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of background. Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute. It is often not easy to distinguish between those statements which (if they were made at all) merely reflect the aspirations of one or other of the parties and those which embody at least a provisional consensus which may throw light on the meaning of the contract which was eventually concluded. But the imprecision of the line between negotiation and provisional agreement is the very reason why in every case of dispute over interpretation, one or other of the parties is likely to require a court or arbitrator to take the course of negotiations into account. Your
Lordshipsâ experience in the analogous case of resort to statements in Hansard under the rule in Pepper v Hart AC 593 suggests that such evidence will be produced in any case in which there is the remotest chance that it may be accepted and that even these cases will be only the tip of a mountain of discarded but expensive investigation. Pepper v Hart has also encouraged ministers and others to make statements in the hope of influencing the construction which the courts will give to a statute and it is possible that negotiating parties will be encouraged to improve the bundle of correspondence with similar statements.
354:
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.
152:, and then sell the properties. Chartbrook would pay for it, subject to a balancing payment or âadditional residential paymentâ (ARP) defined as â23.4% of the price achieved for each residential unit in excess of the minimum guaranteed residential unit value less the costs and incentives.â This would be paid by Persimmon to Chartbrook. Chartbrook calculated this to mean ÂŁ4,484,862 but Persimmon said on a proper construction the amount was ÂŁ897,051. Persimmon argued that even if they were wrong on construction of the document, rectification should be granted, and if not their pre-contractual negotiations should be taken into account. Chartbrook argued the precontractual negotiations were inadmissible.
246:âThe reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the partiesâ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus.... In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact.
447:
legislation. In the end abolition may be the only workable legislative solution, as eventually happened with the hearsay rule (Law Com No 216 (1993), BAILII: EWLC 216), The
Hearsay Rule in Civil Proceedings). Even that can prove difficult if, on analysis, the view is taken that the rule has no real content, as with the parol evidence rule (Law Com No 154 (1986, BAILII: EWLC 154), The Parol Evidence Rule). The courts, on the other hand, are able to achieve step-by-step changes which can distinguish cases in which such evidence is âhelpfulâ from cases in which it is not. 100. However, the approach to rectification adopted by
452:
negotiations where consensus was reached are very helpful indeed. If the language in the eventual contract does not reflect that consensus, then unless there has been a later variation of it, the formal contract should be rectified to reflect it. It makes little sense if the test for construing their prior consensus is different from the objective test for construing their eventual contract. This situation is, and should be, quite different from the situation where one party is mistaken as to its meaning and the other party knows this - the latter should not be permitted to take advantage of the former.
28:
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the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement. For the reasons given by Lord
Wilberforce, that will usually be the case. But not always. In exceptional cases, as Lord Nicholls has forcibly argued, a rule that prior negotiations are always inadmissible will prevent the court from giving effect to what a reasonable man in the position of the parties would have taken them to have meant. Of course judges may disagree over whether in a particular case such evidence is helpful or not. In
273:(âMy Kingdom for a Horse: The Meaning of Wordsâ (2005) 121 LQR 577-591) point out that although all this may usually be true, in some cases it will not. Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement. Why should court deny itself the assistance of this material in deciding what the parties must be taken to have meant? Mr
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reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes. It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention. Your
Lordships do not have the material on which to form a view. It is possible that empirical study (for example, by the
204:
deal with them. The first was that (contrary to the unanimous opinion of the judge and the Court of Appeal) the House should take into account the pre-contractual negotiations, which in the opinion of
Lawrence Collins LJ (at paragraph 132), were determinative confirmation of Persimmonâs argument on construction. The second was that the judge and the Court of Appeal had misunderstood the principles upon which rectification may be decreed and that if Persimmon had failed on construction, the agreement should have been rectified.
