The Construction of Commercial Contracts Part 4

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The Privy Council’s pointed approach must be contrasted with the academic comment heralding the “new approach” to contract interpretation and with the judgment of Justice Thomas in the Yoshimoto v Canterbury Golf International Ltd decision (19). In that case, which has been recently heard on appeal in the Privy Council, the Court of Appeal found that a condition in a contract for the sale of land, under which an instalment of the purchase price was payable provided all “necessary” resource consents to enable the development to proceed had been obtained within 12 months, had been met. “Necessary” was not defined in the contract. The Court found that a consent which was obtained following a notified hearing after the 12 month period was not one of the “necessary” consents contemplated by the parties in their contract at the time of the contract. While Justice Thomas found that the meaning emerged “fairly securely” from the contract and its commercial background (in, apparently, the conventional sense) he took the opportunity to question the scope of the exception relating to the consideration of previous negotiations and draft agreements. It will be interesting to see if the Privy Council picks up the invitation from Justice Thomas to examine the scope of the exclusion. I rather suspect that this case may, like Valentines, be treated by their Lordships as a “conventional” construction case to be examined on an orthodox basis.

It is also interesting to read the recent WEL Energy Group Ltd v Electricity Corporation of New Zealand Ltd (20) case, which concerned the interpretation of a clause which is regularly found in commercial contracts providing for a right of termination on certain specified events. In that case, the Court adopted what might be termed as an orthodox approach to the Boat Park principles. At paragraph 23, the Court said:

It may seem old-fashioned, but the first step in interpreting the words in a document is to read the words concerned. They are the central focus, and the point of departure. Boat Park principles do not require anything different. The question is the meaning of the words used, in light of surrounding circumstances. Reference to surrounding circumstances is particularly appropriate where words used give rise to ambiguity or literal meaning gives rise to unreasonable outcomes. One does not start from surrounding circumstances and on that basis invent wording which might have made more sense but which does not exist. The task is interpretation, not reconstruction.

Further comment

There are now considerable areas of uncertainty in the principles governing the interpretation of commercial contracts - the scope of background, when it should be referred to, and whether subsequent conduct can be referred to. This makes for argument on the application of the principles in a given case, before the court can move to apply principles to the particular contract. The result of the recent cases is that there is sufficient support for a reasonably confined approach and also support for a much broader approach. In my view the “new” approach risks a good deal in creating an unwelcome measure of uncertainty and is contrary to the established fundamentals of commercial law.

For commercial parties, contracts are important and they expect their relationship to be governed by the contract. They expect also that the court will grapple first and foremost with the meaning of that document in interpreting their obligations. Where words can only be sensibly read one way and are not ambiguous, why should the background be relevant? Why should one party be allowed to “muddy” the waters by reference to background and have the contract rewritten after the contract has been entered into?

The irony of the “new “ approach is that the most developed commercial contracts, which are the result of protracted negotiations, are perhaps most at risk of reinterpretation by reference to the background. I would suggest that the result of any “new” approach may well be longer hearings with less and less reliable evidence creating more and more uncertainty, rather than some kind of better, purer process. A certain flexibility of approach in this area is inevitable, but I believe it would assist if there was a clear restatement of orthodoxy from the Court of Appeal or the Privy Council. At present the broad principles simply provide significant ammunition to a party which wants to examine a wealth of material to arrive at a “fairer” interpretation of the bargain from its viewpoint. I would expect commercial parties to lose faith in the court process if the approach apparently favoured by Justice Thomas is adopted in many cases.

In most cases, the search for the meaning of a commercial contract should begin and end with the interpretation of words used by the parties in the contractual document. This will not always be an easy task - words are inherently uncertainty but that is not a reason to be deflected from the primary task of grappling with the meaning of the contract. In difficult cases, the Courts need to be careful not to delve too deeply into the “background” and to become involved in reconstructing or rewriting a bargain in a manner which the Court decides is fair. Ultimately, if a Court does this in one case, a great disservice can be done to commercial law generally. A traditional approach seems more likely to provide commercial parties with what they need - an objective interpretation of their bargain, neither more nor less, after a hearing of reasonable duration at reasonable cost.

19. [2001] 1 NZLR 523.
20. [2001] 2 NZLR 1.
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