Courts refuse to consider evidence from contract negotiations
except in rare circumstances and the Court of Appeal has underlined
that stance in the case of property development company Persimmon
Homes.
Persimmon was developing flats under a deal it cut with the
owner of the land on which the flats would sit, Chartbrook.
Persimmon disputed the meaning of a term which was defined in a
schedule to the contract between it and Chartbrook. The High Court
and then the Court of Appeal both ruled that Persimmon should not
be allowed to rely on evidence from the negotiating process to
support its re-definition of the term.
"[The term] is clear, certain and unambiguous and its arithmetic
is straightforward," said Lord Justice Rimer, one of the three
judges in the case. "The phrases which are elsewhere defined are
accepted as meaning what their definitions provide, and no other
word or phrase is said to bear any meaning other than its ordinary
one."
"I can see no basis for re-writing the agreement as invited by
Persimmon," he said. "I would reject any suggestion that this is a
case in which it is legitimate, as part of the construction
exercise, to have recourse to the pre-contract negotiations. The
basic rule is that they are out of bounds."
The ruling held even though one of the three Appeals Court
judges found that if the evidence had been used, it would have
strongly supported Persimmon's case about what the parties intended
the disputed term in the contract to mean.
The stakes in the case were high. Persimmon argued that under
the disputed clause it owed Chartbrook £900,000. Chartbrook's
interpretation of the clause, which gave a formula defining how the
profits from flat sales were to be divided between the two
companies, meant that it was owed £4.6 million.
The term in dispute was defined in a schedule to the contract.
This meant that it was not possible to use the "private dictionary
principle" as an exemption to the rule of inadmissibility of
pre-contract negotiations.
This is an exemption designed to take account of the fact that
parties to a contract might have agreed that a word or phrase has a
certain meaning but have not defined it within the contract. That
was not possible here because the term had been defined, the judges
ruled.
One of the three judges, though, said that the literal meaning
of the clause did not make as much sense as the meaning which
Persimmon wanted to put on it. Lord Justice Lawrence Collins said
that Persimmon's view ought to prevail.
"In my judgment this is a case where a syntactical analysis must
yield to business common sense," he wrote in his judgment. His view
was not adopted by the Court because the other two judges
disagreed.
David Woods, a litigation specialist with Pinsent Masons, the
law firm behind OUT-LAW.COM, said that the case emphasised the
unwillingness of courts to admit as evidence negotiations leading
up to a contract.
"When construing contracts, the courts seek to avoid commercial
uncertainty arising from allowing reference to pre-contract
negotiations, and this case follows that line," he said. "The
courts take the view that it is important to have certainty, and
generally this means looking at the words contained in a concluded
contract and treating them as the agreed conclusion of the parties
negotiations. Only in limited circumstances will the courts look
out with the words of the contract."
"One example used by the court in this case was of the potential
risks to a third party if a contract was assigned to it and it was
not able to look at the contract and interpret it from the words on
the page, and instead needed to make additional reference to
negotiations between the original parties. The court's view was
therefore that for the reason, and for other policy related
reasons, the general rule had to be followed," said Woods.
