Dispute Resolution News
Pre-contract negotiations inadmissible as contract construction aid
Important decision reaffirms pre-contract negotiations inadmissible as contract construction aid
Chartbrook Limited v Persimmon Homes Limited and others (Appellants) and Another (Respondent) HL [2009] UKHL 38 (1 July 2009)
Within the cut and thrust of the commercial world, each party to a contract will spend a great deal of time and money in the pursuit of a ‘watertight' agreement that safeguards their rights and remedies while minimising their exposure to liabilities. Prior to entering into a contract, the parties, and their lawyers, will negotiate terms in minute and frequently tedious detail to ensure that their positions are protected and that the agreed terms of the contract reflect the intentions of both sides.
Once signed however, the actual contract is frequently sidelined, never to see the light of day again ......unless there is a dispute. At that point, once the dust is blown off the contract and the relevant term is read, it may not accurately reflect the intentions of at least one of the contracting parties. In those circumstances, that party may naturally wish to rely on pre-contractual negotiations as evidence of the parties' intentions at the time the contract was entered into. Can they?
In a recent judgment, the House of Lords has confirmed that they cannot do so by reaffirming the earlier authority of Penn v Simmonds [1971] 1WLR 1381; namely, that pre-contract negotiations are inadmissible as an aid to the true construction of a written contract.
In 1991, the parties had entered into an agreement to develop a site in Wandsworth. After completion of the development, a dispute arose over the method of calculation of an "additional residential payment", (a defined term within the contract with a defined method of calculation). The Claimant's sued, relying on the terms of the contract. The judge at first instance and the majority on appeal agreed with the Claimant. On appeal to the House of Lords, Lord Hoffman held that while the court did not easily accept that linguistic mistakes were made in formal documents, in some cases the context and background would lead a court to reasonably conclude that: "something must have gone wrong with the language" and, in allowing the Defendant's appeal accepted that this was "an exceptional case in which the drafting was careless and no one noticed".
However, Lord Hoffman took the opportunity to reaffirm that a court did not easily accept that linguistic mistakes were made in formal documents; that the law of contract was designed to ensure that contractual promises could be enforced with a high degree of predictability and that a long, consistent line of case law had developed, over many years, an exclusionary rule that pre-contract negotiations were inadmissible as an aid to construction. To admit evidence of pre-contract negotiations as an aid to construction of the contract would create uncertainty for the parties and increase the costs of resolving disputes. Whilst the Lords did have the power to depart from the exclusionary rule, this was intended to be applied to only a small number of cases and in very limited circumstances. The remedies of rectification and estoppel by convention were alternative protective safeguards that would, in appropriate cases, allow the inclusion of pre-contract negotiations as background to support either of those remedies.
Whilst lawyers are familiar with the principles outlined in this judgment, it does provide useful cautionary advice for the parties to contractual relationships, some of whom may be over-eager to cast the contract aside if its terms are no longer agreeable.
The lesson is clear: pre-contract negotiations provide the parties with the only opportunity they are likely to have, to settle the terms of the contract and iron out potential ambiguities. Whilst post-contract/pre-litigation, further negotiations may resolve the dispute behind closed doors, it will be a brave litigant who brings to court, the subject of pre-contract negotiations on the question of construction.
Veronica Howley
Principal
I/Scanned papers and website material/website material/case report 21 09 09 VTH Chartwell
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