Language problems
Date: 13 November 2009
Authors: Nick Knapman
Issue: Vol 159, Issue 7393
Categories: Features, Property
Having found in favour of Persimmon on the construction issue (Chartbrook Limited v Persimmon Homes Limited and another [2009] UKHL 38, [2009] All ER (D) 12 (Jul)), Lord Hoffmann felt that he had to deal with the two alternative arguments “of very considerable general importance” which Persimmon had advanced relating to the exclusionary rule and the principles of rectification.
The exclusionary rule is well established by case law and has been affirmed on a number of occasions by the House of Lords. It prevents parties from introducing evidence of pre-contractual negotiations to support arguments based on construction.
The existence of the rule notwithstanding, Persimmon argued that the House of Lords should depart from the rule to allow evidence of pre-contractual negotiations—in particular two letters which supported its interpretation of the agreement—to be made available to the court. Lord Hoffmann began by reviewing the variety of reasons to support the exclusionary rule, ie:
During pre-contractual negotiations, parties’ positions are changing—it is only the final document which records a consensus. Evidence of the negotiations leading to the final document is therefore irrelevant and unhelpful.
Admitting evidence of pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and increase the cost of advice or litigation.
The final document should speak for itself, especially when ‘statements in the course of pre-contractual negotiations will be drenched in subjectivity’.
To allow evidence of pre-contractual negotiations would be unfair on third parties taking an assignment of the contract or relying on it as security as they would have taken the terms of the contract at face value.
There are the “safety nets” of rectification and estoppel by convention.
Lord Hoffmann made it clear however that pursuant to Practice Statement (Judicial Precedent) [1966] 1 WLR 1234 the House of Lords had the power to depart from a rule if it thought that it was impeding the development of law, was contrary to public policy or produced results that were unjust. He considered in some detail the reasons why this might be so in the case of the exclusionary rule:
There may be a benefit to a court in considering such material: “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.”
Evidence of pre-contractual negotiations is invariably tendered in construction cases to support an alternative claim of rectification or an argument based on estoppel by convention, meaning that the excluded evidence finds its way in front of a judge anyway.
The continental legal system has little difficulty in taking pre-contract negotiations into account.
Lord Hoffmann emphasised that evidence of previous communications between the parties could be admitted “as part of the background which may throw light upon what they meant by the language they used”. He confirmed the “general rule” in this respect: “there are no conceptual limits to what can properly be regarded as relevant background.”
Negotiations could be relevant background if they addressed the issue which the court had to decide, namely “what the parties would reasonably be taken to have meant by the language which they finally adopted to address their agreement”. In most cases they would not be relevant but not always—there might be “exceptional cases” where evidence of negotiations should be admitted.
Decision
Lord Hoffmann did not think that there was a “clearly established case” for departing from the exclusionary rule. The rule has been in existence for many years and, fundamentally, it does not impede the proper development of the law or lead to results which are unjust or contrary to public policy.
Moreover he was not prepared to find that the evidence of the negotiations in question was relevant to the “background” (as opposed to the meaning of the contract). So, while the decision confirms the exclusionary rule, the door has nonetheless been left open for the admissibility of pre-contractual negotiations. Important questions remain in this respect.
What is the extent of the “relevant background”? What are the “exceptional cases” in which previous communications can be admitted? It seems very unlikely that Lord Hoffmann has had the last judicial word on the exclusionary rule.
Rectification
One of the consequences of the exclusionary rule is that in many cases a party will advance an additional argument to ensure otherwise potentially inadmissible evidence finds its way before the court. That is precisely what Persimmon did. It argued that if its construction argument was unsuccessful, the agreement should be rectified to accord with its interpretation.
Lord Hoffmann referred to Swainland Builders Limited v Freehold Properties for a summary of the requirements for a successful rectification argument: “The party seeking rectification must show that:
(i) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
(ii) there was an outward expression of accord;
(iii) the intention continued at the time of the execution of the instrument sought to be rectified; and
(iv) by mistake, the instrument did not reflect that common intention.”
Three letters sent by Persimmon to Chartbrook from February to May 2001 explored in considerable detail how the profit share formula would work in practice. Persimmon had argued that the last of these letters was an outward expression of the common and continuing intention of the parties and that the definition of the “ARP” in the contract had been drafted in the mistaken belief that it gave effect to that common intention.
Chartbrook disgreed. Its two principals had given oral evidence that there was no mistake in the agreement and it achieved precisely what they wanted. Both the judge and the Court of Appeal sided with Chartbrook on this issue—on the basis of the principals’ evidence, the mistake was not common to both parties.
Persimmon contended in the House of Lords that the judge and Court of Appeal had been wrong in their assumption about what a party had to be mistaken about.
They said rectification requires a mistake about whether the written document correctly reflects the prior consensus, not whether it accords with what the party in question believed that consensus to have been.
Fundamentally the terms of the prior consensus are what a reasonable observer—and not one or both of the parties—would understand them to be.
Lord Hoffmann agreed with Persimmon. The question to be asked in such cases is what an objective observer would think the intentions of the parties and the terms of the prior consensus to be.
Lord Hoffmann relied on the “clearest statement” on the point given by Denning LJ in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 All ER 739: “In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties—into their intentions—any more than you do in the formation of any other contract.
You look at their outward acts, that is, at what they said or wrote to one another in coming to their agreement, and then compare it with the document which they have signed.”
Accordingly it is the objective ascertainment of the common intention which is important. Where the exchange between the parties giving rise to the common intention was wholly or partially based on verbal exchanges, oral evidence might carry significant weight.
That was not the case here—the prior consensus was established by the May letter and there was no evidence given by either party to suggest that this was not the case.
Accordingly, although he had already found in favour of Persimmon on the construction issue, Lord Hoffmann made clear the agreement should be rectified in any event.
Nick Knapman is a partner in the property litigation group at Beachcroft LLP
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