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Contract Interpretation Notes

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Contract Interpretation Wednesday, 8 September 2010 11:12 a.m.

General principles
○ An objective approach
 Lord Hoffman's 1st principle from West Bromwich Building Society
□ Interpretation is ascertainment of the meaning which a document would convey to the 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
 Vector Gas per Tipping J
□ The necessary inquiry [is] what a reasonable and properly informed third party would consider the parties intended the words of their cnotract to mean. The Court embodies that person.
□ "It is fundamental that words can never be construed as having a meaning they cannot reasonably bear." (Excepting estoppel, private dictionary exceptions)
 Yoshimoto per Thomas J
□ In contract law effect must be given to the reasonable expectations of honest people.
○ The 'plain', 'ordinary', 'natural' meaning is preferred
 Lord Hoffman's 5th principle from West Bromwich Building Society
□ Common sense rule that words are given their plain meaning.
□ But the law doesn't require judges to attribute to parties an intention they could not have had if a term "flouts business common sense".
 Yoshimoto, Thomas J,
□ Parties are presumed to intend the plain meaning of their contractual terms.
□ The rule would only be departed from where the Court cannot be confident that the words used in the contract convey the meaning intended by the parties, and reliable extrinsic evidence is available to confirm the parties' actual intention.
 Lord Hope in Melanesian Mission Trust
□ It is not the function of the court to search for an ambiguity.
□ Unless the context shows the ordinary meaning cannot be given, or there is an ambiguity, the ordinary meaning of words must prevail.
 Vector Gas
□ Per McGrath J:
 The ordinary or plain meaning of the contractual text is always a principal, and usually the primary, consideration.
□ Per Wilson J:
 Words of a contract are to be given their plain ordinary meaning, subject to 3 exceptiosn...

1. Genuine and relevant ambiguity

2. If plain meaning makes no commercial sense

3. Estoppel by convention
○ The parol (or extrinsic) evidence rule
 Formerly, extrinsic evidence was not be brought to bear on the plain meaning of a document to vary, add to or subtract from its terms
□ Edwards v O'Connor per Cooke P
□ Policy behind this:
 Certainty of contract between parties
 Certainty for third parties
 Business efficiency
 Predictability
 Less stress on courts
 Encourages better contract writing.
 Now less certain: "It is always permissible to go outside the written words for the purpose of identifying context ... And objective purpose."
□ Vector Gas per Tipping J
□ West Bromwich Building Society per Lord Hoffman, 2nd principle
 Background referred to as 'matrix of fact' by Lord Wilberforce. Includes absolutely anything which was reasonably available to parties and would affect a reasonable interpretation of the document...
 but excludes previous negotiations and declarations of subjective intent for reasons of practical policy. ( 3rd principle)
□ Yoshimoto per Thomas J: why evidence of prior negotiations should be permitted
 Would not introduce unpredictability and uncertainty where evidence is very strong
 Convenience and efficiency should not be lightly permitted to defeat parties' true intentions.
 Would not encourage more litigation in practice, as such evidence is already brought up in claims of misrep, estoppel and rec tification.
 Third parties do not rely on contracts in all cases
◊ Why should 3rd parties be entitled to hold parties privy to a contract to a meaning that is not their own?
 The underlying theory remains in a state of some confusion - David McLauchlan
 The predominant view in NZ seems to be that [reference to the matrix of fact] is permissible even though the words of the contract seem plain at first sight. - Burrows, Finn and Todd.
○ Acceptable extrinsic evidence
 The 'matrix of fact' (2nd principle)
□ "All the objectively relevant surrounding circumstances" - Gibbons per Tipping J
□ "Background known to both parties" - Chartbrook per Hoffman LJ
□ Context showing the objective commercial purpose of the transaction - Vector per McGrath J
□ "evidence of facts, circumstances and conduct attending the negotiations is admissible if it is capable of shedding objective light on meaning."
 Vector per Tipping J
 Subsequent conduct If it is shared or mutual and capable of providing objective guidance as to intended meaning - Gibbons per Tipping J. Irrelevance should be the touchstone for excluding evidence - Vector Gas per Tipping J
 Prior negotiations Rule excluding them should not be absolute - shouldn't artificially restrict the background knowledge avaiable to parties in determining what a contract would reasonably convey to the parties - Yoshimoto (CA) per Thomas J "The rule excluding resort to prior negotiations could scarcely be more firmly embedded in our law." - Lord Roger in Chartbrook "In principle, I would accept that previous negotiations may be relevant [as part of the background]." - Chartbrook per Lord Hoffman In Vector Gas: Contract Page 24

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