382:) may show that the alleged disadvantages of admissibility are not in practice very significant or that they are outweighed by the advantages of doing more precise justice in exceptional cases or falling into line with international conventions. But the determination of where the balance of advantage lies is not in my opinion suitable for judicial decision. Your Lordships are being asked to depart from a rule which has been in existence for many years and several times affirmed by the House. There is power to do so under the
621:
584:
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542:
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division of opinion occurred in the
Investors Compensation Scheme case itself. The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appears to be an exceptional case in which the drafting was careless and no one noticed.
278:
they do assist a court in deciding what an objective observer would have construed the contract to mean, they should be admitted. I cannot accept this submission. It is clear from what Lord
Wilberforce said and the authorities upon which he relied that the exclusionary rule is not qualified in this way. There is no need for a special rule to exclude irrelevant evidence.
137:. It creates a so-called "red ink" rule, that there is no limit to verbal rearrangement that the court may deploy to give a commercial sensible meaning when construing a contract in its bargaining context. It also, importantly, reaffirmed the rule of English law, that pre-contractual negotiations were ordinarily inadmissible when construing a contract.
349:(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 (âOn Comparing French and English Contract Law: Insights from Social Contract Theoryâ) (16 January 2009),
304:
35. The first is that the admission of pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration. Everyone engaged in the exercise would have to read the correspondence and statements would have to
214:
30. To allow evidence of pre-contractual negotiations to be used in aid of construction would therefore require the House to depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged: see Bank of
Scotland v Dunedin Property Investment Co Ltd 1998
203:
27. If your
Lordships agree with this conclusion about the construction of the contract, the appeal must be allowed. There is no need to say anything more. But Persimmon advanced two alternative arguments of very considerable general importance and I think it is appropriate that your Lordships should
419:
QB 84. If the parties have negotiated an agreement upon some common assumption, which may include an assumption that certain words will bear a certain meaning, they may be estopped from contending that the words should be given a different meaning. Both of these remedies lie outside the exclusionary
410:
was in my opinion an illegitimate extension of the âprivate dictionaryâ principle which, taken to its logical conclusion, would destroy the exclusionary rule and any practical advantages which it may have. There are two legitimate safety devices which will in most cases prevent the exclusionary rule
361:
thought that the most powerful argument against admitting evidence of pre-contractual negotiations was that it would be unfair to a third party who took an assignment of the contract or advanced money on its security. Such a person would not have been privy to the negotiations and may have taken the
353:
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
281:
33. I do however accept that it would not be inconsistent with the English objective theory of contractual interpretation to admit evidence of previous communications between the parties as part of the background which may throw light upon what they meant by the language they used. The general rule,
451:
would go a long way towards providing a solution. If the test of the partiesâ continuing common intentions is an objective one, then the court is looking to see whether there was such a prior consensus and if so what it was. Negotiations where there was no such consensus are indeed âunhelpful". But
441:
99. But I have to confess that I would not have found it quite so easy to reach this conclusion had we not been made aware of the agreement which the parties had reached on this aspect of their bargain during the negotiations which led up to the formal contract. On any objective view, that made the
400:
42. The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as
396:
AC 944, 966, to be applied only in a small number of cases in which previous decisions of the House were âthought to be impeding the proper development of the law or to have led to results which were unjust or contrary to public policy". I do not think that anyone can be confident that this is true
377:
41. The conclusion I would reach is that there is no clearly established case for departing from the exclusionary rule. The rule may well mean, as Lord Nicholls has argued, that parties are sometimes held bound by a contract in terms which, upon a full investigation of the course of negotiations, a
336:
38. I rather doubt whether the ICS case produced a dramatic increase in the amount of material produced by way of background for the purposes of contractual interpretation. But pre-contractual negotiations seem to me capable of raising practical questions different from those created by other forms
300:
34. It therefore follows that while it is true that, as Lord Wilberforce said, inadmissibility is normally based in irrelevance, there will be cases in which it can be justified only on pragmatic grounds. I must consider these grounds, which have been explored in detail in the literature and on the
