Last week’s House of Lords judgment in Chartbrook v. Persimmon Homes marked a significant point in the debate concerning the construction of contracts,and, in particular, the admissibility of evidence from outside the four corners of the contract. The unanimous conclusion of the House of Lords will no doubtset the tone for many years to come.
In their 1997 judgment in ICS v. West Bromwich, the House of Lords reaffirmed the objective approach to the interpretation of contracts: the task was to find the meaning that the document would convey to a reasonable person with all the background knowledge available to the parties. However, the previous negotiations of the parties were excluded from that background knowledge for reasons of “practical policy”.
Twelve years on, in Chartbrook v. Persimmon Homesthe House has taken the opportunity to reconsider this exception. The facts of the case are of no great relevance: the matter concerned the interpretation of a contractual definition. Read literally, Chartbrook was owed millions. Read having regard to the arguable commercial purpose of the clause, it was only owed thousands. At first instance and in the Court of Appeal three judges preferred Chartbrook’s interpretation; one preferred Persimmon’s. The House of Lords unanimously preferred Persimmon’s.
If that 6-3 score line shows anything, it shows that the search for the objective intention can lead to markedly different results: the relevant viewpoint is not so much that of the reasonable person but rather that of the particular judge. Some would say that this was an argument in favour of broadening the material that a judge can look at in searching out the true contractual intent. Here, Persimmon argued that the negotiations would help demonstrate the true commercial purpose of the clause. Whilst such an argument proved unnecessary, the House took the opportunity to consider whether the negotiations ought to be admissible.
Giving the lead judgment, Lord Hoffman considered that the negotiations would be unhelpful or inconclusive more often than not. However, he acknowledged that occasionally “among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus” which would influence a reasonable person in construing the language used by the parties in their final agreement. That being so, why should such material be excluded?
To that question Lord Hoffman gives only one answer: pragmatism. It is, he says, undesirable for the interpretation of a contract to turn routinely on matters outside the four corners of the agreement – so far as possible the document should speak for itself. Some will regard that observation as ironic coming from the prime author of the ICSjudgment, which requires a consideration of the background material whether or not there is ambiguity on the face of the contract. However negotiations, according to Lord Hoffman, are of a different quality to run-of-the-mill background material, being “drenched with subjectivity”.
Yet that, surely, is simply to restate the problem: yes, sometimes the negotiations are unhelpful. What about statements which are not so drenched? To that Lord Hoffman offers no answer other than the difficulty in telling the wheat from the chaff, particularly as evidence of the negotiations would inevitably come to be lead in almost any case of contractual interpretation (and here he draws an analogy with the much abused rule in Pepper v. Harton the admissibility of Hansardin cases of statutory interpretation). But that ignores the point made earlier in his judgment that such evidence is often already before the court when a claim for rectification is raised at the same time.
That is about the limit of the House’s analysis. Elsewhere in his judgment, Lord Hoffman tidies up the law concerning the “private dictionary rule”, consigning the anomalous case of TheKaren Oltmann to the breakers yard. He also makes a welcomed clarification to the law of rectification and the objective nature of the underling consensus between the parties.
But other than by reference to the “private dictionary rule” the boundaries of the exclusionary rule – noted in ICS as being “unclear” – were not explored at all. Many will also be disappointed at how a House that has been prepared to develop the law in other fields on no better pretext than “times have moved on” (the rationale adopted in Stack v. Dowden) were so conservative here. The existing rule is best justified, it seems, on the basis that there is no clear case for changing it.
Thomas Braithwaite, Commercial and property law practitioner, Serle Court