised
admitting previous negotiations may not be inconsistent with the objective theory.
140 See Vector, above n 1, at [119] “words should be given their ordinary meaning because parties are presumed to have intended the words to be given that meaning”.
141 Ibid, at [129].
142 Ibid, at [122].
McGrath J’s judgment represents the stricter objective approach. His Honour claimed ‘intention’ plays no real part in contract interpretation, and that any move to an approach similar to that advocated by McLauchlan143 will bring intentions to the forefront of interpretation, placing the objective theory at risk.144 He claimed the closest ICS came to relying on intention was to make clear the court was not required to attribute to the parties an intention they plainly did not have.145 With the greatest of respect to McGrath J this seems contrary to principle. Surely requiring of the court that it does not arm parties with an intention contrary to what they actually intended is in effect being concerned with actual objective intention. In other words, McGrath J must surely accept that the parties’ intention as to the meaning of words is indeed relevant to contractual interpretation. McGrath J seems to have misinterpreted the arguments of McLauchlan and others advocating for the admissibility of previous negotiations as encompassing subjective intent. However, they do not advocate, using the words of McGrath J, that ‘inner intention, rather than overt contextual factors’146 be examined.
Vector acknowledged that the parties’ language was to be the source of meaning and that the court will not easily displace a plain meaning.147 Nevertheless, the decision affirmed the shift away from a strict adherence to the plain meaning rule. It was considered permissible, by the majority, to consult extrinsic evidence even where the contract is plain and unambiguous.148
143 McLauchlan advocates the aim of contract interpretation should be to find the parties’ actual mutual intention to the extent it can be objectively discerned. See for example, McLauchlan “Objectivity in Contract” above n6; “Contract Interpretation: What is it About?” above n57; “The New Law of Contract Interpretation” above n26. 144 Vector, above n1, at [76].
145 Ibid.
146 Ibid.
147 Ibid. See Blanchard J at [11]; McGrath J at [61]; Tipping J at [22].
148 Ibid. See Blanchard J at [4]; Tipping J at [22-23]; McGrath J at [66].
In particular, McGrath J traced the common law shift in interpretation, emphasising the need to place contractual language in context to ascertain meaning.149
Wilson J was the only judge to consider that ambiguity was required to refer to extrinsic material. In fact his Honour’s approach essentially affirmed the plain meaning rule, albeit in a more liberal sense than the orthodox literalist approach.150 Wilson J provided a somewhat novel approach to interpretation.151 He prescribed that words should be given their ordinary meaning as parties are presumed to have intended those words.152 He posed three exceptions to this principle. Extrinsic evidence can be considered when ascertaining meaning where there is ambiguity; the words in their ordinary meaning make no commercial sense; or under estoppel.153 This approach can be criticised as being inconsistent with the trend away from the plain meaning rule and as having two significant problems. Firstly, it is argued words do not have fixed, settled meanings independent of those who use them, thus context is required to determine meaning.154 Secondly, as evidenced in Vector, judges will often disagree as to whether words are ambiguous or plain.155
149 Vector, above n1, at [57-67].
150 Wilson J is more liberal in the scope of extrinsic evidence that can be admitted when an ambiguity does occur as he considers previous negotiations are admissible.
151 Although he claims this is a ‘difference more apparent than real’. See his discussion at [127-128] and
McLauchlan’s criticism in “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” (2010) 16 NZBLQ 229 at 262-263.
152 Vector, above n1, at [119].
153 Wilson J at [126] also recognises extrinsic evidence is available in an action for rectification, which lies outside interpretation.
154 See McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at
258-259; Hoffmann, above n10, at 658; Steyn “The Intractable Problem of the Interpretation of Legal Texts,” above n27, at 6-7; Nicholls, above n107, at 578-579.
155 See Yoshimoto, above n7, at [66]. In Vector Blanchard J at [4] and Tipping J at [40] considered “$6.50 per
GJ” to be ambiguous. McGrath J at [56] considered the phrase to be plain, but considered the background to determine if it shed light on meaning. Wilson J at [135] considered the phrase to be plain.
Some commentators156 maintain Vector illustrates a court rewriting a plain and unambiguous meaning as four judgments indicated that the plain words of the contract supported BoPE’s interpretation.157 McGrath J’s judgment in particular supports this claim as his Honour agreed with the Court of Appeal that the meaning of agreement was plainly in favor of BoPE’s interpretation.158 Hall argues that this alone should have resolved the interpretation. Instead the Court substituted their view which subsequently risks certainty and confidence in the clear words of the contract being upheld by the court. This argument, however, is essentially challenging the shift away from the plain meaning rule. In response it can be argued plain meaning is not the ultimate inquiry of contract interpretation, except to the extent it evidences the parties’ intended meaning. Furthermore, as discussed there will always be disagreement as to what constitutes a plain meaning, thus the use of extrinsic evidence is valid in determining the parties’ intended meaning. The judgments in Vector considered, on different grounds, that the plain meaning did not in this instance reflect the parties’ intended meaning.
The judgments of Tipping, McGrath and Wilson JJ are the only three to explicitly discuss the exclusionary rule and whether it should be upheld. Tipping and Wilson JJ end the ban on previous negotiations, whereas McGrath J holds steadfast. Blanchard J does not use negotiations in his interpretation inquiry and implicitly upholds the rule by recognising it is not one of absolute exclusion, relying on the subject-matter exception.159 His Honour left the matter open for another day. Gault J agreed with the reasons of Blanchard J. He further stated
156 Chris Hall “Vector Gas – An Unwelcome Decision” NZLawyer (Issue 138, 11 June 2010) at 23. Hall was General Counsel for BoPE; Lisa Tat “A Timely Reminder of the Importance of Careful Drafting” (Bell Gully Commercial Quarterly, 2010) <www.bellgully.com/newsletters/18corporate/commercial_1.asp>.
157 See Blanchard at [4-5] “$6.50 by itself..is perhaps more likely to be a price inclusive of supply...at first sight
appears to resolve the point in favor of BoPE”; Tipping J at [40] “the reference to the interim agreement suggests the sum included delivery costs”; Wilson J at [135] “on the ordinary and unambiguous meaning of the words...price..was therefore inclusive of transmission costs”.
158 Vector, above n1, at [56].
159 Ibid, at [13].
no reference to the principles of contract interpretation is required and determined the dispute simply by ascertaining objectively what the parties agreed to in their correspondence.160
Tipping and Wilson JJ provide some sound and logical reasoning for abandoning the exclusionary rule.161 Both emphasised the relevance of pre-contractual correspondence in ascertaining the parties’ intent.162 Tipping J, in particular, considered the touchstone of admissibility to be relevance.163 Negotiations are relevant if they constitute evidence of circumstances and conduct which shed objective light on the meaning both parties intended.164 Furthermore, both firmly assert subjective evidence is irrelevant and inconsistent with the objective approach.165 The two judgments also support the principles articulated by the Supreme Court in Wholesale Distributors v Gibbons Holdings166 and consider there can be no logical distinction between pre-contractual negotiations and post-contract conduct.167 If evidence of subsequent conduct is admissible to aid interpretation, as it provides a reliable
160 Vector, above n1, at [151]. He considered the case to be one where the parties had formulated the arrangement progressively with a view to accepting obligations once all terms were agreed upon, similar to an oral contract. The letter of 5th October from BoPE was not a rejection but rather built on Vector’s proposal.
161 It must be noted, that although Wilson J determined previous negotiations were admissible, this is still
conditional on one of his three exceptions applying. Rather than abandoning the rule completely he has widened the available matrix of fact in situations where it is permissible to consider the surrounding circumstances.
162 Vector, above n1. Wilson J at [122] states that they might illuminate what the parties were intending to
achieve.
163 Ibid, at [29]. Tipping J uses Evidence Act 2006, s7 to reinforce this view. S7(1) provides all relevant evidence is admissible in a proceeding. S7(3) determines evidence is relevant if it has a tendency to prove or disprove anything that is of consequence to the determination of the proceeding.
164 Ibid, at [27].
165 Ibid. Tipping J at [27-29]; Wilson J at [122].
166 Above n130 and n138. The facts concerned the interpretation of a deed of assignment of a sub-lease. The original sub-lease specified the term was to expire on 30th October 2002, with a new lease to be granted expiring 31st October 2010. The deed of assignment specified it would expire ‘on the remainder of the lease.’ The issue concerned whether this should be interpreted to be 30th October 2002, or the 31st October 2010. Gibbons submitted there was relevant subsequent conduct which supported their interpretation. Four of the five members of the bench determined subsequent conduct could be relevant evidence to the interpretation of a contract. However, not all members found the subsequent conduct in this instance was helpful.
167 Vector, above n1. Wilson J at [122]; Tipping J at [31]. Tipping J was a member of the Supreme Court bench
in Gibbons.
guide to the parties’ actual intent, then there seems to be no sensible basis for excluding evidence of prior negotiations, which can also provide a reliable guide to intent.168 Both Tipping and Wilson JJ were not convinced by pragmatic considerations justifying the rule.169 Unfortunately, Tipping J does not adequately address the objections to overturning the rule. He merely stated he was not satisfied with any pragmatic considerations.170 Wilson J elaborates further and asserts they should not act as a barrier in interpretation when they do not act as a bar in rectification. 171 He also determined that third parties freely choose to involve themselves in the contract and must accept that in interpretation the court is entitled to the evidence of prior negotiations.172
With the greatest of respect to Tipping J, two questionable footnotes have been suggested to weaken his judgment.173 Tipping J properly determined previous negotiations are admissible if the evidence is capable of shedding objective light on meaning. Unfortunately, he claimed this is consistent with Chartbrook in accordance with Lord Hoffmann’s statement that admitting prior negotiations, which may throw light upon meaning, is not inconsistent with the objective theory of law.174 However, Lord Hoffmann clearly considered there was no convincing justification for abandoning the exclusionary rule and the force of his judgment upholds the rule. Tipping J also comments he was unsure whether Lord Hoffmann regarded pragmatic considerations as justifying the exclusion of subjective intention, and in addition, evidence demonstrating objective intention.175 He suggested that if it were only the former then that evidence would be inadmissible on grounds of irrelevance anyway. With the utmost respect to Tipping J it does seem clear that Lord Hoffmann was excluding more than just
168 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 265; McLauchlan “Interpretation and Rectification: Lord Hoffmann’s Last Stand” above n32 at 453; Johnson, above n130, at 51.
169 Vector, above n1, at Wilson J at [129]; Tipping J at [29].
170 Ibid, at [29]. Perhaps more discussion on this would have given his judgment more force.
171 Ibid, at [129].
172 Ibid.
173 See McLauchlan “Contract Interpretation in the Supreme Court - Easy Case, Hard Law?” above n151, at 245-247.
174 Vector, above n1, at FN 29; Chartbrook, above n3, at [33] per Lord Hoffmann.
175 Vector, above n1 at FN 30.
subjective intention as his Lordship recognised admissibility was usually based on relevance, but the exclusionary rule is an exception whereby relevant evidence is inadmissible on pragmatic grounds.176
Wilson J’s abandonment of the exclusionary rule is to some extent undermined by his actual reliance on the pre-contractual correspondence. His Honour first determined prior negotiations were admissible when outlining the ambiguity exception, but did not decide on this ground. He did, however, provide further discussion on the admissibility of previous negotiations after outlining all three exceptions.177 It can be assumed at that point he was regarding previous negotiations to be admissible for the purpose of each exception, including commercial commonsense.178 His Honour found BoPE’s interpretation lacked commercial commonsense, but again he did not rely on the negotiations in this conclusion. Instead Wilson J examined the negotiations under estoppel, where they are already admissible. Despite this, it is contended the force of his argument is still present as he clearly proposed abandoning the rule.179 To the contrary Tipping J examined the negotiations in his interpretation.180 Unfortunately this reliance is also slightly undermined as he concluded, in one paragraph, that the case could also be analysed as estoppel.181 McLauchlan remarks there
176 See McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 245-246.
177 Vector, above n1, at [129].
178 As established in 1.4.iii negotiations are already admissible for the purpose of estoppel. The fact His Honour did not specifically mention the admissibility of negotiations whilst discussing the commercial commonsense exception would not be problematic in admitting negotiations under that exception as he clearly proposed abandoning the rule at [122].
179 Wilson J at [122] stated it is “time to remove the bar in this country imposed by Prenn”.
180 Ibid, at [40 - 45]. His Honour found that accepting BoPE’s argument would involve accepting a subtle distinction that reference to $6.50 on the first page of the 8th October letter, where the parties’ positions are recorded, is price exclusive yet their proposal on the second page is price inclusive. He considered it was clear the parties had reached an agreement during the negotiations as to what ‘$6.50 per GJ’ should mean for the purpose of their agreement. Through an examination of the correspondence Tipping J observed BoPE did not dispute or challenge the figure and that if their interpretation was accepted it would not be “quantifying the loss” fully as stated.
181 Ibid, at [48].
was no need to invoke the safety net of estoppel when his Honour did not accept the existence of the exclusionary rule in the first place.182
McGrath J was persuaded by recent affirmation in Chartbrook that prior negotiations are inadmissible as evidence of the parties’ intention, but admissible for the purpose of rectification, estoppel or in establishing the background facts known to the parties.183 McGrath J adhered to the objections184 against abandoning the exclusionary rule and was satisfied these pragmatic considerations justify the rule notwithstanding that reliable evidence contributing to the parties’ intended meaning may be excluded.185 He recognised the arguments of McLauchlan186 but concluded that the force of these was lessened by Chartbrook’s reaffirmation and the “legitimate safety devices”, estoppel and rectification.187 He concluded it was better to “march in step with settled approaches overseas in this important field of commerce”.188
With the greatest of respect to McGrath J, dismissing arguments for abandoning the exclusionary rule due to recent confirmation of the rule in the House of Lords and Australia189 is not a sufficient justification.190 New Zealand law is developing in a different direction from
182 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 250-
251. He argues there is no need for estoppel because the accepted meaning is the true meaning. See further discussion at 3.2.iv.a.