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1 AC 251, 269, is that there are no conceptual limits to what can properly be regarded as background. Prima facie, therefore, the negotiations are potentially relevant background. They may be inadmissible simply because they are irrelevant to the question which the court has to decide, namely, what
180:
held that Persimmonâs interpretation was right, and the amount due was ÂŁ897,051. There was no limit to the âred inkâ that the court could use to correct the verbiage when it was clear that in its commercial context, an agreement could not make sense. The only requirement was that it should be clear
163:
agreed with Chartbrook's interpretation. Persimmon Ltd appealed on the interpretation given and argued that if they failed on those grounds, the contract should be construed in light of previous negotiations, or that the court should allow for the document to be rectified, because it was clear that
313:
and in this case) or an argument based on estoppel by convention or some alleged exception to the exclusionary rule. Even if such an alternative claim does not succeed, the judge will have read and possibly been influenced by the evidence. The rule therefore achieves little in saving costs and its
277:
QC, who appeared for Persimmon, went so far as to say that in saying that such evidence was unhelpful, Lord Wilberforce was not only providing a justification for the rule but delimiting its extent. It should apply only in cases in which the pre-contractual negotiations are actually irrelevant. If
194:
thought it had. It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another: compare the Kirin-Amgen case RPC 169 at pp. 189-190. Such a
446:
1 WLR 1381, the pot so gently but effectively stirred by Lord Nicholls of Birkenhead in his Chancery Bar Association lecture of 2005 ( 121 LQR 577). My experience at the Law Commission has shown me how difficult it is to achieve flexible and nuanced reform to a rule of the common law by way of
340:
39. 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
330:âit would be inconvenient, that matters in writing made by advice and on consideration, and which finally import the certain truth of the agreement of the parties should be controlled by averment of the parties to be proved by the uncertain testimony of slippery memory.â
309:) would be considerably increased. As against this, it is said that when a dispute over construction is litigated, evidence of the pre-contractual negotiations is almost invariably tendered in support of an alternative claim for rectification (as in
189:
15. It clearly requires a strong case to persuade the court that something must have gone wrong with the language and the judge and the majority of the Court of Appeal did not think that such a case had been made out. On the other hand,
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case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be
305:
be taken from those who took part in oral negotiations. Not only would this be time-consuming and expensive but the scope for disagreement over whether the material affected the construction of the agreement (as in the
411:
from causing injustice. But they have to be specifically pleaded and clearly established. One is rectification. The other is estoppel by convention, which has been developed since the decision in the Karen
553:
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36. There is certainly a view in the profession that the less one has to resort to any form of background in aid of interpretation, the better. The document should so far as possible speak for itself. As
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said it was only dirt. As I have said, there is nothing unusual or surprising about such differences of opinion. In principle, however, I would accept that previous negotiations may be relevant.
198:
16. I agree with the dissenting opinion of Lawrence Collins LJ because I think that to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense.
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rule, since they start from the premise that, as a matter of construction, the agreement does not have the meaning for which the party seeking rectification or raising an estoppel contends.
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to a reasonable person what was meant. It was rejected that pre-contractual negotiations should be taken into account. If they had not so held, they would have granted rectification.
345:(1999) provide that in ascertaining the âcommon intention of the parties", regard shall be had to prior negotiations: articles 4.3 and 5.102 respectively. The same is true of the
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terms of the contract at face value. There is clearly strength in this argument, but it is fair to say that the same point can be made (and has been made, notably by
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background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.
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1 NZLR 523, 538-549) Professor David McLauchlan (âContract Interpretation: What is it About?â (2009) 31:5 Sydney Law Review 5-51) and
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matter crystal clear. This, to me, increased the attractions of accepting counselâs eloquent invitation to reconsider the rule in
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223:.) The House is nevertheless invited to do so, on the ground that the rule is illogical and prevents a court from, as the
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231:(1878) 3 App Cas 552 said, putting itself in the position of the parties and ascertaining their true intent.
