The Principles of Contractual Interpretation - Business As Usual Part 2

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High Court

In the High Court the judge held that the parties were each entitled as tenants in common in equal shares and that each was to be regarded on the terms of their agreement as having provided a half share of the purchase price. On appeal, in simple terms, the argument was that, on the proper interpretation of the agreement, and in the light of extrinsic evidence, there was, as a result of the agreement not being performed, either a resulting trust of half the proceeds of sale in favour of the party who had provide the purchase price or a presumption that the provision of the whole purchase price was a loan of half the purchase price to the other party.

Court of Appeal

The judgment of the Court of Appeal was given by Justice Fisher. The Court initially observed that the resulting trust claim and the loan claim were mutually exclusive. The resulting trust argument was rejected.

On the loan argument the Court of Appeal found that, on the face of the agreement, there was nothing to say that there was any contract of loan of half the sale price by the party paying the whole purchase price. An argument based on the use of the word “provide” in clause 1(a) of the agreement was met by consideration of the agreement as a whole. From this consideration the Court concluded that the agreement clearly meant that the payment of the money was irrevocable (in the same way as the surrender of other property rights by the other party to the agreement was irrevocable). The Court then had to deal with an argument that the contract should be interpreted as a contract of loan on the basis of extrinsic evidence and made observations of a general nature on this topic.

The appellant sought to rely on certain general statements concerning the construction of agreements in their context in various authorities as the basis on which to admit this background material. A broad approach to extrinsic material was advanced.

Extrinsic material

The Court of Appeal rejected any broad availability of extrinsic material to support a particular interpretation of the contract. It emphasised that the reference to background knowledge by Lord Hoffman in I C S Limited v West Bromwich(4) had to be read in context and subject to the basic proposition in Lord Hoffman’s own speech that the law excludes from “admissible background the previous negotiations of parties and their declarations of subjective intent”. The Court described Lord Hoffmann’s statements on contractual interpretation as a “gloss” on the well known speeches of Lord Wilberforce in Prenn v Simmonds(5) and Reardon Smith Line Ltd v Yngvar Hansen-Tangen(6) (and expressed uncertainty about how long the gloss might endure).

The Court made this general comment about the conduct of commercial litigation in New Zealand:

Wherever the emphasis is placed, the way in which commercial litigation is currently conducted in New Zealand suggests widespread misunderstanding of the limits of extrinsic evidence. It must not be overlooked that the “background knowledge” referred to by Lord Hoffman can be relevant only where stringent requirements are satisfied. Four are of particular importance in the present case.

The judgment then outlines four of the “stringent requirements” which are relevant in the case:

• Background material cannot be used to suggest ambiguity or throw doubt on the meaning of the contract. Interpreting a contract in its objective factual setting does not mean using the background to create doubt about the natural ordinary meaning of the words in the contract. Rules which aim to remove ambiguity cannot be used in this way. (see eg. Melanesian Mission Trust Board v Australian Mutual Providence Society [1997] 1 NZLR 391, 395 (PC).

• Extrinsic evidence can only ever be admitted to prove facts which are mutually in the contemplation of the parties at the time of the contract.

• The subjective intention of the parties is always irrelevant and inadmissible.

• Precontractual negotiations, earlier drafts and similar documents are not admissible unless they support objective observable facts as opposed to contentions as to meaning by either party. The aim is to construe the contract which was entered into, not earlier versions of it (7).

This means that extrinsic evidence which goes beyond the objective general background to the agreement will, in addition to being unhelpful, also be inadmissible. As the Court of Appeal noted there has been no change made by the Privy Council in Yoshimoto to the limits of the admissibility of extrinsic evidence.
The Court of Appeal noted that we are back now to the established position of starting and usually ending with the interpretation of the agreement itself (see dictum in Wel Energy Group Limited v ECNZ (8)). The Court saw the need to focus the minds of lawyers on the limited ambit of what is relevant on a question of contractual interpretation. It observed that considerable misdirected litigation time might be saved if more effect were given to those limits.

In Potter v Potter the Court of Appeal ultimately held that if the principles were carefully applied none of the extrinsic evidence which the appellant sought to rely on was admissible. The Court further held that various objective facts which were within the mutual contemplation of the parties at the time of the contract were admissible but did not support any interpretation other than that which would be reached by analysing the document itself. The plain and ordinary meaning of the agreement was that the payment of the purchase price under the agreement was irrevocable and not a loan. There was no loan of half the purchase price on the true construction of the agreement. The appeal failed.

4. [1998] 1 WLR 896, 913(A) (HL)
5. [1971] 1 WLR 1381, 1384-1386
6. [1976] 1 WLR 989
7. See eg Lord Hoffman in the Privy Council in Canterbury Golf International Limited v Yoshimoto [2004] 1 NZLR 1
8 [2001] 2 NZLR 1at 18.

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