183 Vector, above n1, at [67].
184 Ibid, at [71]. McGrath J raises delay, expense, increased uncertainty, and risk and inconvenience to third parties.
185 Ibid, at [75].
186 McLauchlan “Contract Interpretation: What is it About?” above n57. McLauchlan argues evidence of negotiations can be accommodated within an objective approach and thus previous negotiations where they demonstrate objective mutual intention should be admissible.
187 Vector, above n1, at [73].
188 Ibid, at [78].
189 Codelfa, above n74.
190 McGrath J’s reasoning is similar to that identified by Mitchell as a reason why the rule was upheld in
Chartbrook. See “Contract Interpretation: Pragmatism, Principle & the Prior Negotiations Rule” above n49 at
143. Mitchell recognises an underlying reason in Lord Hoffmann’s judgment was a reluctance to depart from a long and consistent line of authority. His Lordship did not consider there was a power to depart from precedent
those jurisdictions, one more inclined to allow any evidence relevant to the objective meaning of the contract and the parties’ actual intent. This is evidenced by the liberal approach taken by the Supreme Court in Gibbons.191 McLauchlan has also criticised McGrath J’s use of Chartbrook. He contends Lord Hoffmann did not in fact decide the exclusionary rule was justified by pragmatic considerations, but rather said it may be.192 Lord Hoffmann concluded that there was no clearly established case for departing from a long established rule and that the ultimate determination lay not with a judicial body. He considered an empirical study was required to determine whether pragmatic disadvantages of admissibility outweighed the advantages of admissibility.193
Blanchard J, in disagreement with McGrath J, considered the subject-matter exception applied and thus used evidence of previous negotiations, to merely reinforce his interpretation.194 His Honour furthermore, took a liberal view and effectively expanded the scope of the exception. Blanchard J considered there could not sensibly be degrees of subject- matter, thus the court could regard communications that shed light on the commercial purpose and further what ground the contract was to cover, subject to the caveat that subjective intent is admissible.195 Applying this to the facts he considered one could not sensibly refer to negotiations to ascertain the subject-matter of the agreement was the supply of gas, without ascertaining whether the price of gas was inclusive of supply costs. To the contrary, McGrath J considered the contract’s subject-matter was clearly identifiable as the
as the rule was not impeding the proper development of the law, nor leads to results that are unjust or contrary to public policy under the Practice Statement (Judicial Precedent). See Chartbrook, above n3 at [41].
191 Gibbons, above n130. Edward Scorgie & Tim Smith, “Tips from the Top on Commercial Interpretation”
(Chapmann Tripp 26 February 2010) <www.chapmantripp.com/Pages/Publication.aspx?ItemID>.
192 Vector, above n1, at [75]. McGrath J states the House of Lords considered the rule was justified on pragmatic grounds.
193 Chartbrook, above n3, at [41]. Lord Rodger agreed at [70].
194 Vector, above n 1, at [13].
195 Ibid, at [14].
supply of gas.196 Blanchard J left open how far the courts should go for another day. With respect it is arguable this exception can go no further.197 If it was open to Blanchard J to determine price under this exception, then it seems any important contractual terms might too constitute the “ground the contract was to cover”.198 McLauchlan argues this is an example whereby a judge has purported to adhere to the exclusionary rule, but in reality has invoked an exception to find proof of the parties’ intention.199
McGrath, Tipping and Wilson JJ all considered estoppel by convention could give appropriate relief to Vector.200 A common understanding, that $6.50 was exclusive of transmission costs, could be found from BoPE’s letter on the 5th October. Any further references were the parties continuing to negotiate on their common assumption.201 It was therefore found to be unconscionable to allow BoPE to depart from this common assumption. Estoppel was not pleaded in the proceedings but the Court determined it would not prejudice BoPE to permit the action at this stage.202 It was considered estoppel had inherently been pleaded through the contention that the parties had agreed to their own dictionary meaning.203
196 Vector, above n1, at [83].
197 The next step would be to admit evidence of subjective intent, which clearly is not contended for by anyone. McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 239-240. 198 Ibid, at 239-240.
199 Ibid, at 240-241. He also considers Bank of Scotland v Dunedin Property Invest Co Ltd 1998 SC 657 to be
another example. See later discussion at 3.4.A.
200 It must be noted Tipping and Wilson JJ decided on this ground in the alternative.
201 Vector, above n1. See McGrath J at [95-97]; Wilson J at [142].
202 As discussed later at 2.2.C.iv this is contrary to what the Court thought about the pleading of rectification. McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151 at 266 has criticised this difference as the finding of estoppel by convention in this case has the same effect as granting rectification.
203 See McGrath J at [85]. Tipping J at [25] considered the private dictionary principle to be a linguistic example
of estoppel by convention. At [48] he considered it need not be specifically pleaded, as there was no element of surprise which would prejudice BoPE. Wilson J at [124] stated “estoppel by convention effectively subsumes the “private dictionary” principle. At [130] he questioned whether estoppel must be pleaded when it is advanced in response to the proposition that the words in the contract carry their ordinary meaning. At [140] he
As previously discussed Tipping and Wilson JJ undermine their determinations on the admissibility of previous negotiation through the alternative use of estoppel. However, McGrath J used estoppel in the orthodox sense to admit previous negotiations. This orthodoxy, however, can be directly challenged. If one accepts previous negotiations are admissible not only under estoppel and rectification, but also to prove the existence of the subject-matter or background facts known to both parties, then it is arguable the exclusionary rule is stripped of any real substance.204 In practice previous negotiations are likely to be admissible on some established basis. Furthermore, once the evidence is before the court then in practice it may be difficult for a judge to divorce their pure interpretation from the evidence in the negotiations.205
To the contrary, Martin Taylor proposes that following Vector estoppel has taken on a new importance as a tool whereby the court will uphold an agreement to the meaning of a contractual term.206 He suggests this injection of equity is a development to be welcomed. However, McLauchlan has suggested a ‘more principled approach’ than reliance on estoppel.207 If it can be proven parties have negotiated under a common assumption as to the meaning of a contractual term, then that meaning is the meaning of the term. Accordingly, if actual meaning can be ascertained there is no need to invoke estoppel to prevent a party denying that meaning.208 Ascertaining this meaning can be facilitated through the use of previous negotiations thus they should be admissible when undertaking interpretation.
determined that BoPE was not prejudiced by the estoppel as Vector had raised it under the private dictionary principle.
204 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 257.
205 This lack of transparency is essentially what McLauchlan has claimed in relation to Blanchard J’s reasoning. See McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 240- 241.
206 Martin Taylor “Vector Gas – What Does it Mean?” NZLawyer (Issue 134, 16 April 2010) at 16-17.
207 This is a ‘more principled approach’ than estoppel by convention which McGrath J considered at [74] to be a “principled supplementary approach in contract interpretation”.
208 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 248.
Tipping J is the only judge to have addressed Karen Oltmann209. Firstly, his Honour classified the private dictionary principle as a linguistic example of estoppel by convention. The parties are bound by their agreement to use a special linguistic meaning for the purpose of their contract, which neither can later disavow.210 He determines this private code is to be determined objectively. His Honour, like Lord Hoffmann, is not satisfied the Karen Oltmann decision is one of private dictionary meaning as there was no unconventional usage of the word ‘after’.211 He considered that it was an example of an estoppel by convention where the parties had negotiated on a common assumption that words will have one of two meanings. 212
McLauchlan has criticised this reasoning, as hiding under the pretense that it is consistent with Chartbrook.213 Lord Hoffmann did consider Karen Oltmann to be an illegitimate exception. However, he acknowledged the possibility of rectification or estoppel, if specifically pleaded, as both were remedies contending the agreement did not have the meaning the parties were seeking.214 To the contrary, Tipping J explained the decision as one where the parties had reached an agreement to meaning, which they were bound by.215 On this basis Karen Oltmann is not required as an exception to the exclusionary rule as the meaning the parties are bound by is the parties’ actual meaning. There is also no need to distinguish the private dictionary principle as on Tipping J’s analysis evidence of previous
209 Karen Oltmann, above n101.
210 Vector, above n1, at [25-26].
211 Ibid, at [36]. See Lord Hoffmann in Chartbrook, above n3, at [45-46].
212 Ibid, at [34-36].
213 This is because Tipping J claimed the decision does not evidence the private dictionary principle in accordance with Lord Hoffmann.
214 Charbrook, above n3, at [47]. See McLauchlan “Interpretation and Rectification: Lord Hoffmann’s Last
Stand” above n32, at 446-451; “Contract Interpretation in the Supreme Court – Easy Case, Hard Law” above n151, at 248-249 for a criticism of the Lord Hoffmann’s reasoning.
215 Vector, above n1, at [36].
negotiations are always admissible in interpretation, if objectively determined.216 Previous negotiations can be given where there are two unconventional or conventional meanings.
This renders Tipping J’s discussion of the case otiose.217
Rectification must be specifically pleaded and clearly established.218 The Court collectively agreed it would be unfair for rectification to be pleaded at the later stage of the proceedings.219 However, many consider the facts of this case were right for rectification.220 It is claimed this is evidenced by Vector’s final piece of correspondence where it asked for an amendment.221 Critics contend the Court rewrote the contract to reflect a reasonable agreement without concern that a clear remedy, rectification, was the appropriate solution. In doing so, the requirements and safeguards of that doctrine have been circumvented through the use of interpretation.222
216 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law” above n 151, at 250. McLauchlan also argues there is no point distinguishing the principle if Tipping J does not adhere to the plain meaning rule.
217 This ties back to his use of estoppel which was unnecessary and undermines his decision. With respect it
perhaps would have been better to use Karen Oltmann to show the relevance previous negotiations may have in determining the parties’ actual shared meaning in a contract interpretation dispute.
218 Vector, above n1, at [130]. Chartbrook, above n3, at [47] per Lord Hoffmann.
219 Ibid, see [9], [84], [132].
220 See Wilson J at [131]; Court of Appeal in Bay of Plenty Energy Ltd, above n124, at [97]; BoPE submissions in Supreme Court Transcript, above n115, at 61, 113; Hall, above n156 at 23; Martin Taylor “Certainty versus Correctness after Vector Gas” NZLawyer Extra (Edition 7, NZLawyer Online, 30 July 2010)
<www.nzlawyermagazine.co.nz/NZLawyerextraarchive/Bulletin7/extra7F3/extra7F3print/tabid/2500/Default.as px>. It was thought by Wilson J that rectification wasn’t pleaded as a result of compromised objectivity of the counsel representing Vector, see [149].
221 Hall, above n156, at 23. It would certainly be open to argument from BoPE that the mistake was not
common. On this basis, unilateral rectification would be the only remedy available, but as at 1.4.ii the state of this action in New Zealand is unclear. However, as Tipping, McGrath and Wilson JJ’s judgments all considered the parties were negotiating under a common intention that price was inclusive, it is likely objective common intent necessary for common mistake could be found.
222 Hall, above n156, at 23. These requirements relate to delay, third parties and the need for clear and
convincing proof.
In response Taylor asserts there is still a significant burden necessary before a court will displace the formal document through interpretation.223 The Court took care to reaffirm that “linguistic mistakes will not easily be accepted”.224 Taylor further suggests Vector has not expanded the range of circumstances in which a remedy is available for inadequate record of a bargain as, if pleaded, rectification was likely to grant relief anyhow. 225 This leads one into discussion regarding the overlapping processes of interpretation and rectification. Wilson J recognised that rectification is not a question of interpretation, but may in fact obviate a question of interpretation that might arise.226 Tipping J recognised that clear drafting errors will primarily be subject to rectification, but where an error is clear, and intention from both parties is equally clear, then this mistake can be remedied through interpretation, taking context into account.227 In Chartbrook Lord Hoffmann considered the exclusionary rule to hinder the available ‘context’ in an interpretation issue. The consequence of this is to disadvantage correction of mistakes through interpretation, as compared to rectification. Tipping J’s ‘context’ does include previous negotiations thus on his analysis the approach under rectification and interpretation is amalgamated.
It can fairly be stated that at the core of Vector the Court was unanimously convinced the interpretation advanced by BoPE defied commonsense.228 Blanchard J decided the
223 Taylor “Certainty versus Correctness after Vector Gas” above n220.
224 See Vector, above n1, at [61] [128]. McGrath J said at [66] “there must be a strong case to persuade the Court something has gone wrong with the agreement”. Taylor asserts Vector also requires some established justification be satisfied, i.e. estoppel or commercial commonsense, before the court will intervene through interpretation.
225 Taylor “Certainty versus Correctness after Vector Gas” above n 220.
226 Vector, above n1, at [126]. The opposite could be contended, interpretation could obviate rectification which would otherwise arise.
227 Ibid, at [33]. However, this seems to be contrary to the decision he cites in footnote 35, Rattrays Wholesale
Ltd above n90, where Tipping J at 13 states there is no power to go beyond the document at issue.