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28. The rule that pre-contractual negotiations are inadmissible was clearly reaffirmed by this House in
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the intentions of the parties was different from that found. Accordingly, it contended that the rule in
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agreed to get planning permission, build some residences on Chartbrookâs land at 1 to 9 Hardwicks Way,
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EWCA Civ 2070, which is unreported, but the relevant passage is cited in Lord Binghamâs paper in the
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that pre contractual negotiations should be ignored, was an illogical rule and should be overturned.
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abolition would restore some intellectual honesty to the judicial approach to interpretation.
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Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd
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1 NZLR 523. Thomas J thought he had found gold in the negotiations but the
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United Nations Convention on Contracts for the International Sale of Goods
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whole rejected by academic writers but supported by some practitioners.
219:; Alexiou v Campbell UKPC 11 (âvouched byâŠcompelling authorities", per
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374:) in respect of the admissibility of any form of background.
56:, 1 AC 1101, 3 WLR 267, 4 All ER 677, 125 ConLR 1, 3
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agreed with the result, but also said the following.
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215:SC 657, 665 (âwell-established and salutary", per
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597:Photo Production Ltd v Securicor Transport Ltd
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291:Yoshimoto v Canterbury Golf International Ltd
266:Yoshimoto v Canterbury Golf International Ltd
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388:1 WLR 1234. But that power was intended, as
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469:
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242:said by way of justification of the rule:
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394:R v National Insurance Comrs, Ex p Hudson
357:40. In his judgment in the present case,
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647:HIH Casualty Ltd v Chase Manhattan Bank
385:Practice Statement (Judicial Precedent)
688:Interpreting contracts in English law
7:
675:Oceanbulk Shipping SA v TMT Asia Ltd
661:Chartbrook Ltd v Persimmon Homes Ltd
122:Chartbrook Ltd v Persimmon Homes Ltd
21:Chartbrook Ltd v Persimmon Homes Ltd
368:National Bank of Sharjah v Dellborg
343:Principles of European Contract Law
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259:32. Critics of the rule, such as
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326:(1604) 5 Co Rep 25, 25b, 26a:
229:Inglis v John Buttery & Co
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521:Hartog v Colin & Shields
524:[1939] 3 All ER 566
271:Lord Nicholls of Birkenhead
135:interpretation of contracts
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633:ICS Ltd v West Bromwich BS
533:Canada Steamship Lines v R
397:of the exclusionary rule.
324:Countess of Rutlandâs Case
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579:[1976] 1 WLR 989
221:Lord Bingham of Cornhill
76:, 2 All E.R. (Comm) 387
558:[1953] 2 QB 450
679:[2010] UKHL 44
665:[2009] UKHL 38
637:[1997] UKHL 28
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406:47. On its facts, the
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127:[2009] UKHL 38
651:[2003] UKHL 6
616:[1986] QB 644
602:[1980] UKHL 2
537:[1952] AC 192
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217:Lord President Rodger
758:House of Lords cases
699:English contract law
575:The Diana Prosperity
372:Edinburgh Law Review
250:. thought so in the
185:said the following.
131:English contract law
427:, Lord Rodger, and
192:Lawrence Collins LJ
554:Rose Ltd v Pim Ltd
504:(1871) LR 6 QB 597
225:Lord Justice Clerk
36:construction sign.
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238:1 WLR 1381, 1384
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65:Case history
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429:Lord Walker
99:Lord Walker
95:Lord Rodger
747:Categories
735:References
716:1 WLR 1381
364:Saville LJ
351:French law
252:Utica Bank
157:High Court
150:Wandsworth
425:Lord Hope
390:Lord Reid
320:Popham CJ
255:found....
248:Cardozo J
146:Persimmon
87:Lord Hope
50:Citations
457:See also
431:agreed.
392:said in
359:Briggs J
261:Thomas J
172:Judgment
109:Keywords
726:UKHL 38
413:Oltmann
234:31. In
54:UKHL 38
415:: see
129:is an
705:Notes
141:Facts
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176:The
159:and
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