Since this conference last year our courts have continued with their regular work of interpreting commercial bargains. The efficient despatch of that work is of vital importance if the courts are to serve the needs of parties to commercial agreements. Last year my paper highlighted the controversy which seemed to then be developing concerning the extent to which the background to an agreement should be reviewed to assist in arriving at the meaning of the agreement.
The statement by Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society (1) (“Investors”) that the background was “absolutely anything” which might assist the court in construing the agreement had caused some concern with commercial lawyers. The concern was that an approach to interpretation was emerging which would allow extensive reference to background material to arrive at the meaning of the words used in the contract when such a process was unnecessary. The fear was that the natural and ordinary meaning of the words which the parties had chosen to express their agreement would be lost in detailed consideration of all available background to the commercial bargain, with the background material then being used to arrive at a meaning of the contract which was “fair” in the eyes of the court.
There was a significant reaction to Lord Hoffman’s comments and, by the time of the seminar, the courts in both New Zealand and England (including Lord Hoffman himself) had moved to emphasise that the comments he had made on interpreting commercial contracts in Investors did not really involve anything radical in contractual interpretation. (2) The orthodox approach to the construction of contracts has been continued in cases in the last year before the New Zealand courts and before the Privy Council.
Our courts have heard a range of cases concerning the interpretation of agreements in differing commercial contexts. The cases have covered the sale or development of land (3), an alleged agreement for the sale of shares in a dairy cooperative (4), the interpretation of an indemnity given against claims on the sale of a business. (5) Somewhat unusually, the Court of Appeal has had to construe the limitation of liability provisions in a bill of lading - a key commercial document in the international sale of goods. (6) There have also been a number of cases where applications for summary judgment based on the construction of documents have been refused because the construction was not clear on the agreement itself and there was insufficient background or material relevant to the factual matrix before the court. (7)
Most judgments in the cases begin with a standard reference to the Boat Park and Investors principles. The decisions in the cases tend to show that the New Zealand courts see this as a reference to orthodox principles of contractual interpretation. The focus of the exercise of interpretation remains on the words of the commercial bargain. The provisions of the contract must be construed in the context from the perspective of a reasonable commercial man. The cases do not show any enthusiasm to extend the idea of background to which reference can be made and the approach to the factual matrix which excludes reference to previous negotiations and drafts holds good. The question of the relevance of conduct after the contract is undecided. (8)
The “commercial” approachThe commercial courts have long moved away from literalism. Most cases in which an issue of contractual interpretation arise begin with a statement of the kind made by the Court of Appeal in Mountjoy Farms Limited v Waipahi Dairy Farm Limited & Ors: (9) The day has long since past in our courts where words are to be given a purely literal meaning. The words used are to be given their natural and ordinary meaning, and having regard to what those words as used in a document would convey to a reasonable person who has all the background knowledge which would reasonably have been available to the parties in the situation which they were at the time of the contract.
The courts continually emphasise the need for commonsense in approaching the construction of commercial bargains. This has been the thrust of many comments by commercial judges in England where the courts are most anxious to ensure that merchants remain confident in the courts. This is a well established concern for commercial commonsense. In Hamilton v Mendes (10), Lord Mansfield famously observed: The daily negotiations and property of merchants ought not to depend upon subtleties and niceties; but upon rules, easily learned and easily retained, because they are the dictates of common sense, drawn from the truth of the case.
These observations were recently repeated by Lord Bingham in Owners of cargo lately laden on board “Starsin” & ors v Owners and/or demise charterers of “Starsin” (“The Starsin”) (11) case, where the House of Lords had to decide whether a bill of lading was a contract with the owner or the charterer of a ship, by examining the signature provisions on the bill, and their Lordships were most anxious to arrive at a conclusion which would make sense to a commercial man.
A general commonsense approach to the construction of a commercial bargain is perhaps exemplified by the statement of Lord Diplock in Antaios Cia Navaera SA v Salen Rederiana AB: (12) If a detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.
All this means is that the courts will use good business sense in determining what the words of a contract mean. It does not mean that the approach to interpretation allows a subjective view of the commercial purpose of the agreement to override the natural ordinary meaning of the commercial bargain. This is a question of balance where a court will be choosing between competing meanings, but, our courts have often warned of the dangers where courts go too far in applying a view of purpose to the exercise of construing a contract and disregard the words which the parties have chosen in their contract. (13) A court construing a commercial contract should assume that commercial parties intended their bargain to function in accordance with the clear and natural meaning of the words used in it, rather than in accordance with some other meaning which might be available if the background is considered and a particular view of the commercial purpose is taken. 1. 1998 1 WLR 896 912-913; Lord Hoffman’s general restatement was adopted in our Court of Appeal in Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 and Valentines Properties Ltd v Huntco Corporation Ltd [2000] 3 NZLR 16, a decision which was reversed in the Privy Council without comment on the general principles.
2. See e.g. the statement in WEL Energy Group Ltd v Electricity Corporation of New Zealand Ltd [2001] 1 NZLR 523 (CA) and the orthodox approach of the Privy Council in Valentines Properties Ltd v Huntco Corporation Ltd [2001] 3 NZLR 523 (CA).
3. See e.g. Bonnar v Summerland Property Developments Ltd 04/07/02, Heath J, HC Auckland, 134-1M02
4. Mount Joy Farms Ltd v Kiwi South Island Co-Operative Dairies Ltd [2002] BCL 100 (CA)
5. Tower Ltd v McConnell Dowell Corporation Ltd [2002] 3 NZLR 280 (HC)
6. Dairy Containers v The ship “Tasman Discoverer” [2002] Lloyds Rep 528, NZCA; also [2002] 1 NZLR 265 (HC)
7. See eg. McRae v Kale [2002] BCL 421 (HC)
8. The New Zealand courts seem to allow such reference, see e.g. Valentines supra fn1; A-G v Dreux Hldgs Ltd (1996) 7 TCLR 617 although the position cannot really be regarded as certain.
9. [2001] NZCA 372
10. (1761) 2 Burr 1198 at 1124; 97 ER 787 at 795
11. [2003] UKHL 12 page 6,7
12. (1985) AC 191 HL at 201.
13. See eg. Attorney General v Forestry Corporation of New Zealand Limited [2000] 3 NZLR 172 at page 19 para 60 and 61.
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