228 See McGrath J at [8-9]; Tipping J at [46]; McGrath J at [82]; Wilson J at [137]; and Gault J at [151]. Chapman Tripp, above n191.
background proceedings indicated the only ‘commercially sensible’ conclusion which was ‘$6.50 per GJ’ was exclusive of transmission costs, otherwise the agreement was extremely unfavorable for Vector considering the recovery they have could received in court.229 Tipping J also considered it was unlikely Vector would be willing to enter into the agreement on this less favourable basis.230 McGrath J recognised the courts are not required to attribute to the parties an intention they could not have intended, especially where it flouts business commonsense.231 Wilson J considered it defied commercial commonsense for Vector to have entered the agreement when they could have received market price and transmission costs under BoPE’s undertaking.232
As discussed some commentators argue the Court rewrote the plain meaning of the contract to facilitate a more fair and reasonable bargain.233 This is despite Lord Hoffmann’s caution that a contract appearing unduly favorable to one party is not sufficient reason for supposing it means otherwise.234 Wilson J considered that where a decision defies commercial sense, then it constitutes more than a bad bargain. The distinction between what merely amounts to a bad bargain and what defies commercial sense is fine.235 Vector illustrates this point with disagreement between the lower Courts and Supreme Court on this issue. McLauchlan argues the facts of Vector were possibly not comparable to cases where genuine commercial absurdity was found236 and as a result Blanchard J, who decided on this ground alone, has
229 Vector, above n1, at [9].
230 Ibid, at [39].
231 Ibid, at [82].
232 Ibid, at [137].
233 See Tat, above n156; Hall, above n221, at 23; Taylor, “Vector Gas – What Does it Mean?” above n206 at 16 recognises the Court might have been motivated to achieve justice rather than adhere to the literal terms.
234 Chartbrook, above n3, at [20]. Blanchard J recognises this at [9].
235 For example, in application to Vector, did BoPE out-negotiate Vector, or were they trying to take advantage of a recording error?
236 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 236.
See for example, Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749. In that decision a notice to terminate a lease on “12 January” actually meant “13 January” as a reasonable person in the position of the landlord with knowledge of the contract would have understood this. Investors Compensation Scheme and Chartbrook are also cited as examples where genuine commercial absurdities were found.
come very close to remedying a bad bargain under the guise of interpretation.237 He proposes that if one could not consider the parties’ prior correspondence when undertaking interpretation then it is unlikely one would infer something had gone wrong with the language.238
Whether or not the agreement was commercially sensible, consideration of the use of this ground is necessary. It must be noted commercial commonsense was not used as a ground in itself, other than by Blanchard J. In fact the other members of the bench did not decide on commercial sense alone, but supplemented this reasoning with other grounds. Tipping J only used it to reinforce his interpretation. McGrath and Wilson JJ considered the ground but decided on estoppel in the alternative. Furthermore, the bench did not use commercial commonsense as an abstract reason in itself.239 The absurdity was used to discern the intent of the contracting parties.240 This is in accord with the aim of interpretation, to discern the parties’ intent, actual or objective.
237 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 236. McLauchlan further warns of the danger of this approach for future parties at 235.
238 Ibid. Blanchard J claimed to have reached his decision without previous negotiations, which merely reinforce
his interpretation. McLauchlan argues at 240 that this is an example of a judge adhering to the exclusionary rule but in practice invoking the evidence. However, it must be noted Wilson J’s application of commercial commonsense is reached without consideration of the negotiations, although on his approach, they were admissible if he did want to regard them. McGrath J also does not use the previous negotiations when considering the commercial sense of the transaction, and only considers them in depth under estoppel.
239 Cf McLauchlan who criticises Wilson J’s exception for commercial commonsense. Wilson J explains a
commercial absurdity as there being ‘no possible commercial justification for the results of giving the words of the contract their ordinary meaning.’ McLauchlan claims this is a stricter inquiry than considering whether a reasonable person would intend the meaning. The test Wilson J poses is one whereby absence of commonsense is in itself enough to displace the meaning of the document. See McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 263-264.
240 Vector, above n1. See Blanchard J at [10] who claims “no party acting rationally would in these
circumstances have agreed to give up transmission costs”; Tipping J at [45]: “a reasonable and properly informed reader would undoubtedly have understood BoPE to be agreeing to pay $6.50 plus transmission costs”; McGrath J at [82] “For [Vector] to have agreed to those terms would flout business commonsense...strong indication something went wrong with the language”; Wilson at [139] “in order to give commercial sense to their contract, the parties must have intended price be exclusive of transmission costs”.
2.3 The State of the Law Following Vector
After considering the complexity and diversity of Vector it is important to determine whether a collective majority can be found regarding the admissibility of previous negotiations, or the ground decided on. Unfortunately, after the analysis it becomes apparent there is no clear majority to either. Most commentating on Vector observe that the issue has not been resolved and rather the Court has confused the state of law.241 The five separate judgments present a view that is far from uniform. Both Tipping and Wilson JJ explicitly abandoned the exclusionary rule,242 contrary to the one explicit upholding of the rule from McGrath J. It then seems the balance lies with Blanchard J, with the support of Gault J. Johnson argues Blanchard’s liberal subject-matter exception combined with his reference to a clear limiting principle on the use of pre-contractual negotiations, the exclusion of subjective intent, demonstrates partial agreement with Tipping J.243 However, it is more arguable the judgment of Blanchard J implicitly affirmed the existence of the rule through his Honour’s use of the subject-matter exception. Nonetheless, a clear majority for upholding the rule cannot be found either as Blanchard J employed a liberal version of the subject-matter exception, leaving little substance in the rule. Furthermore, his Honour left the question open for another day. It is more tenable there is now strong authority that previous negotiations have relevance in contract interpretation and are likely to be admissible.244 On which grounds, however, is unclear. The liberal approach taken by the Court and the use of negotiations in every
241 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 265; David Goddard ‘Contract Law Update’ Commercial Law Intensive (NZLS, Wellington, May 2010) 1 at 6; Taylor “Vector Gas – What Does it Mean?” above n206, at 16.
242 It must be bore in mind that under Wilson’s judgment the admissibility of previous negotiations are still
subject to one of his exceptions applying.
243 Johnson, above n130, at 52.
244 Goddard, above n241, at 7-8; Johnson, above n130, at 52. Not all commentators agree with this analysis. See Brent O’Callahan “Transactions – Contract Interpretation” [2010] NZLJ 137 who argues Vector left the law unchanged as the facts of the case did not require any development in the law to resolve the issues. He claims practitioners can keep playing by the same rules. Although he does not rule out that this may change if a case comes before the Supreme Court where the admission of such material would produce a different result than the more traditional approach. See also Brent O’Callahan “Transactions – Contract Interpretation- Previous Negotiations” [2010] NZLJ 69 at 70.
judgment is indicative of the fact it seems likely full reference to negotiations will become standard.245
Even though no consensus can be found on the admissibility of previous negotiations the importance of commercial commonsense in interpretation cannot be denied following Vector. Although the majority did not decide on this ground alone, it was a common theme running throughout the judgment. It could also be argued a majority ruling can be found under estoppel by convention.246 Commentators have recognised the importance and relevance of estoppel in contract interpretation following the decision.247 However, this majority is slightly dubious, considering both Tipping and Wilson JJ decided on estoppel in the alternative.
As helpful as the comments and predictions are in determining the law post-Vector, it is pertinent to consider how the lower courts have analysed the decision and approached contract interpretation. McLauchlan predicts courts will act with puzzlement and exasperation at the state of disarray.248 One High Court decision has explicitly recognised an analysis in the light of Vector is not straightforward.249 Deeper analysis shows inherent confusion in some judgments, especially regarding the objective theory. Tipping J’s objective analysis is cited alongside McGrath J’s and ICS, which as discussed, fundamentally differ.250
245 Taylor “Vector Gas – What Does it Mean?” above n206, at 17; Goddard, above n241, at 8.
246 McLauchlan, “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151, at 266 recognises it has majority support through Wilson, Tipping and McGrath JJ.
247 Taylor “Vector Gas – What Does it mean?” above n206, at 16-7; Chris Browne & Kate Morrison “Use of
Evidence of Prior Negotiations in Contract Interpretation” (2010) <www.wilsonharle.com/use-of-evidence-of- prior-negotiatons-in-contract-interpretation>.
248 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151 at 265.
249 Blackler v Tiger Lilly Productions Ltd HC Wellington CIV-2009-485-1599, 23 March 2010 at [46]. The judge avoided a contract interpretation analysis by concluding there was no contract which had come into force. 250 See Blackler, above n249, at [43]; Lumley General Insurance (NZ) Ltd v Body Corporate No 205963 [2010] NZCA 316 at [29] where the Court stated the objective was to ascertain ‘presumed mutual intent’ and cited Tipping J for this proposition; See also Dominion Finance Group Ltd (in rec and in liq) v Dyson Smythe & Gladwell (2010) 24 NZTC 24,330 (HC) at [31-32]; KC Securities Ltd v Belgrave Finance Ltd (in rec) CA115/10, 8 September 2010 at [30-31].
It appears no cases have attempted to analyse what ground Vector was decided on. Nevertheless, some direction from the decisions can be gained.251
Many cases use Vector in an orthodox manner. Some judgments use the decision to affirm the decline in the plain meaning rule and the importance of a contextual approach in interpretation.252 Others affirm the use of commercial commonsense in contract interpretation.253 Many of the cases cite Tipping J’s objective approach254 as the appropriate approach to contract interpretation.255 Notwithstanding many of those judgments are likely to have cited Tipping J without regard for the distinction with respect to the strict objective approach, the authority is present and their affirmations give strength to Tipping J’s judgment.256 These decisions provide further evidence of New Zealand courts being more concerned to ascertain actual intent over presumed.
251 This is contrary to the view of Goddard who considers Vector provided no useful guidance to lower courts but rather lays out a smorgasbord of possible approaches. See Goddard, above n241, at 7.
252 See ANZ National Bank Ltd v Tower Insurance Ltd [2010] NZCA 267 at [88]; Camelot Partnerships Ltd v
BOP Business Consultants Ltd HC Tauranga CIV-2009-470-1052, 29 June 2010 at [53]; Chang v Lumley General Insurance (NZ) Ltd HC Auckland CIV-2009-404-7820, 23 August 2010 at [36-36]; Henderson v Henderson HC Auckland CIV-2009-404-5557, 26 April 2010 at [30-31]; I-Health Ltd v iSoft NZ Ltd HC Auckland CIV-2006-404-7881, 8 September 2010 at [23]; Little v IAG New Zealand Ltd HC Auckland CIV- 2010-404-729, 26 August at [25].
253 See Todd Pohokura Ltd v Shell Exploration NZ Ltd and Anor HC Wellington CIV-2006-485- 1600, 13 July
2010 at [111-112]; Chang, above n252, at [36]; I-Health, above n252, at [31]; Lumley, above n250, at [41]; KC Securities, above n250, at [38]. The court distinguished the facts from Vector as the background there demonstrated KC Securities failed to negotiate better terms, and thus it was not commercially absurd in the sense it was in Vector.
254 Embodied in Vector, above n1, at [19].
255 Todd above n253, at [110]; Chang, above n252, at [36]; D A Constable Syndicate 386 v Auckland District Law Society Inc [2010] NZCA 237; [2010] 3 NZLR 23 at [23]; Dominion Finance, above n250, at [32]; Henderson, above n252, at [30]; I Health, above n 252, at [22]; Porteous v Chief Executive of The Department of Building and Housing (2010) 9 NZELC 93,520 (EMC) at [59]; Mathews v CP Realty (PN) Ltd HC Palmerston North CIV-2010-454- 276, 15 September 2010 at [28].
256 They are also unlikely to appreciate the possible consequences for the admissibility of previous negotiations
flowing from the differing objective approaches.
What are more controversial are the decisions of the lower courts regarding the admissibility of previous negotiations. Like the Vector decision, the approaches are varied. Henderson v Henderson quotes the judgment of McGrath J257 whereby he confirms the application of the exclusionary rule in New Zealand.258 The context of this quote aimed to demonstrate that evidence of common intention was available for rectification and estoppel claims. In Fairview Park v Harrison Grierson Consultants259 Associate Judge Faire recognised the breadth of the factual inquiry in interpretation is less than in rectification due to the exclusionary rule. The Judge did not consider that the breadth of the inquiry under interpretation had changed after Vector.260 However, Court of Appeal authority in Cockburn v CS Development considers otherwise.261 Counsel submitted on the authority of Vector that the Court should consider the negotiations to assist in interpretation.262 The Court recognised Vector took differing approaches to admissibility and went on to state that despite those differences, evidence of negotiations would be helpful if it shed light on objective commercial purpose,263 or objective meaning.264 The Court cited approval of Tipping J’s analysis of the distinction between negotiations which constitute relevant objective evidence, which is admissible, and evidence of subjective intent which is not. The Court considered the negotiations and found on the facts there was no objective evidence to support the meaning claimed.265 Asher J in I-Health Ltd v I-Soft NZ Ltd266 has provided the most extensive
257 Vector, above n1 at [67].
258 Henderson, above n 252, at [45].
259 Fairview Park Ltd v Harrison Grierson Consultants Ltd (No 2) HC Auckland CIV-2006-404-6588, 4 May 2010.
260 Ibid, at [19]. In essence he considered the exclusionary rule is still good law.
261 Cockburn v C S Development No 2 Ltd [2010] NZCA 373 (CA) at [74].
262 The facts concerned a dispute about the GST implications of an agreement for sale of a property. Cockburn contended the property was sold as a going concern and therefore zero-rated for GST purposes. The Court was asked to consider evidence of the previous negotiations. They found that when inadmissible subjective evidence was stripped from the negotiations, little assistance could be derived.
263 Cockburn, above n261, at [74]. This is in accordance with objective background fact exception. They quote
approval of Blanchard J’s liberal subject-matter exception.
264 This is directly contrary to the proposition that evidence of previous negotiations cannot be considered to provide a gloss on meaning. This proposition was cited with reference to Tipping J in Vector at [27].
