INTERPRETATION OF CONTRACTS AND THE ADMISSIBILITY OF PRE-CONTRACTUAL NEGOTIATIONS
| Citation | (2005) 17 SAcLJ 248 |
| Date | 01 December 2005 |
| Published date | 01 December 2005 |
| Author | Ewan McKENDRICK BCL, MA, LLB(Edinburgh); Professor of English Private Law, University of Oxford; Fellow of Lady Margaret Hall and Barrister, 3 Verulam Buildings, Gray’s Inn, London. |
This essay examines the general rule that pre-contractual negotiations are not admissible in evidence when interpreting a contract. It does so in the light of Lord Hoffmann’s recent restatement in Investors Compensation Scheme v West Bromwich Building Society[1998] 1 WLR 896 of the principles that are applicable when seeking to interpret a contract. The scope of the general exclusionary rule is examined, as well as its rationale. Given the adoption by the modern courts of an approach to interpretation which seeks to give a commercially sensible construction to the clause in dispute, it is suggested that the justification for excluding pre-contractual negotiations from evidence appears suspect. They may in fact provide very good evidence of the issue which is at stake between the parties and, to that extent, should be admissible in evidence unless they relate to the subjective state of mind of the negotiating parties. However, caution must be exercised by judges in order to ensure that the evidence is relevant, reliable and does not add unduly to the cost of the litigation.
1 In 1998, Lord Hoffmann purported to restate the rules or principles which are applicable to the interpretation of contracts. His speech in Investors Compensation Scheme Ltd v West Bromwich Building Society1 must be the most widely-cited statement in modern English contract law.2 The extent to which his restatement is applicable in Singapore is a question which is beyond the scope of this essay. Rather, my aim in writing this essay is to explore the impact of Lord Hoffmann’s restatement on the admissibility of evidence of pre-contractual negotiations in cases concerned with the interpretation of contracts.3 This is an issue which has recently been considered by the Court of Appeal of
Singapore in MCST Plan No 1933 v Liang Huat Aluminium Ltd4 where the general rule which declares evidence of pre-contractual negotiations to be inadmissible was upheld, albeit by a majority. It has also been considered in recent years by the courts in New Zealand and England where divergent answers have been given to the question of the circumstances in which pre-contractual negotiations should be admissible in evidence. Before examining this issue in more detail, it is necessary to set the scene by considering the speech of Lord Hoffmann in Investors Compensation Scheme in rather more detail.
2 The primary significance of the decision of the House of Lords in Investors Compensation Scheme5 is to be found in the following passage from the speech of Lord Hoffmann. He stated:6
… I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds[1971] 1 W.L.R. 1381 at 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen[1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. The principles may be summarised as follows.
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely
anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investment Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749).
(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191, at 201:
if 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.
3 The case itself concerned the proper interpretation of a badly-drafted claim form which required investors to assign to the Investors Compensation Scheme Ltd all of their rights arising out of the sale to them of some home income plans which had proved to be a disastrous investment. Crucially, the form excluded certain rights from the scope of the assignment and it was the proper interpretation of the phrase which excluded these rights that was the subject of dispute before the House of Lords. Lord Hoffmann, speaking for the majority, concluded that the phrase excluding “[a]ny claim (whether sounding in rescission for undue
influence or otherwise)” was actually used by the parties to mean “[a]ny claim sounding in rescission (whether for undue influence or otherwise)”. In reaching this conclusion Lord Hoffmann acknowledged that he had not given the words their natural and ordinary meaning but sought to justify his decision on the ground that the parties had not used the words in their natural and ordinary sense. The court was therefore “engaged in [choosing] between competing unnatural meanings”.7
4 Lord Lloyd dissented. He was of the opinion that the majority had gone too far. In his view, the construction adopted by the majority was not an available meaning of the words used by the parties. He stated that he knew of “no principle of construction” which enabled a court “to take words from within the brackets, where they are clearly intended to underline the width of ‘any claim’, and place them outside the brackets where they have the exact opposite effect”.8 In his opinion, the majority had crossed the line between purposive interpretation, which is legitimate, and creative interpretation, which is not.
5 Lord Hoffmann’s restatement attracted some initial judicial hostility9 but it is now regularly applied in the courts in England.10 It has not necessarily led to a greater degree of predictability in the case law. Indeed, cases can be found recently in which the House of Lords has failed to reach agreement on issues of interpretation (and, indeed, have expressed their disagreement in robust terms).11 Despite these difficulties in the application of the principles to the facts of particular cases, it can be said that Lord Hoffmann’s restatement is now firmly established in the case law in England.
6 The restatement has had a number of consequences. First, it has widened the range of materials to which the courts can have regard when seeking to interpret commercial contracts. The key concept here is the “matrix of fact” which is a frequently used if somewhat elusive concept.12 Lord Hoffmann’s second principle is stated in very broad terms and, while he subsequently attempted to clarify its scope,13 its sphere of application remains broad. Second, it has enabled judges, in an appropriate case, to depart from the natural and ordinary meaning of the words used by the parties without having to resort to the remedy of rectification (which remedy is only available within narrow limits).14 While Lord Hoffmann in his fourth and fifth principles urges the exercise of caution before a judge departs from the ordinary meaning of the words used by the parties, he expressly recognises that it is right and proper for a judge to depart from that meaning in a case where he is satisfied that the parties must have “used the wrong words or syntax”.15
7 Third, Lord Hoffmann’s restatement has been accompanied by the rise of a purposive approach to the interpretation of contractual documents which favours the adoption of a commercially sensible construction of contracts.16 In some ways it is difficult to object to the latter approach because there is little virtue in the...
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