Cayman Islands: If It Ain´t Broke Don´t Fix It - Contract Interpretation After Chartbrook v Persimmon

The recent House of Lords decision in Chartbrook v Persimmon, with Lord Hoffman delivering the leading judgment, confirmed that the rules for contractual interpretation remain:

1. what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to, by using the language in the contract, mean.
   
2. pre-contract negotiations are inadmissible for the purpose of interpreting a contract.
   

It is a little unusual that a case which decides nothing new creates so much interest in the legal community. It might be thought that the reason Chartbrook v Persimmon has done so may be due to the fact it is the last decision of Lord Hoffman sitting on the House of Lords Judicial Committee. However, that would be to vastly underestimate the usefulness of the case and the comprehensive review of the rules undertaken by Lord Hoffman.

Dispute

Knowing the nature of the actual dispute that was decided is not all that important but, for what it is worth, it related to the price to be paid by a developer to a land owner in relation to property built on the land when the property built was sold. The dispute required interpretation of a clause that provided for additional sums to be paid by the developer to the land owner if the price achieved on sale exceeded an anticipated amount. The question was whether a particular deduction from the sale price was applied before or after calculating the percentage of the price to be paid to the landowner by the developer .This question was worth about 3.5 million pounds.

The House of Lords decided that it should not interpret the clause according to the normal rules of syntax as it made no commercial sense to have the clause read in that way. Also, such an interpretation rendered other parts of the contract arbitrary and irrational. Accordingly, the House of Lords ruled in favour of the developer paying the land owner on the basis of the contract interpretation that led to less money being due to the land owner.

Reasoning

Lord Hoffman started from the point that the well established rule of contract interpretation is what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to mean when using the language in the contract. The House of Lords had said previously that it did not easily accept that people have made linguistic mistakes, particularly in formal contracts, but that in some cases the court was driven to the conclusion, from looking at the background and context, that something had gone wrong with the language of the contract. However, it required a strong case to persuade the court that such a thing had happened.

Lord Hoffman considered that where the court was driven to the conclusion that something had gone wrong with the language, whether with the meaning or the syntactical arrangement, it doesn't matter that the meaning the court must give the words does not reflect the conventional meaning of the words. The job of the court, in such a case, is to decide what a reasonable person would have understood the parties to have meant by using the language which they did, and the fact that the court might have to express that meaning in language quite different from that used by the parties is not an issue. In what, I believe, is a soon to be famous statement Lord Hoffman said:

At this point Lord Hoffman could have stopped, as applying these principles to the contract between Chartbrook and Persimmon gave the answer that Persimmon's interpretation of the contract was the correct one. However, Persimmon raised two other points on appeal that their Lordships thought should be addressed. The first was the question of including pre-contract negotiations as an aid to contract interpretation and the second was a rectification claim.

Although the obiter discussion on rectification is interesting and important it goes beyond the scope of this article on contract interpretation. I will, therefore, turn to the other issue dealt with by their Lordships in obiter discussion.

Pre-Contract Negotiations in Interpretation

The rule that pre-contract negotiations are not admissible as evidence in regard to interpreting a contract was traced back by Lord Hoffman to 1878, although Lord Rodger traced it back to 1822 in a marriage contract case. Whether first stated in 1822 or 1878, the rule has, as Lord Hoffman said, been established for a very long time. On top of its venerability it is also a rule that the House of Lords has looked at, and affirmed, as recently as 1971 in Prenn v Simmonds and which the Scottish Courts and the Privy Council have acknowledged even more recently. Accordingly, their Lordships were being asked to depart from a long and consistent line of authority by agreeing to admit pre-contract negotiations in aid of contract construction.

Lord Hoffman considered whether such a departure was justified looking at both the theoretical arguments raised by those for and against the rule, as well as pragmatic considerations. Lord Wilberforce in Prenn v Simmonds was of the opinion that the main reason for not considering pre-contract negotiations is "simply that such evidence is unhelpful". He considered that parties' stated positions, intentions and objectives in pre-contract negotiations do not often reflect their true understanding of the contract. The contrary view is elegantly put as "Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement". Lord Hoffman accepted that in some cases considering negotiations may, in fact, be helpful in interpretation although he did comment that there were examples of cases where one court's gold had been found to be another court's dirt!

Lord Hoffman then examines a number of arguments and factors such as the use of evidence of pre-contract negotiations for contract interpretation in Civil Law, the requirement for consideration of much more material if evidence of pre-contract negotiations is included, that the more one allows conventional meanings or syntax to be displaced by inferences drawn from background the less predictable the outcome of interpretation is likely to be, and the disadvantage to assignees of a contract who were not involved in pre-contract negotiations.

After all this, Lord Hoffman concluded there was no clearly established case for departing from the rule excluding evidence of pre-contract negotiations from contractual interpretation and said:

"Your Lordships are being asked to depart from a rule which has been in existence for many years and several times affirmed by the House. There is power to do so under the Practice Statement (Judicial Precedent) [1966] 1 WLR 1234. But that power was intended, as Lord Reid said in R v. National Insurance Comrs, Ex p Hudson [1972] AC 944, 966, to be applied only in a small number of cases in which previous decisions of the House were "thought to be impeding the proper development of the law or to have led to results which were unjust or contrary to public policy". I do not think that anyone can be confident that this is true of the exclusionary rule."

In reaching this conclusion Lord Hoffman did refer to his decision in Bank of Credit and Commerce International SA v. Ali [2002] 1 AC 251, 269, where he said "that there are no conceptual limits to what can properly be regarded as background ". On that basis although evidence of what was said, or done, during pre-contract negotiations can't be used to decide what the contract meant, it can be used for other purposes, such as to establish that a fact which may be relevant as background was known to the parties.

Lord Hoffman also had some comment to make on cases which he saw as trying to get pre-contract negotiation evidence in the back door for use in contract interpretation. He considered that it was not objectionable that evidence be adduced that the parties habitually used words in an unconventional sense in order to support an argument that words in a contract should bear a similar unconventional meaning. Known as the "private dictionary" principle, such consideration is like the principle by which an unconventional linguistic usage in a trade or among a religious sect may be provided in evidence to show that the parties had in common an understanding of the meaning of a word, or words, which was different to that of the reasonable person considering the contract. In this context evidence of usage by the parties could come from the course of negotiations or any other occasion. However, Lord Hoffman considered the case Karen Oltmann (Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd's Rep 708 went too far in using pre-contract communication to interpret the meaning of the word "after". Lord Hoffman stated that if a word can have more than one conventional meaning in the context in which it used then the court should give it the meaning that makes most sense having regard to the background and context. In the case where the parties intended to use different words, or they mistakenly thought their words bore a different meaning, rectification is available. If the parties have negotiated an agreement upon some common assumption, which may include an assumption that certain words will bear a certain meaning, they may be estopped from contending that the words should be given a different meaning.

Conclusion

Whilst there is nothing new that is decided in Chartbrook v Persimmon nevertheless it is an important judgment as it re-states eloquently the fundamental rules of contract interpretation. Further, in examining why the rules exist and the history of their development, Lord Hoffman has nipped a lot of potential clever legal argument in the bud and firmly slammed the back door on attempts to subvert the integrity of the rules' application. Once again, Lord Hoffman has done great service to all of us, as the users and drafters of contracts, as, in his words, " the law of contract is an institution designed to enforce promises with a high degree of predictability". His last but not, on any basis, least House of Lords decision aids greatly.

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