265 Cockburn, above n261, at [74-79].
examination of Vector. He considered Tipping, Blanchard and Wilson JJ declined to follow Chartbrook.267 In accordance with the judgment of Tipping J he admitted previous negotiations on the basis that when construed objectively they could be relevant to establish background facts, known to both parties, and furthermore to cast light on meaning.268 He acknowledged subjective intent was inadmissible. Asher J undertook a clear and logical analysis whereby he examined the relevant previous drafts and emails to firstly determine objective background facts, and then to discern the extent to which they shed light on the parties’ intended meaning. He carefully excluded subjective material where it asserted internal exchanges of individual thought.269
2.4 Conclusion
It is apparent Vector has resulted in confusion amongst commentators, judges and practitioners. There seems to be some authority following Vector which counsel could rely on to admit evidence of previous negotiations, but there is no clear statement in favour of abandoning the exclusionary rule. It seems that at this stage previous negotiations could be admissible on the authority of Tipping and Wilson JJ’s judgment with the support of Cockburn and I-Health. If this approach is not utilised then evidence of previous negotiations is still likely to be admissible in contract interpretation under the established exceptions. For the lawyer advising, it would be pertinent to review pre-contractual material to determine the extent these shed light on meaning.270
266 I-Health, above n 252. The facts concerned the sale of I-Health to I-Soft, with the purchase price being a percentage of future turnover. I-Soft breached the agreement by failing to use all reasonable endeavors to promote and sell the product. The issue regarded the interpretation of a limited liability clause and whether it operated to limit I-Soft’s liability for breach of the best endeavors clause. Asher J determined the clause did limit I-Soft’s liability.
267 Ibid, at [37]. He determined Blanchard J’s liberal version of the subject-matter exception went further than
the principles in Chartbrook.
268 Ibid, at [40-41].
269 Ibid, at [52].
270 Goddard, above n 241, at 8. He furthermore states any documents relating pre-contractual negotiations should be discovered and reviewed in every interpretation dispute.
PART THREE: THE ADMISSIBILITY OF PREVIOUS NEGOTIATIONS
In the words of Lord Steyn, the reason for a rule is important and the rule ought to apply where the reason requires it. If the rule appears not to fulfill its purpose it is potentially defective and is at liberty for review.271 This part aims to demonstrate that the rule precluding the admissibility of previous negotiations in contract interpretation is defective in principle and in practice. Firstly, this part promotes conceptual clarity in contract law. The misunderstanding surrounding the objective approach will be discussed and it will be demonstrated previous negotiations are capable of being accommodated within the objective theory. Abandoning the rule will also result in more coherent contract principles. Secondly, this part criticises the rule in practice. The relevance and utility of prior negotiations will be emphasised and the pragmatic considerations used to justify the exclusion will be counterbalanced to demonstrate they are inadequate reasons for retaining the rule. Finally this part will consider further justifications and advantages in abandoning the exclusionary rule, being transparency and harmonisation with international instruments. In essence this part advocates for a liberal contextual approach where there are no artificial limits on evidence.272 Previous negotiations should be admissible on account of their relevance in ascertaining the background facts known to both parties and in shedding light on the meaning intended by the parties. They will be relevant to meaning where they are objective and demonstrate actual mutual intent, or where one party has led the other to reasonably believe they accepted a certain meaning. Subjective, inner, intention is not admissible on any account. In accepting these propositions it is important not to lose sight of the fundamental premise that we will not easily accept mistakes in a formal contract.273 However, where context is required in interpretation, the surrounding circumstances should not be artificially restricted by the exclusionary rule.
271 Steyn “Contract Law: Fulfilling the Reasonable Expectations of Honest Men” above n5, at 433.
272 As opposed to a traditional literal approach focused solely on the meaning of words, or the qualified contextual approach embodied in Investors Compensation Scheme. See discussion from McLauchlan in “Contract Interpretation, Contract Formation & Subsequent Conduct” [2006] UQLawJl 7; (2006) 25 UQLJ 77 at 90-94; McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law” above n151, at 258-259.
273 Chartbrook, above n3, at [14-15]; Vector, above n1, at [61][128]; Yoshimoto, above n7, at [75].
3.1 The Exclusionary Rule and the Misunderstanding Regarding the Objective Theory
As previously canvassed274 there is a difference of opinion regarding the precise meaning of objectivity. This operates at the core of the division between judges, practitioners and academics as to the admissibility of prior negotiations. To recap, a strict theory of objectivity is concerned with ascertaining the meaning the document conveys to the reasonable person. This entails an impersonal construction, whereby the parties are stripped of their personalities and assumed to be reasonable men.275 This external standard is used to presume the parties’ intent. Effectively, the court is discerning the intention the parties should have had, as a reasonable person would have had this intention. Actual intent, even where objectively manifested, represents the parties’ inadmissible subjective intent. Previous negotiations as a revelation of actual intent are therefore irrelevant to the inquiry.276 They can only be received to the limited extent they shed light on the contract’s purpose and background. Lewison claims the traditional formulation of interpretation, framed in reference to the parties’ intention, gave rise to the erroneous thought that the inquiry was to ascertain the intention of the actual parties. He claims this is not the approach taken by English law, which despite references to intention, has always been presumed intention.277 The theory of presumed intent seems to have been approved in countless statements, and perhaps seems beyond challenge. Judges have come to presume intent without questioning the process.278
274 See 2.2.A.i.
275 Hoffmann “Intolerable Wrestle with Words and Meaning” above n10, at 661-662; Steyn, above n5, at 433.
276 Nicholls above n107 at 582; Collins, above n6, at 197; McLauchlan “New Law of Contract Interpretation” above n26, at 165; See also Vogenauer, above n71, at 128.
277 Lewison, above n12, at 21-22. He claims this was re-emphasised in ICS. Lewison quotes the following
passage from Reardon-Smith in support of this proposition: “when one speaks of the intention of the parties, one speaks objectively - they cannot themselves give evidence directly of their intention – what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties.” With respect to Lewison, this quote actually supports the expansive theory of objectivity as the reasonable person is not strictly detached but in the position of the parties.
278 Gibbons, above n130, at [96] per Thomas J; Valcke, above n71, at 11 recognises the English courts have
refrained from clarifying the objective theory and describes the concept as “inherently unstable.” As discussed, the confusion in approach is evidenced in Wilson J’s judgment in Vector and some of the lower court decisions
To the contrary, Thomas J claims formalism has caused the object of giving effect to intentions to be confused.279 Mere rhetorical weight should not be given to statements regarding the ascertainment of intent, nor should the doctrine be elevated to a universal rule whereby it is always necessary to presume intent.280 Rather the parties’ actual mutual intent should be ascertained where possible with the strict objective test applying in the absence of actual intention.281 The inquiry no longer focuses on discerning what the parties should have intended in reference to what a reasonable person would have intended. Instead, the reasonable person is placed as far as possible in the position of the contracting parties.282 The inquiry asks what did they actually intend, discerned under an objective framework. Actual intention as to meaning must be mutual or where one party led the other to reasonably believe they had accepted a particular meaning.283 This is an approach said to uphold the reasonable expectations of the contracting parties.284
post-Vector. This confusion results from a distinction that is often not appreciated when articulating the objective theory.
279 Gibbons, above n130, at [95]. In Yoshimoto, above n7, at [37] he found the objective of ascertaining actual
intent was a cardinal principle, enshrined in ancient authority.
280 Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 153; McLauchlan “New Law of Contract Interpretation,” above n26, at 166.
281 McLauchlan “A Contract Contradiction” (1999) 30 VUWLR 175 at 177.
282 Counsel for Persimmon Homes invited the House of Lords to relax the rule on the ground the rule was illogical and prevented the court from putting themselves in the positions of the parties’ and ascertaining their true intent. See Chartbrook, above n3, at [30]
283 McLauchlan, “Contract Interpretation: What is it About?” above n57, at 13.
284 Yoshimoto, above n7, at [71]; McLauchlan “New Law of Contract Interpretation” above n26, at 166; Sebastian Grammond, “Reasonable Expectations and the Interpretation of Contracts Across Legal Traditions” Social Science Research Network <http://ssrn.com/abstract=1474266> at 10. Cf Holborow, above n14, at 273 who thinks a conservative approach is required for contract law to enable the efficient conduct of business and the parties’ reasonable expectations. Parties would be surprised if they realised their words could be overturned by the meaning of the contract. Stephen Smith “The Reasonable Expectations of the Parties: An Unhelpful Concept” (2009) Social Science Research Network. <http://ssrn.com/abstract=1349995> provides an interesting discussion on the different conceptions of a “reasonable expectation” and the limited role it plays in interpretation. He claims it is more useful as a slogan than a practical concept.
In most instances actual and presumed intent will correspond, however, we cannot always be sure.285 Consequently, where actual intent is discernible, a court should do so over presuming intent.286 A meaning should not be imposed on parties which may not accord with their actual intention.287 Ascertaining actual intent, however, is not possible in every case. Frequently the parties will not have contemplated the situation that has arisen. It would be an impossible task and furthermore artificial to attribute intention where it was clearly not formed. Meaning in this instance can only be resolved through presumed intention.288
The decision in Codelfa289 evidences a situation where actual intent prevails. If parties refuse to include a provision in their agreement then evidence of this refusal should be, and is, admissible. The court should not undertake the objective exercise to the extent they might attribute a meaning that the parties were united in rejecting. There is the risk this could occur if the inquiry is framed from the detached reasonable observer. This decision is claimed to destroy the rationale for the exclusionary rule.290 If evidence of a common rejection was admissible to determine actual meaning then evidence establishing the parties were united in accepting a meaning should too be admissible.291 Lord Hoffmann’s discussion regarding a conversation between Alice and Humpty provides a further example.292 Humpty informs Alice that “glory” means “a nice knock-down argument” contrary to its ordinary meaning. Lord Hoffmann states Alice, as a reasonable person who has been expressly told,293 will now have no problem in understanding what “glory” means. McLauchlan argues this reveals Lord Hoffmann is in fact not a strict objectivist. The reasonable person is in fact placed in the
285 Gibbons, above n130, at [63]; Hoffmann, “Intolerable Wrestle with Meaning and Words” above n10, at 661.
286 Ibid, at [97] per Thomas J.
287 Yoshimoto, above n7, [37]; Gibbons, above n130, at [63] per Tipping J; McLauchlan, “Common Assumptions and Contract Interpretation” above n108, at 241.
288 Attorney General v Dreux, above n88, at 632; Yoshimoto, above n7, at [37]; McLauchlan “Contract
Interpretation: What is it about?” above n57, at 10; “Objectivity in Contract” above n6, at 488.
289 Above n74.
290 Nicholls, above n107, at 584 claims this decision “lets the cat out of the bag”; McLauchlan “A Contract Contradiction” above n281, at 187.
291 McLauchlan “A Contract Contradiction” above n281, at 187.
292 Investors Compensation Scheme, above n2, at 914.
293 Or if she could infer this from the surrounding circumstances.
position of the parties, aware of their shared communications and understandings.294 The objective meaning of “glory” is a “nice knock-down argument” in accordance with their actual intent.295
Those advocating previous negotiations should be admissible are resolute in asserting subjective intention is inadmissible.296 As discussed, subjective intention represents one party’s uncommunicated, inner intent. It is not suggested a party should be allowed to deliver an unsubstantiated version, with the benefit of hindsight, as to what they meant.297 Claims of previous negotiations and declarations of subjective intent as one in the same, no longer hold true. Admissible evidence of negotiations is not “drenched in subjectivity”.298 On the approach advocated for, it is illogical to exclude previous negotiations to the extent they constitute objective evidence of intention.299
Once accepted it is legitimate for a court to give effect to actual intention, then objections to the admissibility of previous negotiations on the basis of an inconsistency with the objective theory become null. To exclude the evidence would in fact be perverse. The judge armed with previous negotiations will be better equipped to ascertain actual intention, as the most
294 McLauchlan “Contract Interpretation: What is it About?” above n57, at 39; “Objectivity in Contract” above n6, at 493-494. He reveals a fundamental inconsistency with this proposition is that is that the evidence of shared understandings is excluded by Lord Hoffmann’s ban on previous negotiations.
295 Alice is bound not because we are concerned with their subjective intentions, but because a reasonable
person in Alice’s position, armed with her knowledge, would have understood this to be the meaning.
296 See Yoshimoto, above n7, at [49][74]; Tipping, above n1, at [19]; McKendrick “Interpretation of Contracts & the Admissibility of Previous Negotiations” above n39, at 265; McLauchlan, “Contract Interpretation: What is it About?” above n57, at 13; McMeel, “Prior Negotiations and Subsequent Conduct” above n35, at 274; Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 146.
297 Yoshimoto, above n7, at [74]; McLauchlan “New Law of Contract Interpretation” above n26, at 170. This
differs from the civil system whereby any evidence of what the parties actually intended, explicitly or implicitly, is legally significant, even if it has not been shared with the other. See Valcke, above n71, at 5.
298 Cabrelli, above n20, at 14. He claims Lord Hoffmann’s rather blunt and simplistic analysis breaks down at
the margins.
299 McKendrick “Interpretation of Contracts & the Admissibility of Previous Negotiations” above n39, at 264-65 recognises the exclusionary rule in its present form goes further than just excluding declarations of subjective intent and encompasses objective evidence of mutual intent.
pertinent background is no longer artificially excluded.300 In accordance with the move away from the plain meaning rule, abandoning the exclusionary rule is another step in ascertaining actual intent.301 This shift is evidenced by Supreme Court decisions302 and Tipping J’s analysis in Vector. An undermining of the presumed intent approach is also reflected in Codelfa and Karen Oltmann.303 More recently this trend is evidenced by post-Vector decisions.304
It could be argued the confusion is embedded in an inconsistency between underlying contract theories and the objective approach. Classical will theory framed contract law principles in reference to inner will and intention.305 This paper adheres to promissory theories which later subsumed classical will theory. Contracts are essentially still considered to be self-imposed voluntary obligations but the concept of inner wills was removed.306 Under these theories interpretation is concerned with the ascertainment of intention.307 However, this fundamentally conflicts with the objective theory and the search for apparent intention.308 This creates perennial uncertainty, reflected in the debate regarding previous negotiations. If interpretation is to be achieved on a strict objective approach then previous negotiations are inadmissible to the extent they reveal intention. However, if interpretation is framed in reference to discerning intention, then previous negotiations should be admissible. Smith’s solution to this inconsistency supports the approach advocated for. Subjective intention is not
300 Nicholls, above n107, at 580-583; McLauchlan “A Contract Contradiction” above n281, at 183; Collins, above n6, at 197, cites Roy Goode who claims “often the negotiations culminating in the contract is the best guide to the intention of the parties”.
