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| A, an English construction company, entered into a contract (“Agreement”) with B, an English company, according to which B would construct a number of apartment buildings on property owned by A and subsequently sell them. According to the Agreement the price B had to pay to A was to be made up of two parts, the “Minimum Guaranteed Residential Unit Value” and a balancing payment termed "Additional Residential Payment" (“ARP”).
A dispute arose between the parties as to the meaning of the ARP. The Agreement defined it as “[…] 23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives”. A, basing itself on the ordinary meaning of the definition, argued that it was entitled to a 23.4% share of the net proceeds of sale of each apartment in excess of the minimum guaranteed residential unit value. On the contrary B, invoking a different understanding allegedly reached by the parties in the course of the negotiations, objected that A was only to receive either a fixed percentage (23.4%) of the sales revenue or the minimum guaranteed residential unit value, whichever was the greater. The High Court decided in favor of A. In so doing it first of all reiterated the traditional rule of English law according to which pre-contractual negotiations are not admissible as evidence in interpreting a written document, all the more so if the disputed wording is contained – as it was in the case at hand – in a definition section. Moreover it pointed out that since B was ultimately seeking a rectification of the Agreement it should have produced clear and unambiguous evidence that the parties were mistaken in the recording of their real intention and that the alleged intention continued in their minds until the execution of the Agreement. The Court of Appeal (12 July 2008, 2008 EWCA Civ 183: see UNILEX) took a more flexible approach with respect to the question of the admissibility of extrinsic evidence for the purpose of contract interpretation. In particular LJ Lawrence Collins, though admitting that the general rule was that extrinsic evidence was inadmissible, pointed out that the policy reasons for the exclusionary rule were by no means self-evident and compelling. In this respect not only did he recall that the US Restatement Second on Contracts expressly admits negotiations as evidence to establish the meaning of the writing (§ 214) but referred also to both the UNIDROIT Principles of International Commercial Contracts (Article 4.3) and the U.N. Convention on Contracts for the International Sale of Goods (1980) to demonstrate that the traditional exclusionary rule is not accepted in international instruments dealing with private law contracts either. The latter two instruments had also been cited by Thomas J in a decision by the New Zealand Court of Appeal (Yoshimoto v Canterbury Golf International Ltd [2001]: see UNILEX) to argue in favour of a flexible application of the exclusionary rule whenever a cautious use of the pre-contract material would enable the court to arrive at a meaning of the contract which accorded with the ascertainable intention of the parties. LJ Lawrence Collins further recalled a number of English decisions [one of which likewise had referred to both the UNIDROIT Principles and the U.N. Sales Convention: Court of Appeal (Civil Division) in Proforce Recruit Ltd. V The Rugby Group Ltd [2006]: see UNILEX] admitting that negotiations may be looked at to see whether the parties had negotiated on an agreed basis that the words used in their contract bore only one of two possible meanings and concluded that this basically amounted to admitting evidence of prior negotiations in construing a contract. However in the case at hand the Court, with LJ Lawrence Collins dissenting, rejected B’s appeal on the ground that B had failed to produce sufficient evidence that the parties had actually reached a common understanding as to the meaning of the ARP or that rectification of the Agreement was justified for other reasons. The House of Lords overturned the decision of the Court of Appeal and decided in favor of B. As pointed out by Lord Hoffmann in his elaborate opinion, it is a well established principle that whenever “something must have gone wrong with the language” in which the parties have drafted their contract, the court has to attribute to the parties an intention which a reasonable person would have understood them to have. In the case at hand the definition of ARP in the Agreement was undoubtedly poorly drafted with the consequence to interpret it in accordance with ordinary rules of syntax, as did the judge of first instance and the majority of the Court of Appeal, would make no commercial sense; by contrast, the interpretation invoked by B, which took into account some connotations of contingency, was the only one in line with the purpose of the contract. However, Lord Hoffmann rejected B’s further argument that its interpretation was also supported by the parties' subjective intentions as expressed in the course of negotiations: in so doing, he confirmed, though only in the form of an obiter dictum, the traditional rule of the inadmissibility of evidence of pre-contractual negotiations. Admittedly, recently there have been those who have called for a revisitation of this rule pointing out that at international level the general trend is in favour of the admissibility of pre-contractual negotiations, as demonstrated, among others, by the UNIDROIT Principles and the CISG, but in his view these two instruments were clearly inspired by the French philosophy of contractual interpretation and are as such incompatible with English law. To quote the relevant passage in Lord Hoffmann's opinion “Supporters of the admissibility of pre-contractual negotiations draw attention to the fact that Continental legal systems seem to have little difficulty in taking them into account. Both the Unidroit Principles of International Commercial Contracts (1994 and 2004 revision) and the Principles of European Contract Law (1999) provide that in ascertaining the “common intention of the parties", regard shall be had to prior negotiations: articles 4.3 and 5.102 respectively. The same is true of the United Nations Convention on Contracts for the International Sale of Goods (1980). But these instruments reflect the French philosophy of contractual interpretation, which is altogether different from that of English law. As Professor Catherine Valcke explains in an illuminating article (“On Comparing French and English Contract Law: Insights from Social Contract Theory”) (16 January 2009), French law regards the intentions of the parties as a pure question of subjective fact, their volonté psychologique, uninfluenced by any rules of law. It follows that any evidence of what they said or did, whether to each other or to third parties, may be relevant to establishing what their intentions actually were. There is in French law a sharp distinction between the ascertainment of their intentions and the application of legal rules which may, in the interests of fairness to other parties or otherwise, limit the extent to which those intentions are given effect. English law, on the other hand, mixes up the ascertainment of intention with the rules of law by depersonalising the contracting parties and asking, not what their intentions actually were, but what a reasonable outside observer would have taken them to be. One cannot in my opinion simply transpose rules based on one philosophy of contractual interpretation to another, or assume that the practical effect of admitting such evidence under the English system of civil procedure will be the same as that under a Continental system […]" |