The Principles of Contractual Interpretation - Business As Usual Part 3

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Recent cases

In the past year, the New Zealand courts (and, no doubt, arbitrators) have had to construe contracts of many different kinds. The decisions continue to reflect some uncertainty about the scope of the relevant background which can be referred to, in order to place an agreement in its factual context but generally emphasise the awareness of the strict limits on the use of extrinsic material and the basic requirement to focus on the meaning of the agreement to be construed. The contracts considered range from property sharing arrangements(9) to complex commercial property agreements (10) , from relatively informal commercial arrangements for work on a takeover (11) to formal settlement deeds (12) , from complex joint venture arrangements in the oil and gas industry (13) to detailed contractual arrangements governing the selection of Olympic athletes (14). In the last case, the Court of Arbitration in Sport (“CAS”) has recently applied fundamental principles of contract interpretation in deciding on the meaning and application of selection criteria.
The scope for reference to background extrinsic material is inherently somewhat uncertain but the established general principle that extrinsic evidence will not be admitted unless the agreement can fairly be said to be ambiguous remains.

Some practical points

On a practical level, the correct approach to the construction of a contract provides a natural focus on the agreement itself. This has an obvious significance for those who draft contracts and those who become involved in disputes over them - clear focus on the meaning of the bargain is essential. There will always be potential for some argument concerning the relevant admissible background but the proper recognition of the limits on the use of extrinsic material by lawyers and the courts will both maintain focus on the agreement itself and offer the opportunity for the more efficient determination of contractual disputes.

Procedure for rapid resolution

If a dispute concerning a contract arises, which cannot be resolved, the correct approach to what is admissible in such a dispute should mean that the dispute can be decided and the rights of the parties declared rapidly, whether by a court or an arbitrator. Procedural mechanisms are available in the form of summary judgment under HCR 138 or a construction summons in the Commercial List. Express provision is made by section 24C(4) of the Judicature Act 1908 for an application to the Commercial List judge where any dispute has arisen concerning the construction, status or application of a contract or document and the matter is eligible for entry in the Commercial List. The procedure under HCR 446P involves filing a statement of claim and an affidavit with all relevant exhibits. The Commercial List judge has broad procedural discretion to bring the matter to a rapid hearing. Issues concerning the interpretation of documents in their (limited) objective factual background should be capable of determination by those procedures. The problem is that these procedures can be avoided by pleading a case which broadens the scope of the factual inquiry (eg claims based on mistake, rectification, the Fair Trading Act or estoppel). The reality of such claims in the context of a commercial contract is that they often have little or no chance of success but are included to avoid arguing the central issue quickly. Little can be done to prevent this but I would suggest that, in many disputes, parties and their advisers might be better occupied in focussing at an early stage on the merits of the central interpretation issues and, if necessary, having those issues resolved in an efficient manner rather than broadening (and delaying) the litigation.

Conclusion

In the past year we have seen the application of the established principles of contractual interpretation to a range of contractual relationships. There has been an important underlining of the limits on the use of extrinsic evidence as an aid to interpretation. While the precise scope of the relevant background will vary in different contractual contexts, it can and should, be quite confined in most contractual settings. Extrinsic evidence of matters which were within the mutual contemplation of the parties to support a particular interpretation of the contract should only come into play if the contract can properly be described as ambiguous.
It is to be hoped that a clearer attitude to the admissibility of extrinsic evidence may lead to a more efficient disposal of contractual disputes in the courts if such disputes arise.

Paul David

9. Potter v Potter (supra)
10 See eg Auckland City Council v Union House Ltd (unreported) High Court, Auckland, Randerson J, 30 July 2003
11 Jowda Holdings Ltd v Cullen Investments Ltd (unreported) CA, McGrath J, Fisher J and Rodney Hansen J, 5 June 2003
12 Compcorp Ltd v Force Entertainment Centre Limited [2003] 7 NZVLC 403, 996
13 Greymouth Petroleum Acquisition Company Limited & Or v Ngatoro Energy Limited (unreported) High Court, Wellington, 30 May 2003 where, in relation to the interpretation of a joint venture operating agreement for an oil-field in Taranaki, the judge appears to adopt a very wide view of the matrix of fact and considered post-contract dealings as admissible to assist in construing the contract.
14 Yachting New Zealand v Murdoch; Yachting New Zealand v Cooke & Gair, Award of Court of Arbitration for Sport, (“CAS”) 2 April 2004

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