301 Yoshimoto, above n7, at [71]. The plain meaning rule essentially presumed the plain meaning to be the
parties’ intention, rather than ascertaining actual intent.
302 Gibbons, above n130; Totara, above n138.
303 See later discussion at 3.2.iv.c.
304 Discussed at 2.3. See n255.
305 Paterson, Robertson & Duke, above n36, at 5-7.
306 Ibid, at 9-12. Stephen Smith, Contract Theory, (Oxford University Press, New York, 2004) at 56-59. If classical will theory was adhered to as governing contract principles, then the claim advocated in this paper that subjective inner intention is inadmissible on all accounts would be inconsistent with the theory.
307 Cabrelli, above n20, at 1.
308 Collins, above n6, at 189.
relevant to interpretation and on that basis classical will theory will always be inconsistent with the objective theory.309 However, under the promissory version of contract, meaning is public and objective, as opposed to inner wills.310 Actual intent can therefore be accommodated to the extent it is expressed objectively. Mitchell furthermore argues contracts should be ascertained according to intent, not just as a matter of contractual theory, but also as a matter of legal entitlement derived from voluntary assumed obligations.311
3.2. Establishing Coherency
The exclusionary rule and surrounding legal principles are conceptually unsound. Maintaining the rule on the basis of policy has come at a cost for coherency.312 This section will consider the exclusionary rule and incoherency in relation to contract formation, the contextual approach to interpretation and the admissibility of subsequent conduct. Finally, this section will consider the unsound exceptions to the rule and the effect abandonment of the exclusionary rule would have on the doctrines of rectification and estoppel.
Contract formation also mandates an objective approach.313 However, here the objective approach is more concerned to give effect to actual intentions through the requirement of an intention to create legal relations and doctrines such non est factum.314 In deciding whether parties should be held to their bargain a court is required to engage with relevant material, including objective evidence of previous negotiations. There is no sensible reason why interpretation should differ from the formation process. Why should a party be permitted to
309 Smith, Contract Theory, above n306 at 272-273.
310 Ibid, at 272-274.
311 Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 154.
312 McLauchlan “New Law of Contract Interpretation” above n26, at 175; Cf Spigelman, above n54, at 332 who considers coherency is unquestionably desirable, but not the only value in contract law. He claims there is no incoherency in having a general rule, subject to exceptions, where there are good policy reasons. He argues the common law does not have the same fascination with consistency as civil law systems do.
313 Smith v Hughes (1871) LR 6 QB 597 per Blackburn J.
314 Smith, above n306, at 173-176.
contradict an apparently complete contract, but not the apparent meaning of the contract?315 Furthermore, if the issue of formation is not upheld in court, then it is possible an interpretation claim might be brought in the alternative. The court must then discount the evidence when undertaking interpretation, resulting in “unnecessary intellectual gymnastics.”316 This is illustrated in Edwards v O’Connor where the New Zealand Court of Appeal relied on pre-contractual material to conclude the agreement in writing constituted the whole contract.317 However, in accordance with the parol evidence rule, on the issue of construction the Court concluded evidence manifesting intention was not admissible and went on to apply the strict objective theory.318
In light of the contextual approach taken to interpretation, it is difficult to rationalise the exclusion of previous negotiations from ‘absolutely anything’ in the admissible matrix of fact. The exclusionary rule was founded in an era, very remote from the contextual approach now taken, where interpretation focused solely on the document.319 Yet the rule was re-stated in ICS, inherently conflicting with the rest of the ‘commonsense’ principles formulated.320 The most pertinent background should not be excluded from the admissible context, as a reasonable person in the position of the parties gains an incomplete picture and is less able to discern the parties’ intended meaning.321 Furthermore, previous negotiations would facilitate discerning what is commercially sensible and what is merely a bad bargain.322
315 McLauchlan “Objectivity in Contract” above n6, at 496; “A Contract Contradiction” above n281, at 182.
316 McMeel “Prior Negotiations and Subsequent Conduct” above n35, at 286-287.
317 [1991] 2 NZLR 542. The trial judge Smellie J had found the agreement was partly written and partly oral. The facts concerned a contract regarding the sale of a fishing business. The issue was whether fishing quota passed with the sale. The evidence excluded by the court clearly evidenced an intention that it was meant to.
318 Ibid, at 548-550.
319 McKendrick “Interpretation of Contracts & the Admissibility of Previous Negotiations,” above n39, 273-274.
320 A Kramer “Common Sense Principles of Contract Interpretation” (2003) 23 (2) OJLS 173 at 180.
321 McLauchlan “Contract Interpretation: What is it About?” above n57, at 32; Richard Buxton “‘Construction’ and Rectification After Chartbrook” (2010) 69(2) CLJ 253 at 259.
322 Cabrelli, above n20, at recognises the court may be able to determine the agreement was a bad bargain due to
concessions given during the negotiations. See discussion at 2.2.D regarding McLauchlan’s claim that
Subsequent conduct, until recently, was also excluded in interpretation disputes. It was considered “one and the same principle which excluded evidence during the negotiations, or subsequent to the contract.”323 As discussed, the Supreme Court in Gibbons lifted the ban on subsequent conduct.324 This rejection calls for reconsideration of the ban for previous negotiations. Subsequent conduct is now admissible on the basis it provides a reliable guide in establishing the commercial purpose, background and furthermore where it sheds light on the mutual intention of the parties.325 Much of the reluctance in admitting subsequent conduct was an inability to distinguish between the task of giving effect to mutual intention and the misguided exercise of ascertaining subjective intent. It is now established the latter is an illegitimate exercise and that evidence must be objectively ascertainable in order to elucidate meaning.326 There can be no sensible reason for continuing to exclude previous negotiations when they will be used on the same basis as subsequent conduct and could possibly provide an even more reliable guide to meaning.327 If the exclusions derived from the same principle, then logically, previous negotiations should no longer be subject to exclusion, just as subsequent conduct is not.
Blanchard J in Vector inadvertently used the prior correspondence to determine the agreement was not ‘commercially sensible’.
323 L Shuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 at 261; Steyn “The Intractable Problem of
the Interpretation of Legal Texts” above n27, at 10 states the exclusion on both pre-contractual and post- contractual conduct was described as the “two sacred cows” of English Law.
324 Gibbons, above n130. There is still some confusion regarding the requirement of mutual conduct. Tipping
and Anderson JJ found mutual conduct was needed, in disagreement with Thomas J. In Vector Wilson J at
[122] considered mutuality was not a requirement but a consideration in weight. Tipping J at [30] also considered his relevance approach was a more simpler and clearer articulation than in Gibbons.
325 McLauchlan “Interpretation & Rectification” above n32, at 453; “Contract Formation, Contract
Interpretation, and Subsequent Conduct” above n272, at 84.
326 Gibbons, above n130, at [114] per Thomas J.
327 As discussed, this reasoning was prominent in the judgments of Tipping and Wilson JJ in abandoning the rule. See Vector, above n1, at [31] per Tipping J; at [129] per Wilson J.
The exceptions to the exclusionary rule also demonstrate incoherency. Formalism and compartmentalisation are being used to overcome a defective and unjust rule.328 The exceptions cause many fine distinctions to be drawn and really serve to demonstrate the rule is wrong in principle. The exceptions for rectification, estoppel, private dictionaries and Karen Oltmann are primarily concerned with giving effect to the parties’ actual mutual intentions. There is no need for these exceptions where the primary purpose of interpretation is to ascertain actual mutual intention. Rather if previous negotiations are admissible, these exceptions will, to a large extent, be accommodated within interpretation. This section aims to highlight the difficulties with the exceptions.
a) Objective Background Facts
This exception involves the difficult process of distinguishing evidence in previous negotiations to the extent they shed light on objective background facts or the subject-matter of the contract, and disregarding the evidence for the light it might shed on meaning. This involves a very thin line that is hard to draw in practice.329 Furthermore, in light of the liberal analysis Blanchard J accords to the subject-matter, this exception in essence can be used to shed light on meaning, contributing to a lack of transparency in judicial reasoning.330 If the exclusionary rule was abandoned previous negotiations could be used to facilitate an understanding, not only of the objective background, but also the meaning intended by the parties.331
328 McLauchlan “Contract Interpretation in the Supreme Court” above n151, at 257.
329 McKendrick “Interpretation of Contracts & the Admissibility of Contracts” above n39, at 273; Mitchell “Contract Interpretation: Pragmatism, Principle and the Prior Negotiation Rule” above n49, at 152; McLauchlan “Interpretation and Rectification” above n32, at 443.
330 See later discussion at 3.4.A.
331 Tipping and Wilson JJ in Vector demonstrate this approach. See also Cockburn, above n261; I-Health, above n252; Brownsons Holdings (1999) Ltd v The Plaza Pakuranga Ltd High Court Auckland CIV 2004-404-2113, 30 May 2006.
b) Estoppel and Private Dictionaries
After Vector the prominence of estoppel is evident. However, estoppel proves to be an artificial and unnecessarily cumbersome means of holding a party to their intention.332 Unconscionability must be established and it is difficult to see why this should act as an obstacle in ascertaining the parties’ actual intentions.333 If previous negotiations are admissible to confirm the parties were negotiating on the basis of a common understanding that a term had a particular meaning, then that meaning is the meaning of the term. This will be so, whether the meaning was a private code or conventional. Both are to be determined on an objective basis. This is a more principled and coherent approach, where there is no need to invoke the “legitimate safety device” of estoppel.
The decision in Karen Oltmann, despite numerous attempts to analyse it in orthodox terms, clearly evidences an exception devised in order to escape the exclusionary rule. 334 The decision demonstrates how previous negotiations can be helpful and relevant in establishing a shared meaning. Using previous negotiations to ascertain common assumptions to meaning should not, however, be precluded by a requirement of ambiguity.335 Karen Oltmann illustrates a Court willing to ascertain actual intent, over presumed intent, where it exists.
d) Rectification
Rectification and the overlap with interpretation, demonstrate the most incoherent aspect of the exclusionary rule. Interpretation has overtaken much of rectification’s role through the modern contextual approach, causing the two to live in uneasy parallel.336 The contextual
332 McLauchlan “Contract Interpretation in the Supreme Court” above n151, at 248-249.
333 Ibid, at 249.
334 Collins, above n6, at 197, recognises the decision was most likely a route to get around the restriction.
335 McLauchlan ‘Common Assumptions and Contract Interpretation’ above n108, at 243.
336 Buxton, above n321, at 253; Burrows, above n83, at 90; McMeel “Principles and Policies of Contractual Construction” above n4, at 35.
approach allows greater freedom to rectify the contract under the guise of interpretation, as if concluded from the context that the parties used the wrong words, the court is not required to attribute an intention they could not have had.337 The neat line between interpretation and rectification as a corrective tool collapses.338 ICS itself evidences this trend, whereby Lord Hoffmann was able to extract the contractual terms from their brackets.339 Practitioners express alarm at this approach, which allows the court to make certain assumptions about the parties’ intentions without the clear evidence required in rectification.340
When undertaking interpretation the court is disadvantaged by the exclusionary rule. In this framework, where the relationship with rectification is so close, it is therefore sensible to allow evidence of previous negotiations under interpretation to facilitate finding actual mutual intent.341 This would not offend against the objective theory. Previous negotiations are admitted under rectification on the objective basis advocated for in this paper.342 Continuing
337 McKendrick “Interpretation of Contracts & the Admissibility of Prior Negotiations” above n39, at 270. Buxton, above n321, at 267-8 provides a specific discussion on the revolutionary nature of principle five of Investors Compensation Scheme. It allows the court to substitute for the meaning of the document an intention that was not manifested in the agreement. This reflects the ability of the court to correct clear mistakes through interpretation as discussed at 1.4.ii and 2.2.C.iv.
338 Cabrelli, above, n20 at 10.
339 Lord Hoffmann, at 914, concluded the phrase excluding "[a]ny claim (whether sounding in rescission for undue influence or otherwise)" was actually used by the parties to mean "[a]ny claim sounding in rescission (whether for undue influence or otherwise)". In reaching this conclusion Lord Hoffmann acknowledged he had not given the words their natural and ordinary meaning but justified his decision on the ground the parties had not used the words in their natural and ordinary sense. Lord Lloyd, at 904, dissented. He stated that he knew of "no principle of construction" which enabled a court "to take words from within the brackets, where they are clearly intended to underline the width of “any claim” and place them outside the brackets where they have the exact opposite effect"“ In his opinion, the majority had crossed the line between purposive interpretation, which is legitimate, and creative interpretation, which is not.
340 Calnan, above n14, at 19.
341 McKendrick ‘The Interpretation of Contracts and the Admissibility of Previous Negotiations’ above n39, at 270.
342 Under rectification one is searching for actual intention, to the extent it is objectively ascertainable. See
Burrows, above n83, at 95.
common intention is an objective fact, not a subjective one.343 This in fact reveals a fundamental inconsistency. Previous negotiations are not available in interpretation due to their ‘subjective’ nature, yet they are admissible under rectification to establish an objective prior consensus.344 The ascertainment of actual objective intent under rectification is fundamentally what interpretation should be seeking to achieve, but which has become misguided with strict objectivity. Rectification developed to bridge the gap between the strict objective test and the aim of ascertaining the parties’ intentions.345 Civil systems, which ascertain actual, albeit inner, intent through interpretation know no doctrine of rectification.346
If accepted that previous negotiations are admissible, much of rectification for common mistake will be subsumed by interpretation.347 If actual objective meaning can be ascertained in interpretation, there will be no need to resort to rectification to accord meaning with actual intention. Take for example, where two parties agree to the sale of ordinary horsebeans, but stipulate in the contract “feveroles,” due to a mistaken belief they were ordinary horsebeans. There is no need to rectify the contract, as objective common intention can be found as to meaning. However, the doctrine will not be rendered completely redundant. There will still be room for rectification where parties may have mistakenly omitted a whole clause.348
343 Lord Hoffmann emphasises the need for the prior consensus to be objective. Chartbrook, above n3, at [59- 65]. See also Cabrelli, above n20, at 10.
