A New Approach to Contract Interpretation?
Topics covered in this article: Other
The parole evidence rule
A recent judgment may indicate a trend away from a long-standing approach to interpreting contracts, known as the ‘parole evidence rule’. Traditionally, evidence of negotiations or what parties “intended” to agree is not able to be put before the court to explain what a document means. Evidence of what the parties (or one of them) claim they intended to agree (their “subjective intentions”) is not admissible. The traditional approach requires the court to look only at the wording of the document they actually signed up to, which is presumed to reflect, reliably, what their final agreement was. This restrictive approach has recently been emphasised by the New Zealand Court of Appeal in Bathurst Resources Ltd v L & M Coal Holdings Ltd  NZCA 113. It also prevails in the UK and Australia.
But in Poutu v Attorney General  NZHC 723, the High Court has signalled a possible move away from such a strict technical distinction. In Poutu the court did consider pre-contractual documentation and wider circumstances to determine what the parties’ “real intentions” were. And the High Court did actually decide the meaning using pre-contract discussion evidence. However, because of the contrary decisions at appellate level, it did not rely on this approach alone. Whether or not this approach prevails will have to wait on future appellate decisions.
Background to settlement
The Poutu case arose because of a hiccup in the drafting of a deed recording settlement of a Treaty of Waitangi claim. The position was complicated by the fact the settlement deed had an “entire agreement” clause, and also had been confirmed in legislation, as is common with Treaty settlements.
The settlement involved a Treaty claim by Te Atiawa against the Crown. Under the settlement, Te Atiawa could elect to purchase up to 52 Crown properties which had been land-banked for possible Treaty settlements. The properties included the New Plymouth Courthouse, Police Station and a number of schools. In each case the price would be the market price, and for some, there would be a leaseback to the Crown on an agreed rental basis.
During the negotiations, a particular arrangement was agreed for the Courthouse property, whereby if Te Atiawa chose to purchase it, there would be a 20% price discount from the market value. However, when the deed was drawn up, wording in a schedule applied the 20% reduction to all 52 properties. The mistake was not noticed and the Deed was signed and included in the validating Act of Parliament.
Te Atiawa exercised their election to acquire a number of the properties, without seeking the 20% discount. After another Crown entity picked up the error, Te Atiawa began claiming the 20% discount on other properties. The Crown resisted and said it had been a drafting error. It said the Crown would be in breach of the Public Finance Act if it allowed such a discount, as it had not been appropriated for. The value difference for the Crown was almost $10m. The issue went to court.
Te Atiawa position
Te Atiawa acknowledged freely to the court that there was no evidence indicating the negotiation about the 20% applied to other than the Courthouse property. It also acknowledged the error had not been noticed or relied on by Te Atiawa earlier. But it said that as a trust, with obligations to its beneficiaries, where the face of the document gave an entitlement to a discount, the trustees were obligated to extract the entitlement.
Te Atiawa also argued this was not really an interpretation issue, as there was no ambiguity in the deed - it was just an error. Although in the normal course a court might be able to correct (or rectify) an error, in this case Te Atiawa said that was not possible because of the ‘entire agreement’ clause in the deed, and the confirming legislation also explicitly prevented any court from inquiring into the settlement or the deed.
Court’s interpretation approach
Because Te Atiawa had conceded that the common intention and agreement was that the discount applied to only one property, the Court said it would not go through in detail the cases on admissibility of pre-contract negotiations. But the judge took the opportunity to comment on the “trend” in New Zealand favouring some recourse to pre-settlement evidence. His Honour referred to an earlier judgement of Tipping J in Vector Gas, where a distinction was made between consideration of all circumstances and conduct in the negotiating process, compared with evidence which showed “objectively the meaning the parties intended their words to convey”. The latter was able to be considered, because the target was to discover, by objective means, the meaning actually intended by the parties.
What is not permitted is evidence of a subjective claim for “what I intended to agree to”. But that prohibition does not exclude recourse to reliable objective evidence of conduct or communications indicating that the parties had agreed, as a fact or probability, their common understanding of the meaning of the words in dispute. An example would be correspondence reliably and objectively showing there had been agreement on the intended meaning, even if the final contract was not so clear. The crucial difference is the ability to be sure that the evidence is objectively reliable, rather than the subjective view of one or other of the parties.
In the Poutu case, the Court did examine in detail the records of the negotiations, the history of preparing the deed, and the parties’ conduct after settlement. Having done so, the Court would have been prepared to find that there was reliable evidence of agreement on such a common intention limiting the discount to one property, and based on that negotiation evidence, the court would have interpreted the deed accordingly (even though in this case the deed’s contrary wording was fairly clear). But the court said this case would not be decided ‘solely’ on an interpretation basis because the legal position in New Zealand on accepting parole evidence is ‘not clear cut’ and awaits a decision by the Supreme Court.
The final order made was instead to amend (or ‘rectify’) the deed’s schedule so that only one property was discounted. This was done using normal rectification principles, so as to carry into effect the “real agreement”.
But the case shows an increasing readiness of courts to consider the whole pre- and post-contract circumstances as an interpretation tool. Consideration may in future be given to reliable indications of the “real intentions”, rather than just looking at the words of the final contract document. At this stage, the higher appellate decisions are adverse to such an approach, but no doubt it will come before the appellate courts in due course.
Latest Update: 26 May 2021