Negotiations and drafts
inadmissible as evidence?
CHARTBROOK v PERSIMMON HOMES (HL)
This House of Lords (HL) case has provided an important reminder of the need to ensure clear drafting of commercial contracts and of the primacy of the words used in the written contract. The so called ‘exclusionary rule’ that pre-contractual negotiations and drafts are inadmissible when interpreting a contract was confirmed. In some respects, this is a relief because if the reverse had been decided, the outcome of disputes, if account could be taken of what the parties said or wrote to each other pre-signature, would arguably be more uncertain. It could also be a recipe for more protracted negotiations if parties feel the need to state their position for the record in meetings and drafts with a view to such statements being used if a dispute transpired later.
Unfortunately some aspects of the judgment are not quite as straightforward as they might have been and it is this which has perhaps led some commentators to suggest that prior negotiations will have a more important role in contract interpretation in the future. In addition, it is quite clear that there are certain judicially approved routes to potentially circumvent the impact of this rule.
facts:
C and P each claimed that a definition in their contract resulted in a different price being payable. The definition clearly had a grammatical ambiguity which had to be resolved. C asserted one meaning which P argued would have produced a non-commercial result whereas P’s preferred interpretation would, it argued, lead to a more rational outcome. P claimed that pre-contract material which pointed very strongly in favour of its construction should be allowed.
decision:
- Although a Court will not easily accept that commercial parties have made linguistic mistakes in the drafting, here the HL ruled in favour of P's interpretation as the literal meaning was felt to be ‘clearly wrong’ and would have made certain other provisions of the contract appear arbitrary and irrational. As it was evident that something had gone askew with the language of a contract, the HL gave the definition what it believed was its more rational meaning.
- In doing so, it held that it was entitled to look at the background facts to establish the context. This is where some of the confusion perhaps arises. It was expressly acknowledged that pre-contract communications between the parties would be admissible if they helped to establish the factual background (as distinct from the subjective intentions of the parties or what the contractual words mean). The HL then applied an objective test to construe what a reasonable person would have understood the parties to have meant, taking into account the relevant background.
- However, P’s argument that the exclusionary rule did not apply was not upheld and it is the consideration of this aspect that makes the case of most interest to those involved in negotiating and drafting contracts and those resolving disputes.
points to note:
- As one of the Judges noted:
- To admit pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and it would be very time-consuming and expensive if everyone engaged had to read the correspondence and statements had to be taken from those who took part in oral negotiations. This would be very time-consuming and costly and the scope for disagreement over whether the material affected the construction of the agreement would be considerably increased.
- The exclusionary rule reflects a sound practical aim - namely that the law of contract should enforce contractual promises with a high degree of predictability and the more that inferences drawn from negotiations are considered, the less predictable the outcome is likely to be.
- Even though the current law seeks to provide certainty for contracting parties, as is often the case in complex projects concluded under pressurised circumstances, ambiguities and errors in drafting sometimes occur. If a dispute arises that goes to court, whilst the view of the ‘reasonable person’ is to be attributed, this is largely down to how particular judges interpret this and we have seen how views can vary significantly. Nevertheless, there seems more likelihood for an uncertain outcome where pre-contract material is added to the pot.
- One clear message to come out of this case has to be the importance of striving to avoid all potential differences of interpretation by clear, unambiguous drafting. It is worthwhile observing the old adage ‘the devil is in the detail’. Including a mathematical or worked example of how a formula is intended to work in practice could avoid a future disagreement where the words alone are capable of multiple meanings.
- There are two legitimate devices, or ‘safety nets’ as the judge called them, which allow the admission of pre-contractual evidence: (1) rectification of a mutual mistake and (2) so called ‘estoppel by convention’. These have to be specifically pleaded and clearly established. A court can rectify a mutual mistake where there is evidence that the parties had a common intention as to the terms of the contract and there was a mistake in the drafting which meant that it did not reflect that joint intention. Estoppel by convention prevents a party contending that a particular word or phrase has one meaning, when the parties negotiated on the assumption that the language would bear a different meaning. Neither of these devices was considered applicable in this case.
- The exclusionary rule therefore, contrary to some reports, remains firmly embedded in English contract law, at least for the time being.
- Although the general rule is clear, the reality is that Judges will very often hear evidence of pre-contract negotiations and, since they are only human, there must be a suspicion that this evidence influences their interpretation of the words used. Therefore, if you believe that such evidence may assist a Judge to interpret the language used to suit your case, it may be worthwhile at least raising a claim for rectification so that the evidence can be adduced even if the rectification or other claim turns out to be unsuccessful. As one Judge acknowledged: “such evidence [of pre-contractual negotiation] will be produced in any case in which there is the remotest chance that it may be accepted”.
- The Judge also recognised that there is an argument that “when there is a dispute over construction, evidence of pre-contractual negotiations is almost inevitably tendered and even if such alternative claim does not succeed, the judge will have read and possibly been influenced by the evidence”. Baroness Hale, one of the Law Lords even went so far as to say “I have to confess that I would not have found it quite so easy [to agree that P’s construction of the contractual formula was correct] had we not been made aware of the agreement which the parties had reached on this aspect of their bargain during negotiations which led up to the formal contract”. At least she was honest!