344 Buxton, above n321, at 260.
345 Valcke, above n71, at 13; Hoffmann “Intolerable Wrestle with Meaning and Words” above n10, at 667.
346 Steyn “Written Contracts: To What Extent May Evidence Control Language” above n103 at 27; Vogenour, above n71, at 124; Valcke, above n71, at 5. There is no need for a corrective measure to bring contractual intention into line with actual party intention.
347 Burrows, above n83, at 94-97. The extent to which unilateral mistake is swallowed up, if it does exist as an
action, depends on whether it is accepted that common intention can be established where one party has reasonably led the other to believe they are accepting their meaning. It might still play a role, however, due to the unconscionability element of the action, which is not a requirement in interpretation.
348 Nicholls, above n107, at 586; Burrows, above n83, at 96. Although Burrows admits this will be relatively
rare.
3.3 The Utility and Relevance of Previous Negotiations
It is conceded previous negotiations may frequently be unhelpful in identifying meaning. For example, they will not be helpful or relevant, where the parties did not anticipate the events that occurred, nor where they demonstrate a meaning intended by one party only.349 However, the claim that the parties’ positions are constantly changing and therefore negotiations are never helpful is no more than a generalisation.350 To the contrary, it is possible prior negotiations may provide cogent evidence shedding light on the interpretation to be accorded to the agreement. A judge should not have to speculate where evidence is available which might afford valuable insight.351 Previous negotiations may, for example, demonstrate that changes occurred concerning the nature and structure of the transaction, and the reasons for such changes may be relevant to the interpretation to be given.352 Not only might previous negotiations establish essential objective background facts, but they may also reveal that the parties had made clear the meaning they intended by their language.353 Or they may offer a different shade of meaning sufficient to negate an ambiguity and show a particular meaning.354 In Chartbrook Lord Hoffmann endorsed the rationale in Prenn that negotiations were “unhelpful”. This however, sits uncomfortably with his rectification finding that an objective consensus was reached during the negotiations, months before the conclusion of the contract.355 This indicates actual objective consensus can be found in evidence of negotiations and that the parties’ positions are not constantly changing and divergent as claimed.
As discussed earlier, it is claimed the formal contract puts an end to future disputes as the last word of the parties’ therefore evidence of what has come before is irrelevant.356 However, in
349 Gibbons, above n130, at [52] per Tipping J.
350 Yoshimoto, above n7, at [77].
351 Nicholls, above n107, at 581.
352 McLauchlan “Contract Interpretation: What is it About?” above n57, at 32.
353 Nicholls, above n107, at 583; Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 149.
354 Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 157.
What may seem ambiguous to the reader may not actually be to the parties.
355 Chartbrook, above n3, at [66]; McLauchlan “Interpretation and Rectification” above n32, at 444-445.
356 A&J Inglis, above n37, at 577.
practice many parties do not view the contract in this discrete manner.357 In their view ‘negotiations’ cannot often be easily distinguished from the ‘contract’.358 This may especially be true where parties have used a variety of instruments, such as letters, draft contracts and agreements to agree, in the process of recording their agreement. The law at present therefore excludes the most pertinent and relevant background, providing an incomplete picture to the interpreter.359
It is apparent the “unhelpful” objection is not wholly convincing. Rather, it is contended previous negotiations should be admitted on the basis of Tipping J’s judgment in Vector.360 That is, admissibility on the basis of relevance, an approach supported by the Evidence Act.361 Negotiations will be relevant where they establish the circumstances in which the contract was entered into and any objective consensus as to meaning.362 It makes little sense to have a rule of exclusion when it is only possible to conclude previous negotiations are
357 It must be noted that if previous negotiations are admissible then one possible consequence could be a decline in the importance and need for the formal contract, furthermore possibly leading to an increase in incomplete contracts. However, the scope of this possibility is outside the reach of this paper. In brief, this possibility would not affect the arguments of the paper. This paper takes the view that contractual relations and intent may not be solely found in the formal deed. It can further be argued there will still be a need for the formal contract as the starting point of the interpretation inquiry is the language used by the parties. Context is used in a facilitative role.
358 Mitchell, “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 147-
148; Mitchell claims empirical evidence demonstrates the parties rarely view the contract as the last word on their obligations. Contracts will always be surrounded by their expectations and informal understandings. Mitchell “Contracts and Contract Law: Challenging the Distinction Between the ‘Real’ and ‘Paper’ Deal” 29(4) OJLS 675 expands further on the bridge between the formal contract and artificial world created by contract law on the one hand and the real world of the parties and how they understand the agreement on the other. The paper argues legal reasoning will be improved if we place more emphasis on the ‘real deal.’
359 McLauchlan “New Law of Contract Interpretation” above n26, at 170.
360 This analysis is considered to be more principled than the judgment of Wilson J. As already discussed, the admissibility of previous negotiations under Wilson J’s judgment is subject to the three exceptions he provides. 361 This is similar to the argument made by counsel for Persimmon in Chartbrook who submitted the rule should only apply in cases where the previous negotiations are actually irrelevant, and if they do assist in meaning they should be admitted. See Chartbrook, above n3, at [32].
362 Vector, above n1, at [27].
irrelevant or unhelpful by firstly regarding the evidence.363 Simon France J demonstrates a process similar to Tipping J’s approach in Brownsons Holdings v The Plaza Pakuranga364. He examined the pre-contractual material to determine what evidence was relevant and admissible, and what constituted evidence of subjective intent.365 If evidence is produced which is unreliable or equivocal, then this is suggested not to be a matter of admissibility but rather for the weight to be attached to the evidence.366 The court should approach such evidence with caution.367 Furthermore if evidence is led which is superfluous, irrelevant and unnecessarily prolongs the hearing, then this is a matter where the court should deploy their power to award costs.368
Numerous examples can be found where evidence was reliable and helpful in resolution of interpretation. For example, in Yoshimoto the extrinsic evidence left no doubt in Thomas J’s mind that the plain meaning was contrary to the parties’ actual intention.369 He considered the evidence to be reliable as the drafts did not form part of the bargaining process, but instead
363 McKendrick “Interpretation of Contracts & the Admissibility of Previous Negotiations” above n39, at 265.
364 Above n331.
365 Ibid, at [17-27]. He excludes pre-contractual material where it did not establish any relevant common knowledge and subjective intent that went to proving the meaning of the agreement.
366 Nicholls, above n107, at 585; McKendrick “Interpretation of Contracts & the Admissibility of Previous
Negotiations” above n39, at 265; Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 136; McLauchlan “New Law of Contract Interpretation” above n26, at 172.
367 Yoshimoto, above n7, at [49].
368 Vector, above n1, at [24] per Tipping J; Brownsons, above n 331 at [13]. Cf Scorgie & Smith, above n191, doubt whether costs will be a realistic disincentive to the ‘kitchen sink’ approach.
369 Yoshimoto, above n7. The facts concerned the price payable under an agreement to buy shares in a company
whose principal activity was the development of land into a golf course. In addition to the base price, a further payment of NZ$1m would become payable if Canterbury Golf obtained "all necessary consents to the development within 12 months of the date of this agreement". Canterbury Golf failed to obtain one consent until five months after the expiry of the 12 month period. It denied that it was liable to make the payment. Thomas J let in evidence of previous negotiations, despite the exclusionary rule, as hard evidence of what the parties had in mind to assist in interpreting the meaning of “necessary consents.”
were consequential changes seeking to give effect to the bargain reached.370 In the Court of Appeal in Chartbrook,371 Lawrence Collins J felt bound to accept the rule, but stated that if the evidence were admissible, it would determine the construction as there was strong evidence supporting Persimmon’s interpretation. Lady Hale, in the House of Lords, also conceded she could not have reached her decision on interpretation had she not been made aware of the agreement which the parties had reached on this aspect during the negotiations.372
If the court is deprived of reliable evidence, which may otherwise be helpful, then the court is, to that extent, less able to accurately ascertain meaning in accordance with the parties’ intentions.373 This is a less than satisfactory state of affairs and is prone to cause injustice where credible and reliable evidence is excluded.374 The justice of a correct interpretation, one that accords with actual objective intention where possible, surely outweighs any costs that might occur.375 This aptly leads into discussion regarding the pragmatic considerations.
3.4 Counteracting the Pragmatic Considerations
It is not enough to merely address the conceptual arguments supporting the admissibility of previous negotiations. Nor is it enough to demonstrate they can constitute relevant and reliable evidence. Lord Hoffmann himself recognised that prima facie evidence of previous
370 Ibid, at [70]. Thomas J’s decision was, as predicted by himself, overturned by the Privy Council in Yoshimoto v Canterbury Golf International Ltd [2004] 1 NZLR 1 (PC). At [25] Lord Hoffmann declared this was not a suitable occasion for re-examining the law, as they considered on the facts, the evidence was unhelpful.
371 Chartbrook, above n51, at [131]. The facts concerned a contract to develop property owned by Chartbrook.
The interpretation concerned a complex formula concerning the price payable. See a summary of the facts in McLauchlan “Interpretation and Rectification” above n32, at 434-435.
372 Chartbrook, above n3, at [99].
373 Nicholls, above n107, at 586.
374 McMeel “Prior Negotiations and Subsequent Conduct” above n35, at 294; Burrows, above n83, at 82.
375 Cf Lord Hoffmann in Chartbrook, above n3, at [41] who claims a system which allows this to happen is justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes.
negotiations may be relevant and that inadmissibility is usually based on irrelevance.376 However, he considered, on balance that pragmatic considerations weighed in favor of exclusion.377 This section intends to counteract and weaken the force of the pragmatic considerations, essentially arguing they are factors which support the need for caution in the admissibility of previous negotiations, but they are not wholly convincing nor do they support the retention of the exclusionary rule in light of the arguments for admissibility.
Judges are invited to read voluminous pre-contractual correspondence when determining other contractual issues, such as the formation of a contract or misrepresentation. It can be questioned why time and expense acts as an objection in interpretation. Why should the court not have to undergo this exercise where the evidence is reliable and relevant? Huge costs are already incurred in the parties attending court.378 Any extra delay as a result of the ‘voluminous’ evidence produced could be controlled by the judiciary through their case management powers.379 This same objection was expressed in relation to the contextual approach following ICS. Many have recognised that fears of being overwhelmed by masses of evidence have not resulted.380 Any suggestion that previous negotiations differ from other background as they result in large amounts of material, many of which is subjective, is
376 Chartbrook, above n3 at [33].
377 Ibid at [41]. Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 142 recognises it is not clear that Lord Hoffmann himself endorsed the policy as good reason for retaining the rule. Rather he recognised the policy considerations as arguments to weigh in balance when considering whether to the overturn the rule. In the end he was not required to reach a final decision and was able to remain equivocal, although it is safe to assume he supports them on some level.
378 McLauchlan “Contract Interpretation: What is it About?” above n57, at 37 claims costs might in fact be
reduced with fewer disputes over what is admissible.
379 See Part 7, High Court Rules in the Judicature Amendment Act 1908, sch 2. Suggested by Nicholls, above n107, at 587; McKendrick “Interpretation of Contracts & the Admissibility of Previous Negotiations” above n39, at 266; McMeel “The Principles and Policies of Contractual Construction” above n4, at 46.
380 Chartbrook, above n3, at [38]; Bingham, above n284, at 387-388; McMeel “The Principles and Policies of
Contractual Construction” above n4, at 46.
unconvincing.381 As discussed, only evidence of objective mutual intent is admissible and should be admitted on the basis of relevance.382
The most persuasive claim against this objection, is that in reality the evidence will be submitted in support of estoppel or rectification.383 Little time or cost is therefore avoided by the exclusionary rule. Furthermore, Vector demonstrates that estoppel need not be formally pleaded and if in essence the action applies the courts will employ it. If rectification or estoppel is not, it is still likely evidence of the negotiations will be considered under the objective background exception. This is even more so, with Blanchard J’s liberal version of the subject-matter. It is these trends that have led Thomas J to acknowledge he can recall few contractual disputes in New Zealand where evidence of pre-contractual negotiations have not been before the court.384
The objection is perhaps most pertinent in relation to increased time and expense in the practitioner’s ability to advise. However, in the majority of cases, meaning is unlikely to be disputed as in most cases the legal advisor will have carefully spelt out the parties’ core interests in the document.385 Furthermore, claims of inconvenience in attending the background material are inconsistent with the contextual approach taken to interpretation. It must be accepted previous negotiations constitute a vital part of that background which is regarded as essential in interpretation. The objections raised by practitioners are overstated
381 See Bingham, above n284, at 389-90; Chartbrook, above n3, at [38] per Lord Hoffmann.
382 I-Health, above n252, at [42] per Asher J, employs this approach to admissibility. He does so conscious of the fear of judges being asked to wade through endless exchanges of drafts. However, he considers the touchstone of relevance, when firmly applied, should ensure that this task can be kept within reasonable bounds.
383 Yoshimoto, above n7, at [80]; McLauchlan, “Contract Interpretation: What is it about?” above n57, at 37;
Buxton, above n321, at 253 claims all but the most negligent of counsel will have pleaded rectification in the alternative.
