Use of post-contractual conduct in contract interpretation – Supreme Court

A recent article covered the decision of the Supreme Court¹which dealt with the extent to which extrinsic evidence of pre-contractual negotiations are admissible to aid the interpretation of commercial contracts. In an earlier decision, Wholesale Distributors Limited v. Gibbons Holdings Limited² (Gibbons), the Supreme Court discussed the admissibility of extrinsic evidence of post-contractual conduct for the same reason.

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Facts

The Court had to interpret a deed of sub-lease. The original sub-lease was assigned from the original sub-lessee to WDL by a deed of assignment. The original sub-lease provided for the sub-lease to expire on 30 October 2002, "with a New Lease being granted for a term expiring on 31 October 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 sub-lessee was committed, meant a term expiring on 30 October 2002 or a term expiring on 31 October 2010.

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The Lower Courts

The High Court held that the new lease was an option that WDL was not obliged to take up. On appeal, the Court of Appeal considered the commercial purpose of the assignment and overturned the judgment of the High Court. It held, by a 2:1 majority, that the parties' intention at the time of the assignment of the sub-lease was that WDL would occupy the premises until the expiry of the new lease (31 October 2010).

WDL appealed to the Supreme Court. WDL's position was that it was not bound to take a new lease as, 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" and, in context, that could only refer to the term that was in existence at the time of the assignment, namely the term expiring on 30 October 2002.

Gibbons' 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 supporting its contention that WDL was bound to take the new lease and pay the rent there under (for example, internal WDL documents, created three years after the granting of the sub-lease, from which it might be inferred that WDL was bound to take a new lease, and evidence that WDL had sub-leased part of its premises for a period extending beyond the term of the original sub-lease).

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Supreme Court Decision

The Supreme Court upheld the decision of the Court of Appeal. 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 business common sense.

As regards Gibbons' subsequent conduct argument, four of five Judges (Blanchard J reserving his position) said that how the parties subsequently treated their contractual obligations might be helpful evidence as to the objective meaning of the contract (even if, save for Thomas J, they did not consider it assisted in this case).

The following principles can be drawn from the judgment. Relevance was the touchstone. The Judges weighed the potential advantages and disadvantages of allowing in 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, and the interpretive function should be directed at answering the question: what did the parties mean by their contract at the time they entered into it? In looking for that mutual intention, the court should be reluctant to deprive itself of material that may be helpful. The court was content that, in policing the exercise, the court will be 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 (and the position is still not clear after Vector) the question whether admissible post-contractual conduct must relate to 'mutual' conduct (that is shared as opposed to unilateral conduct). Tipping J and Anderson J would only admit mutual evidence. Thomas J, however, went further. He considered that there was no reason why evidence of subsequent conduct should 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."[3]

Thomas J's view gained obiter support in Vector with Wilson J, who had been counsel for Gibbons, and who was a member of the Supreme Court in Vector, saying that the fact that some of that conduct is not mutual should go to weight and not to admissibility.

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Comment

Since Lord Reid's influential speech in Whitworth Street Estates (Manchester) Ltd v James Miller & Partners Ltd⁴, 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. Lord Reid said 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, evidence of post-contractual conduct is admissible when a contract is oral, or partly oral, and when the evidence shows what the parties thought they had agreed, and both parties are agreed about what they understood their mutual obligations to be⁵. 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"⁶. It is also admissible where a conveyance is unclear as to 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 and what is not conveyed must be clearly proclaimed: it is a type of case where "the court needs all the help it can get"⁷.

The exceptions to the strict position in English law deny an objection in principle. It is possible that Lord Reid's speech in Whitworth Street Estates has, as Tipping J put it in Gibbons, "shackled" the development of this area of law in England⁸. The Supreme Court saw no sustainable objection in principle to the court looking at, at least mutual, post-contractual conduct.  The position taken by the Supreme Court has influential support. Amongst others, Lord Steyn and Lord Nicholls have argued the case extra-judicially for the admission of post-contractual evidence. Lord Nicholls has said:

"... 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."⁹

The position taken by the Supreme Court makes potentially useful evidence available to judges, and, as Tipping J 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 J recognised the potential for ex post facto subversion of earlier jointly shared intentions¹⁰, but he was confident in the ability of judges to identify, and disregard, self-serving subsequent conduct¹¹. As Tipping J later recognised in Vector¹², 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 the lengthening of interpretation disputes, by encouraging the parties to produce evidence that is only tenuously relevant, is an argument in favour of admitting only "shared" evidence.

In conclusion, 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 leave the scope of the evidence to be policed by the courts on a case by case basis using relevance as the touchstone.

 

 

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[1] Vector Gas Limited v. Bay of Plenty Energy Limited [2010] NZSC 5 (Vector).

[2] [2007] NZSC 37.

[3] At 135.

[4] [1970] AC 583, at 603; Cf. also Chartbrook Limited v. Persimmon Homes Limited and
      Another [2009] UKHL 38.

[5] Carmichael v. National Power Plc [1999] 1 WLR 2042, HL (Carmichael).

[6] At 2051.

[7] Ali v. Lane 2007 EWCA Civ 1532, CA

[8] At 59.

[9] "My Kingdom for a Horse: The Meaning of Words" (2005) LQR Vol 2 p. 577.

[10] At 52.

[11] At 54.

[12] At 24.

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