Construction Of Contracts: No Room For Negotiation

The House of Lords recently considered the rules regarding the

construction of contracts. In particular, the court considered

whether pre-contractual negotiations can be admitted as evidence of

the parties' intentions as to the meaning of a contract

term.

When determining a dispute on the meaning of contract terms, the

basic rule is that the court is required to take into account what

a reasonable person would consider the language of a document to

mean having knowledge of all the relevant circumstances surrounding

the transaction. The courts' preferred approach is to deduce

the meaning of a document (or a particular part of it) by looking

at the document itself. However, where this is not possible, the

court will take into account the 'factual matrix', which

includes 'anything that would have affected the way in which

the language of a document would have been understood by a

reasonable man'. (Investors Compensation Scheme

Limited v West Bromwich Building Society [1998] 1 WLR

896).

An exception to this approach is the exclusionary rule. This

rule prohibits the admissibility of pre-contractual negotiations

when interpreting a contract. The reason for excluding evidence of

pre-contractual negotiations from the 'factual matrix' is

that such negotiations will reflect the parties' subjective

intentions before entering into the contract and by their very

nature are not 'factual'.

There are two exceptions to the exclusionary rule that allow for

the admissibility of pre-contractual negotiations as evidence:

Rectification

This enables the court to correct a mistake in a contract that

does not reflect the intentions of the parties. In order to succeed

in this action, the party seeking to make the change must

demonstrate the agreement does not reflect the parties intention

and there was 'outward expression of accord' and continuing

common intention in relation to the issue in question, prior to

entering into the contract.

Estoppel By Convention

This prevents a party contending that language has one meaning,

when the parties negotiated on the assumption that the language

would bear a different meaning.

In the judgment in question, Chartbrook Limited v

Persimmon Homes Limited and others [2009] UKHL 38,

the dispute revolved around a payment due under a development

agreement between the parties. As a result of defective drafting,

there was uncertainty over how a payment should be calculated. The

ambiguity resulted in Chartbrook claiming over £3.5 million

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