384 Yoshimoto, above n7, at [80];
385 Gibbons, above n130, at [120]. This is especially so, if as considered, more time will be spent in the negotiating and drafting process to ensure this. Maybe more time spent at the start will be beneficial later on. McLauchlan ‘Contract Interpretation: What is it About?” above n57, at 12 recognises it is all too easy to attach significance to the difficult cases reaching court. This ignores the reality, that most issues of interpretation can be advised on solely by reading the words of the contract in context.
and would herald a return to literalism.386 In the end, primacy must be accorded to the discovery and implementation of actual intent.
Finally, the objection claims that negotiations will become protracted with more care and skill required in establishing and recording the parties’ positions. More time spent at this stage of the process can be argued to have a beneficial effect and will perhaps result in clearer articulations of intention and less dispute later on.387 The claim of parties making self-serving statements during the negotiations is unlikely as the parties’ minds are likely to be on other facets of the business relationship.388
Potential prejudice to third parties is prima facie a compelling objection. However, if the task of interpretation is to ascertain the contracting parties’ intention, then this process should not be constricted by concern for third parties. They should not be entitled to hold the parties privy to a contract to a meaning they did not intend.389 It is permissible to take account of other contextual matters, which may not necessarily be known by third parties. It does not logically follow that third parties would be anymore vulnerable if previous negotiations were admissible390 as this evidence is objective and would not include subjective intent.391 Wilson J
386 Gibbons, above n130, at [119-120] per Thomas J.
387 It seems some New Zealand law firms have taken this lesson of clear drafting from Vector. See Buddle Findlay “A New Interpretation – Using Evidence of Prior Negotiations in Interpreting Contracts’ (Legal Update, March 2010) <www.buddlefindlay.com/article/2010/02/26/legal-update-on-commercial-and-banking-law- february-2010>.
388 Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 148.
389 Yoshimoto, above n7, at [81]; Gibbons, above n130, at [121-122] per Thomas J; McKendrick, “Interpretation of Contracts & the Admissibility of Previous Negotiations” above n39, at 268; McLauchlan “Contract Interpretation: What is it About?” above n57, at 42.
390 McLauchlan “Contract Interpretation: What is it About?” above n57, at 42.
391 This is similar to the approach taken in civil law regarding contracts which are specifically designed to evoke involvement and reliance on third parties. Such contracts require a more objective standard of interpretation, whereby the parties’ subjective intentions are disregarded. See discussion in Claus Wilheim Canaris & Hans
correctly suggests third parties freely choose to involve themselves and must accept the court is privy to this background material.392 McLauchlan further claims he is yet to see a specific example in practice where negotiations would adversely affect third parties in a way that could not be avoided by the application of another doctrine.393
Certainty is an overriding goal in contract and commercial law. However, contract interpretation is the most intractable of all commercial disputes. They are notoriously difficult to predict as judges often disagree on fundamental questions such as what is the plain meaning or what constitutes commonsense.394 The admission of previous negotiations is therefore unlikely to contribute to the already uncertain outcome in an interpretation dispute. The claim that it will be impossible to advise clients at a preliminary level is wholly unconvincing, as in the majority of cases advice can be given based on the context of the contract. 395 It must be remembered we will not easily accept linguistic mistake. Furthermore, it is argued to the contrary, that admitting previous negotiations may increase certainty surrounding interpretation. No longer artificially excluding relevant and pertinent background will facilitate finding the parties’ actual intent. The exclusion perhaps generates uncertainty by enabling one party to advance a case for a meaning which he knows was not intended and which would otherwise be untenable considering the evidence.396 At present the rule and its boundaries are uncertain in themselves.397 Mitchell contends it would be more certain to
Grigoleit Interpretation of Contracts (2010) Social Science Research Network
<http://ssrn.com/abstract=1536169>.
392 Vector, above n1, at [129].
393 McLauchlan, “Contract Interpretation: What is it About?” above n57, at 39. For example, where a third party, to the actual or constructive knowledge of the parties, reasonably expects to take the contract at face value and acts in reliance, their legitimate concerns can be met through estoppel. See also Burrows, above n83 at 97.
394 McLauchlan “New Law of Contract Interpretation” above n26, at 175; McLauchlan “A Contract
Contradiction” above n281, at 189. This is illustrated by the differing opinions in Vector.
395 McLauchlan “Contract Interpretation: What is it About?” above n57, at 12. He claims too much emphasis is put on the difficult, rare, cases which reach court.
396 Nicholls, above n107, at 587.
397 As recognised by Lord Hoffmann in Investors Compensation Scheme, above n2, at 912.
abandon the exclusionary rule and allow parties the freedom to provide for such exclusion in their contracts.398
What I have aimed to demonstrate is that he pragmatic objections can be counteracted and do not outweigh the arguments for abandoning the exclusionary rule. However, that debate reflects a deeper consideration as to whether contract law should be concerned with adhering to principle or policy. Policy advances community goals and standards, and looks beyond the individual ruling to what is desirable in the future. It requires an assessment of what consequences are beneficial economically, politically and socially in the community.399 Principle, on the other hand, protects individual or group rights and advances standards to be observed as a requirement of justice or fairness. Principles express values internal to the legal system. They rationalise rules and aim to contribute to coherency.400
Those pertaining to pragmatic considerations indicate a preference for policy to govern contract law. For example, Spigelman J claims justice does not attain to the individual and the expectation is the law will provide neutral principles, whereby judges will not decide the appropriate outcome on a case-by-case analysis.401 The practical considerations canvassed, despite the misgivings discerned, therefore wholly justify the exclusion of the rule. If policy outweighs principled criteria in determining interpretation, then this suggests contract law is more concerned with channeling future disputes than resolving interpretation in accordance with the terms the parties agreed upon.402 Conversely, this paper has expressed a concern with ensuring actual objective intent in the individual case is ascertained. It is argued therefore that principles are the legal criteria that should govern interpretation. Clear and coherent rules should prevail over the pursuit of policies. A case is fundamentally an argument between two
398 Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 135.
399 Ibid, at 140-141. These definitions derive from R Dworkin Taking Rights Seriously, (Duckworth, London, 1978) and N MacCormick Legal Reasoning and Legal Theory (Oxford University Press, Oxford, 1994).
400 Ibid.
401 Spigelman, above n54, at 333.
402 Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 135.
parties, whereby the role of the judge is adjudication. It is therefore the wrong forum for an assessment of collective welfare from an unelected judiciary.403 Policy considerations in the face of countervailing principles are not strong and should be considered secondary to the right to individual justice.
3.4 Further Arguments for Admissibility
This section aims to detail two further arguments and advantages supporting the admissibility of previous negotiations.
The exclusionary rule at present undermines transparency in the judicial system.404 Skepticism can be expressed at the court’s ability to find a meaning, which seems difficult to objectively justify, yet happens to accord with the pre-contractual evidence which has been overtly excluded for the purpose of interpretation.405 It is thought to be common practice for counsel to include a rectification claim as a means of producing previous negotiations before the court.406 The aim, or hope, either consciously or subconsciously, is to influence the judge on their interpretation, even though no express reliance is placed on the evidence.407 If an alternative claim of rectification, or estoppel, is not brought, the evidence is still likely to be produced to establish objective background facts. It is argued the law should not encourage this subterfuge and admitting previous negotiations for the purpose of interpretation would restore some intellectual honesty to interpretation.408 The continuance of this practice suggests an unsatisfactory state of law. It is often claimed Bank of Scotland v Dunedin
403 Mitchell “Contract Interpretation: Pragmatism, Principle, and Prior Negotiations Rule” above n49, at 140- 141.
404 Spigelman, above n54, at 332 contends the law should not be dictated by this fashionable concept.
405 Yoshimoto, above n7, at [66] per Thomas J.
406 This practice is considered to be legitimate if the rectification claim is genuine and arguable.
407 Nicholls, above n107, at 578; McKendrick “Interpretation of Contracts & the Admissibility of Prior Negotiations” above n39, at 269.
408 McKendrick, ibid; See also discussion in Chartbrook, above n3, at [35].
Property Investment409 is a decision where the pre-contractual evidence played a decisive role in the Court’s interpretation.410 Dunedin were entitled to repay a loan early, subject to the Bank being reimbursed for all expenses incurred ‘in connection with the loan.’ The issue was whether the Bank could recoup a substantial fee in regards to a swap agreement. Pre- contractual material was admissible to establish objective background facts. In reality, the evidence demonstrated the parties clearly considered the fee was “in connection with the loan.” In effect, the evidence demonstrated actual mutual intent to meaning. The Court, however, claimed not to use the evidence to determine meaning. Rather, it decided the evidence confirmed a ‘commercially sensible’ finding that the Bank was able to recoup the fee. As discussed, McLauchlan argues Blanchard J’s judgment in Vector demonstrates a judge using evidence of prior negotiations as proof of their intended meaning.411
Three international instruments evidence the liberal approach advocated for in this paper.412 The United Nations Convention on Contracts for the International Sale of Goods (1980),413 the Principles of European Contract Law (1999)414 and Unidroit Principles of International
409 Above n76.
410 See McLauchlan “Contract Interpretation in the Supreme Court –Easy Case, Hard Law?” above n151, at 240- 241; McMeel “Prior Negotiations and Subsequent Conduct” above n35, at 282.
411 McLauchlan “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” above n151 at 239. See
discussion at 2.2.D. McLauchlan ‘Contract Interpretation: What is it About?” above n57, at 26-27 argues Eastmond v Bowis, above n77, is another example of a court invoking the exception to find proof of meaning. It is interesting to note Vector’s submissions to the Supreme Court detailed the decisions in Bank of Scotland and Eastmond to demonstrate the process the court undertakes when admitting negotiations under the objective background fact exception. See Supreme Court Transcript, above n115, at 49-56.
412 It is beyond the scope of this paper to address these instruments, their background and shortcomings in
substantive detail.
413 (‘CISG’). This convention aimed to adopt uniform rules to govern contracts which took into account different social, economic and legal systems. The convention aimed to contribute to the removal of legal barriers in international trade and promote the development of international trade,
414 (‘PECL’). The principles are based on no single legal system. They aim to provide a bridge between civil and
common jurisdictions.
Commercial Contracts415 stipulate a contract is to be interpreted according to the parties’ common intention, even if this differs from a literal interpretation.416 If that intention cannot be established then the contract is to be interpreted in reference to the meaning a reasonable person, of the same kind as the parties, in the same circumstances, would attribute.417 Previous negotiations are specified as part of the “relevant circumstances” available in the determination of both tests.418 It must be noted the reference to ‘common intent’ in these instruments is a subjective test, one not advocated for in this paper. The consistency rather lies in the second test, where the reasonable person is in the position of the parties, facilitating a finding of actual intent. Essentially the instruments place primacy of actual intention over reasonable intention.419 More importantly, previous negotiations are available as an aid in interpretation. Abandoning the exclusionary rule will harmonise our domestic approach, as far as possible, with international practice. Many have observed this consistency is desirable.420 New Zealand does not want to risk isolation in this field of commerce, furthermore it would seem odd for the approach regarding domestic contracts for sale to differ from international standards. One point of distinction to note is New Zealand has ratified the Convention, whereas the United Kingdom is absent as a contracting party.421
415 (1994 and 2004 revision). For the most part the principles in this document aim to reflect concepts found in many, if not all, legal systems. The principles are intended to provide a system of rules especially tailored to the needs of international commercial transactions.
416 PECL, art 5:101(1); Unidroit Principles, art 4.1(1); CISG, art 8(1).
417 PECL, art 5:101(3); Unidroit Principles, art 4.1(2); CISG, art 8(2).
418 PECL, art 5:102(a); Unidroit Principles, art 4.3(a); CISG, art 8(3).
419 Freedom of contract underpins the principles. See Unidroit Principles, art 1.1; PECL, art 1:102.
420 Attorney-General v Dreux, above n88, at 627; Yoshimoto, above n7, at [89]; McMeel “Prior Negotiations and Subsequent Conduct” above n35, at 288; Nicholls, above n107, at 586-7; McLauchlan “Contract Interpretation: What is it about?” above n57, at 34; McKendrick “Interpretation of Contracts & the Admissibility of Previous Negotiations” above n39, at 275.
421 New Zealand ratified the Convention on 22 September 1994. For the status of the signatories see
<www.uncitral.org/unictral/en/uncitral_texts/sale_goods/1980CISG_status.html>. Sally Moss “Why the United Kingdom has Not Ratified the CISG” 2005 (25) Journal of Law & Commerce 483 explains this is because Parliament does not see it as a legislative priority, there is little interest in ratifying the Convention and there is a fear the UK will lose its edge in international arbitration and litigation.
CONCLUSION
Vector provided the Supreme Court with an opportunity to reconsider the rule excluding previous negotiations. The bench, however, was not unanimous. Instead the decision illustrates diverse and conflicting opinions regarding contract interpretation principles. The result is an unsatisfactory state of law in which it cannot be clearly concluded whether the rule is still applicable in a contract interpretation dispute. Resulting confusion and uncertainty is evidenced in the application of Vector in the lower courts.
This paper has advocated an approach that results in conceptual clarity. The purpose of interpretation is to ascertain the meaning of a document in accordance with the parties’ intentions. Actual intent, where discernible, should be sought over presumed intent. Actual intent, contrary to the opinion of those adhering to a strict objective approach, can be accommodated within the objective theory because the intention must be mutually held and objectively discernible. Subjective inner intent will always remain inadmissible. Previous negotiations should therefore be admissible to the extent they evidence actual mutual objective intent. Admitting previous negotiations will result in coherent contract interpretation principles devoid of artificial limits on evidence. The exceptions to the exclusionary rule, as they stand at present, entail distinctions difficult to draw in practice and amount to unnecessary methods of ascertaining actual objective intent. These exceptions really serve to demonstrate that the rule is wrong in principle. It is suggested the best course is to admit previous negotiations on the basis of relevance in accordance with the judgment of Tipping J in Vector. Previous negotiations will be relevant where they establish objective background facts and to the extent they shed light on the objective meaning of the contract intended by both parties. They will be irrelevant where they constitute subjective intent. Pragmatic objections often raised to abandoning the exclusionary rule have been proved to be unconvincing. They are matters for caution and weight, but do not outweigh the advantages gained with abandonment of the exclusionary rule. Ultimately, contracts as self-imposed voluntary obligations should be interpreted in accordance with the contracting parties’ intent, in order to uphold their reasonable expectations. Principle should guide this process, rather than policy.
