Further Supreme Court guidance on contractual interpretation, extrinsic evidence and implied terms

• Published date: 07 August 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Disclosure & Electronic Discovery & Privilege
• Law Firm: Wynn Williams Lawyers
• Author: Ms Emily Walton

Two weeks ago, the Supreme Court delivered its decision in Bathurst Resources Ltd v L&M Coal Holdings Limited [2021] NZSC 85. Bathurst addresses two unsettled aspects of contractual interpretation; admissibility of extrinsic evidence and implied terms.

This article outlines the general principles articulated by the Supreme Court, but not the facts of the case.

The general principles of contractual interpretation have been quite settled in New Zealand since the Supreme Court delivered its decision in Firm P1 Ltd v Zurich Australian Insurance Limited [2014] NZSC 432. Briefly:

• The approach is objective
• The aim is to ascertain the meaning the document would convey to a reasonable person, having all the background knowledge, which would reasonably have been available to the parties in the situation they were in at the time of contracting
• The context is provided by the contract, and any relevant background informs meaning
• If the language at issue, construed in the context of the contract, has an ordinary and natural meaning - that will be a powerful, albeit not conclusive, indicator of what the parties meant
• If a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language might suggest. But this should only be "in the most obvious and extreme of cases."

In Bathurst, the Supreme Court took the opportunity to provide a basic framework for the admissibility of extrinsic evidence as an aid to contractual interpretation.

Admissibility

The types of extrinsic evidence most often disputed fall into one of three categories:

1. Declarations of subjective intent
2. Prior negotiations
3. Subsequent conduct

As a general proposition, the Supreme Court found that admissibility of extrinsic evidence is governed by the Evidence Act. The touchstones for admissibility in New Zealand are relevance and probative value. Relevant evidence is, of course, evidence that tends to provide or disprove anything that is of consequence to the determination of the proceeding. ³

The exercise for the Court is to assess the probative value of the relevant evidence, weighed against the risk that it will needlessly prolong the proceeding. ⁴

While not laying down hard and fast rules, the Court said:

• Evidence of what one party subjectively understood, or intended the meaning of the contract to be, will not be admissible if that was not communicated to the other party prior to contract formation
• However, evidence of...