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14 September 2010
A recent Supreme Court decision in Vector Gas Limited v Bay of Plenty Energy Limited dealt with the extent to which extrinsic evidence of pre-contractual negotiations are admissible to aid the interpretation of commercial contracts (for further details please see "Use of evidence of prior negotiations in contract interpretation"). In an earlier decision, Wholesale Distributors Limited v Gibbons Holdings Limited,(1) the court discussed the admissibility of extrinsic evidence of post-contractual conduct for the same reason.
The court had to interpret a deed of sublease. The original sublease was assigned from the original sublessee to Wholesale Distributors Limited by a deed of assignment. The original sublease provided for its expiry on October 30 2002, "with a New Lease being granted for a term expiring on October 31 2010". The terms of the deed of assignment referred to the "remainder of the term of the lease". The issue was whether the phrase 'remainder of the term of the lease' - the period for which the sublessee was committed - meant a term expiring on October 30 2002 or on October 31 2010.
Lower court decisions
The High Court held that the new lease was an option that Wholesale Distributors Limited was not obliged to take up. On appeal, the Court of Appeal considered the commercial purpose of the assignment and overturned the High Court judgment. It held, by a majority of two to one, that the parties' intention at the time of the assignment of the sublease was that Wholesale Distributors Limited would occupy the premises until the expiry of the new lease (ie, October 31 2010).
Wholesale Distributors Limited appealed to the Supreme Court. Its position was that it was not bound to take a new lease because, in the deed of assignment, the only covenant between it as assignee and Gibbons was that it would "from the Date of Assignment and during the remainder of the term of the lease… pay the rent provided for in the Lease and keep and perform all the covenants in the Lease". In context, it said, that could refer only to the term that was in existence at the time of the assignment - namely, the term expiring on October 30 2002.
Gibbons's primary argument adopted the approach upheld by the Court of Appeal. It also raised an additional argument based on post-contractual conduct. As regards the subsequent conduct argument, Gibbons submitted that there were four pieces of admissible extrinsic evidence relating to subsequent conduct which supported its contention that Wholesale Distributors Limited was bound to take the new lease and pay the rent thereunder - for example, internal Wholesale Distributors Limited documents, created three years after the granting of the sublease, from which it might be inferred that Wholesale Distributors Limited was bound to take a new lease, and evidence that Wholesale Distributors Limited had subleased part of its premises for a period extending beyond the term of the original sublease.
Supreme Court decision
The Supreme Court upheld the Court of Appeal decision. The judges each interpreted the relevant term so as to give effect to their view of the parties' actual intention, as determined objectively in accordance with the commercial context and with business common sense.
As regards Gibbons's subsequent conduct argument, four of the five judges - Justice Blanchard reserving his position - said that the manner in which parties subsequently treated their contractual obligations might be helpful evidence as to the objective meaning of the contract (even if, except for Justice Thomas, they did not consider that it assisted them in this case).
Relevance was the touchstone. The judges weighed the potential advantages and disadvantages of allowing the evidence and held that the advantages outweighed the disadvantages. The court started from the principle that mutual assent is the key to the formation of a valid contract. The interpretive function should be directed at determining what the parties meant by their contract at the time that they entered into it. In looking for that mutual intention, a court should be reluctant to deprive itself of material that might be helpful. The court was satisfied that, in policing the exercise, the court is in the best position to decide - on the overall balance of competing interests - whether and to what extent evidence of post-contract conduct should be admissible.
The judgments do not settle the question - which is still unclear after Vector - of whether admissible post-contractual conduct must relate to mutual conduct (ie, shared as opposed to unilateral conduct). Justices Tipping and Anderson would only admit mutual evidence, whereas Thomas went further. He considered that evidence of subsequent conduct should not have to be mutual to establish a common intention. He said:
"Conduct which is not and has not been 'shared' or 'mutual' may nevertheless point to a meaning contrary to the meaning later asserted by one of the parties. That party has acted inconsistently with the meaning it seeks to persuade the court to place upon the contract. The value of the evidence stems from the inconsistency... It would be unfortunate if the principle that evidence of subsequent conduct is admissible as an aid to interpretation becomes hedged with qualifications which undermine the objective of the principle."(2)
This view gained obiter support in Vector from Justice Wilson - who had been counsel for Gibbons and who was a member of the Supreme Court in Vector. He stated that the fact that some of the conduct is not mutual should go to weight and not to admissibility.
Since Lord Reid's influential speech in Whitworth Street Estates (Manchester) Ltd v James Miller & Partners Ltd,(3) the English common law position has been understood to be that evidence to show what the parties said or did after a contract was made is inadmissible. It was stated that admitting post-contract evidence "might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later".
The English courts have permitted a limited number of exceptions to the strict principle of inadmissibility. For example, it was held in Carmichael v National Power Plc that evidence of post-contractual conduct is admissible when (i) a contract is oral or partly oral, and (ii) the evidence shows what the parties thought they had agreed, and both parties are agreed about what they understood their mutual obligations to be.(4) In Carmichael the justification was said to be that "when both parties are agreed about what they understood their mutual obligations (or lack of them) to be, it is a strong thing to exclude their evidence from consideration".(5) It is also admissible where a conveyance does not make clear what land is conveyed by it - the justification being that when the issue is the ascertainment of a boundary, the issue of what is conveyed or not must be clearly proclaimed. In such cases, "the court needs all the help it can get".(6)
The exceptions to the strict position in English law deny an objection in principle. It is possible that the speech in Whitworth Street Estates has, as Tipping put it in Gibbons, shackled the development of this area of law in England.(7) The Supreme Court saw no sustainable objection in principle to the court considering (at least) mutual post-contractual conduct. The position taken by the Supreme Court has influential support. Among others, Lord Steyn and Lord Nicholls have argued the case extrajudicially for the admission of post-contractual evidence, the latter stating that:
"It is surely time the law recognised what we all recognise in our everyday lives: that the parties' subsequent conduct, that is, their conduct after they had reached agreement, may be a useful guide to the meaning they intended to convey by the words of their contract. Such conduct, for what it may be worth in the particular case, is one of the matters the court should be able to take into account."(8)
The position taken by the Supreme Court makes potentially useful evidence available to judges and, as Tipping recognised, judges are used to evaluating the reliability of evidence. The position also avoids any apparently arbitrary limits as to what evidence is available to the court. Tipping recognised the potential for ex post facto subversion of earlier jointly shared intentions,(9) but he was confident in the ability of judges to identify and disregard self-serving subsequent conduct.(10) As Tipping later recognised in Vector,(11) albeit on the subject of pre-contractual negotiations, those attempting the exercise unsuccessfully may have to pay the additional costs caused by their attempt. The risk of lengthening disputes over interpretation by encouraging the parties to produce evidence that is only tenuously relevant is an argument in favour of admitting only shared evidence.
The Supreme Court considers that the best way to enable courts to interpret contracts in such a way as to give effect to the common intention of the parties is to allow reference to post-contractual conduct, and to leave the scope of the evidence to be policed by the courts on a case-by-case basis, using relevance as the touchstone.
For further information on this topic please contact Chris Browne or Nic Scampion at Wilson Harle by telephone (+64 9 915 5700), fax (+64 9 915 5701) or email (email@example.com or firstname.lastname@example.org).
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