Despite the discord in Vector it seems unlikely the exclusionary rule will survive much longer in New Zealand. At present it is largely devoid of substance, as most parties to a contract interpretation dispute will produce evidence of previous negotiations through the established exceptions. Perhaps the rule will never be explicitly abandoned and incremental development on a case-by-case basis will eventually see full reference to previous negotiations on account of their relevance. Or maybe, as with subsequent conduct, it will take ten years for one judgment, that of Tipping J’s, to be adopted by a full bench.422
422 Thomas J in Attorney General v Dreux, above n88, in 1996 concluded the ban regarding subsequent conduct should be abandoned. Ten years later in 2006 the Supreme Court in Gibbons, above n130 accorded with this decision.
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CASES: ENGLAND
Antaios Cia Naviera SA v Salen Rederierna AB [1984] 3 All ER 229 (HL). Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 (HL). Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657.
Chartbrook Ltd v Persimmon Homes Ltd [2007] 1 All ER (Comm) 1083.
Chartbrook Ltd v Persimmon Homes Ltd [2008] EWCA Civ 183. Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 (HL). East v Pantiles (Plant Hire) (1981) 263 EG 61.
Investors Compensation Scheme Ltd v West Bromich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL).
Inglis (A&J) v Buttery (1878) 3 App Cas 552.
Jacobs v Batavia and General Plantations Ltd [1924] 1 Ch. 827.
L Shuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235 (HL).
MacDonald v Longbottom [1859] EngR 635; (1859) 1 E & E 977, 120 ER 1177.
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749 (HL).
National Bank of Sharjah v Dellborg [1997] EWCA Civ 2070.
Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd’s Rep 708.
Prenn v Simmonds [1971] 1 WLR 1381 (HL).
Proforce Recruit Ltd v Rugby Group Ltd [2006] EWCA Civ 69. Proforce Recruit Ltd v Rugby Group Ltd [2007] EWHC 1621 (QB). Reardon Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570 (HL). Smith v Hughes (1871) LR 6 QB 597.
CASES: AUSTRALIA
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.
LEGISLATION
Contractual Mistakes Act 1977. Evidence Act 2006.
Judicature Amendment Act 1908.
OTHER
Law of Contract: The Parol Evidence Rule, Report No 154, Cmnd 9700 (1986).
Principles of European Contract Law (1999). Supreme Court Transcript, SC 65/2008, 23 June 2009.
Unidroit Principles of International Commercial Contracts (1994 and 2004 revision).
United Nations Convention on Contracts for the International Sale of Goods Act 1980.
BOOKS
SECONDARY SOURCES
Burrows, Andrew & Edwin Peel (eds) Contract Terms (Oxford University Press, Oxford, 2006).
Burrows, Finn & Todd Law of Contract in New Zealand (3rd ed, Lexis Nexis, Wellington, 2007).
Burton, Steve Elements of Contractual Interpretation (Oxford University Press, New York, 2009)<www.oxfordscholarship.com.ezproxy.otago.ac.nz/oso/public/content/law/9780195337 495/toc.html>.
Chetwin, Graw & Tiong Introduction to the Law of Contract in New Zealand (3rd ed, Thomson Brookers, Wellington, 2006).
Dworkin, R Taking Rights Seriously (Duckworth, London, 1978).
Feltham, Flochbergn, Leech Spencer Bower: Estoppel by Representation (4th ed, Reed Elsevier UK Ltd, London, 2004).
Kniffen, Margaret Corbin on Contracts (Revised Edition): Interpretation of Contracts (Vol 5, Lexis Law Publishing, Virginia, 1998).
Lewison, Kim The Interpretation of Contracts (4th ed, London, Sweet & Maxwell, 2007).
MacCormick, N Legal Reasoning and Legal Theory (Oxford University Press, Oxford, 1994).
Mitchell, Catherine Interpretation of Contracts: Current Controversies in Law (Routledge- Cavendish, UK, 2007).
Paterson, Robertson & Duke Principles of Contract Law (3rd ed, Lawbook Co, Sydney, 2009).
Worthington, Sarah (ed) Commercial Law, Commercial Practice (Hart Publishing, Oregon, 2003).
Smith, Stephen Contract Theory (Oxford University Press, New York, 2004).
CHAPTERS
Bradgate, Robert “Contracts, Contract Law and Reasonable Expectations” in Sarah Worthington (ed) Commercial Law, Commercial Practice (Hart Publishing, Oregon, 2003) 651.
Burrows, Andrew “Construction and Rectification” in Andrew Burrows & Edwin Peel (eds)
Contract Terms (Oxford University Press, Oxford, 2006) 77.
Calnan, Richard “Construction of Commercial Contracts: A Practitioner’s Perspective” in Andrew Burrows & Edwin Peel (eds) Contract Terms (Oxford University Press, Oxford, 2006) 17.
Collins, Hugh “Objectivity and Committed Contextualism in Interpretation” in Sarah Worthington (ed) Commercial Law, Commercial Practice (Hart Publishing, Oregon, 2003) 189.
McKendrick, Ewan “The Interpretation of Contracts, Lord Hoffmann’s Re-statement” in Sarah Worthington (ed) Commercial Law, Commercial Practice (Hart Publishing, Oregon, 2003) 189.
McMeel, Gerard “The Principles and Policies of Contractual Construction” in Andrew Burrows & Edwin Peel (eds) Contract Terms (Oxford University Press, Oxford, 2006) 27.
Stevens, Robert “Objectivity, Mistake, and the Parol Evidence Rule” in Andrew Burrows & Edwin Peel (eds) Contract Terms (Oxford University Press, Oxford, 2006) 101.
Vogenour, Stefan “Interpretation of Contracts: Concluding Observations” in Andrew Burrows & Edwin Peel (eds) Contract Terms (Oxford University Press, Oxford, 2006) 123.
ARTICLES
Ben-Shahar, Omri “‘Agreeing to Disagree:’ Filling Gaps in Deliberately Incomplete Contracts” (2004) Wisconsin Law Rev 389.
Berg, Alan “Thrashing Through the Undergrowth” (2006) 122 LQR 354.
Bridge, Michael “The Future of English Private Transactional Law” (2002) 55 CLP 193.
Buxton, Richard “‘Construction’ and Rectification After Chartbrook” (2010) 69(2) CLJ 253.
Cabrelli, David “The Role of Consent in Contract Law: Principles and Practice” (2010) U. of Edinburgh School of Law Working Paper No. 2010/06. Social Science Research Network
<http://ssrn.com/abstract=1556335> .
Canaris, Claus-Wilheim & Hans Grigoleit Interpretation of Contracts (2010) Social Science Research Network <http://ssrn.com/abstract=1536169> .
Douglas, F “Modern Approaches to the Construction and Interpretation of Contracts” (2009) 32 Aust Bar Review 158.
Goddard, David ‘Contract Law Update’ Commercial Law Intensive (NZLS, Wellington, May 2010) 1.
Grammond, Sebastian “Reasonable Expectations and the Interpretation of Contracts Across Legal Traditions” Social Science Research Network <http://ssrn.com/abstract=1474266> .
Hall, Chris “Vector Gas – An Unwelcome Decision” NZLawyer (Issue 138, 11 June 2010), 22.
Holborow, Don “Contract Interpretation” [2004] NZLJ 272. Johnson, Jeremy “Contract: Missed Opportunity?” [2010] NZLJ 50.
Keith, K J “Interpreting Treaties Statutes and Contracts” (Occasional Paper No. 19, New Zealand Centre for Public Law, Wellington 2009).
Kniffen, Margaret “The Cross-Dressing Emperor: Confusing and Conflating Contract Interpretation and the Parole Evidence Rule” (2009) Social Science Research Network
<http://ssrn.com/abstract=1334279> .
Kramer, Adam “Common Sense Principles of Contract Interpretation” (2003) 23(2) OJLS 173.
Lord Bingham “A New Thing Under the Sun? The Interpretation of Contract and the ICS
Decision” (2008) 12 Edinburgh L. Rev 374.
Lord Hoffmann “The Intolerable Wrestle with Words and Meanings” (1997) 114 S Afr Law Journal 656 at 668.
Lord Nicholls “My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 578.
Lord Steyn “Contract Law: Fulfilling the Reasonable Expectations of Honest Men” (1997) 113 LQR 433.
Lord Steyn “The Intractable Problem of the Interpretation of Legal Texts” 25 Syd Law Rev 25.
Lord Steyn “Written Contracts: To What Extent May Evidence Control Language”(1988) CLP 23.
McKendrick, Ewan “Interpretation of Contracts and the Admissibility of Prior Negotiations” (2005) 17 SAcLJ 248.
McLauchlan, David “Actual Consensus Ad Idem in Contract – Unnecessary But Surely Sufficient?” [1995] NZLJ 45.
McLauchlan, David “Common Assumptions and Contract Interpretation” (1997) 113 LQR 237.
McLauchlan, David “A Contract Contradiction” (1999) 30 VUWLR 175.
McLauchlan, David “Contract Formation, Contract Interpretation, and Subsequent Conduct” [2006] UQLawJl 7; (2006) 25 UQLJ 77.
McLauchlan, David “Contract Interpretation in the Supreme Court – Easy Case, Hard Law?” (2010) 16 NZBLQ 229.
McLauchlan, David “Contract Interpretation: What is it About?” [2009] SydLawRw 1; (2009) 31 Sydney Law Review 5.
McLauchlan, David “Interpretation and Rectification: Lord Hoffmann’s Last Stand” [2009] 3 NZ Law Review 431.
McLauchlan, David “Objectivity in Contract” [2005] UQLawJl 28; (2005) 24 UQLJ 479.
McLauchlan, David “The New Law of Contract Interpretation” (2000) 19 NZULR 147.
McLauchlan, David “The Plain Meaning Rule of Contract Interpretation” (1996) 2 NZBLQ 80.
McMeel, Gerard “Language and Law Revisited: An Intellectual History of Contractual Interpretation” (2005) 34 CLWR 256.
McMeel, Gerard “Prior Negotiations and Subsequent Conduct – The Next Step Forward for Contractual Interpretation” (2003) 119 LQR 272.
McMeel, Gerard “The Rise of Commercial Construction in Contract Law” (1998) LMCLQ 382.
Mitchell, Catherine “Contracts and Contract Law: Challenging the Distinction Between the ‘Real’ and ‘Paper’ Deal” (2009) 29(4) OJLS 675.
Mitchell, Catherine “Contract Interpretation: Pragmatism, Principle and the Prior Negotiations Rule” (2010) 26 Journal of Contract Law 134.
Moss, Sally “Why the United Kingdom has Not Ratified the CISG” (2005) 25 Journal of Law & Commerce 483.
O’Callahan, Brent “Transactions – Contract Interpretation: Prior Negotiations” [2010] NZLJ 69.
O’Callahan, Brent “Transactions – Contract Interpretation” [2010] NZLJ 137.
Perillo, Joseph “The Origins of the Objective Theory of Contract Formation and Interpretation” (2000) 69(2) Fordham Law Rev 427.
Sisterton, Craig “General Provisions Should Not Be Permitted to Distort Objective Intention of Parties” NZLawyer (Issue 135, 30 April 2010) 2.
Smith, Stephen “The Reasonable Expectations of the Parties: An Unhelpful Concept” (2009) Social Science Research Network. <http://ssrn.com/abstract=1349995> .
Spigelman, J “From Text to Context: Contemporary Contractual Interpretation” (2007) 81 Aust Law Journal 322.
Staughton, Christopher “How Do the Courts Interpret Commercial Contracts?” (1999) 58 CLJ 303.
Taylor, Martin “Vector Gas – What does it mean?” NZLawyer (Issue 134, 16 April 2010) 16. Taylor, Martin “Certainty versus Correctness after Vector Gas” NZLawyer Extra (Edition 7,
NZLawyer Online, 30 July 2010) <www.nzlawyermagazine.co.nz/NZLawyerextraarchive/
Bulletin7/extra7F3/extra7F3print/tabid/2500/Default.aspx>.
Valcke, Catherine “On Comparing French and English Contract Law – Insights From Social Contract Theory” (2008) Social Science Research Network
<http://ssrn.com/abstract=1328923> .
OTHER
Buddle Findlay “A New Interpretation – Using Evidence of Prior Negotiations in Interpreting Contracts’ (Legal Update, March 2010) <www.buddlefindlay.com/article/2010/02/26/legal- update-on-commercial-and-banking-law-february-2010>.
Chris Browne & Kate Morrison “Use of Evidence of Prior Negotiations in Contract Interpretation” (2010) <www.wilsonharle.com/use-of-evidence-of-prior-negotiatons-in- contract-interpretation>.
Edward Scorgie & Tim Smith, “Tips from the Top on Commercial Interpretation”(Chapmann Tripp 26 February 2010) <www.chapmantripp.com/Pages/Publication.aspx?ItemID>.
Lisa Tat “A Timely Reminder of the Importance of Careful Drafting” (Bell Gully Commercial Quarterly, Summer Edition, 2010)
<www.bellgully.com/newsletters/18corporate/commercial_1.asp>.
Norton Rose “Resolution of an Obvious Error – Developing Case Law” (June 2010)
<www.nortonrose.com/knowledge/publications/2010/pub29215.aspx?lang=engb&page=all>.
Russell McVeagh “When May Prior Negotiations Be Considered in Interpreting Contracts?” (March 2010) <www.russellmcveagh.com/_docs/LitigationMar2010_285.html>.
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