Evidence of pre-contract negotiations and the exclusionary rule
Merthyr (South Wales) v Merthyr Tydfil Borough Council, (Court of Appeal) [2019]
It is an often quoted principle of English contract law that evidence of pre-contract correspondence is not permitted to be used as an aid to contract interpretation. However, despite this, such evidence is often admitted even if, in this particular case, the court was unwilling to do so.
Facts:
Merthyr (South Wales) operated open cast coal mining in South Wales. The respondent was the local planning authority. In 2005 the Council granted planning permission for certain mining operations on the condition that the land would be restored following the conclusion of those operations.
On 21 December 2015 the mining company, the Council and HSBC entered into an agreement to create a fund to secure £15 million for land restoration.
Clause 4.2(a) of the agreement provided that:
subject to clause 4.2(b) and (c), on each [quarterly funding date] the mining company shall deposit £625,000 (as adjusted pursuant to clause 4.2(b) and (c)) into the account.
Clauses 4.2(b) and (c) provided that if a deposit or consecutive deposits were missed, the amount due on the following funding date would increase by the amount outstanding.
Clause 4.2(d) provided that if a deposit was not made on the final funding date, the company must pay the Council the full £15 million by 30 June 2022 (which was the contractual longstop date).
The mining company made no deposits into the account. The Council applied for specific performance to compel the company to make the deposits on an ongoing basis.
Decision:
In the High Court the Council was granted summary judgment and the mining company was ordered to pay the outstanding quarterly payments of £6.25 million into the account.
The mining company appealed on the ground that Clause 4.2 of the agreement did not create an enforceable obligation to pay any money into the escrow account until the contractual longstop date. They argued that the introductory ‘subject to’ wording meant that each earlier paragraph was conditional upon the next following paragraph and that the only one which was an absolute obligation was paragraph (d).
Court of Appeal decision
The Court of Appeal felt that the wording of the clause in question was clear. Therefore there was no uncertainty to resolve. In coming to that conclusion the Court placed great reliance upon ‘business common sense’. Effectively, the interpretation favoured by the mining company would have rendered completely redundant all of the language which addressed the subject of ongoing quarterly payments. This was said to be an irrational outcome.
In support of its interpretation of Clause 4.2, the mining company sought to rely on a passage which appeared in certain pre-contractual documents. The gist of the passage was that if the company was unable to meet a quarterly payment, outstanding payments would be rolled forward, with the full £15 million being deposited into the escrow account by the longstop date.
The Court of Appeal analysed the applicable legal principles on the admissibility of evidence of pre-contractual negotiations. It concluded that a party may not use pre-contractual communications as evidence of what the contract should be understood to mean, nor can that evidence be used to try to demonstrate that the parties reached a consensus on a particular point or used words in an agreed sense.
The Court of Appeal accepted, however, that these pre-contractual documents could be adduced as evidence of the commercial purpose of the agreement as a whole.
Accordingly, the Court of Appeal held that the passage in the pre-contractual documents was inadmissible by virtue of the exclusionary rule and, even if it were admissible, it would provide no guidance as to Clause 4.2's meaning, since the passage contemplated a scenario where the company was unable (rather than unwilling) to pay.
Without reference to the pre-contractual documents, the Court of Appeal held that the appellant mining company was obliged to pay the outstanding sums immediately, because:
(a) The interpretation of the contractual provision put forward by the company was inconsistent with the language of clause 4.2, where the use of terms such as 'shall', 'fails to pay', 'payable' and 'outstanding' signified that payment of sums into the account on a funding date was intended to be a legal obligation, and not a matter of choice;
(b) the company's interpretation would defeat the commercial purpose of the account, which was to build up a fund of money for land restoration while coal mining activity was being carried on; and
(c) it was contrary to business common sense that a sum due from a contracting party would cease to be due because the paying party chose not to pay on the agreed date (even though it seemed to be acknowledged that instalments would just be rolled forward).
Points to Note:
- This decision confirms and reiterates what the Courts have said for some time, namely that the exclusionary rule is alive and well. However, in our view the effect of the rule is then almost completely undermined in practice. There is an almost imperceptible distinction between using evidence of pre-contractual communications to shed light on the business aim of a contract (on the one hand), which is seemingly permitted and to interpret the meaning of individual contractual provisions (on the other) which is not.
- The reality is that evidence of pre-contractual negotiations and correspondence is extremely important and valuable (and is routinely heard in evidence by the courts) even if, in this case, the court declined to admit the evidence in the way the mining company had sought. Great care should therefore be taken with any pre-contractual correspondence and good records should be kept of pre-contractual exchanges as they might prove useful at some point should a dispute arise.