Court of Appeal rewrites rules of contractual interpretation

Friday 1 May 2020

Authors: David Friar, Tim Fitzgerald and Daniel Scholes

​​​​​​​​In a landmark decision, Bathurst Resources Ltd v L&M Coal Holdings Ltd,1 the Court of Appeal has substantially narrowed the rules of contractual interpretation ​by limiting the use of evidence from outside the contract to determine the meaning of the contract.

Many contracting parties are likely to welcome a return to interpretation rules that focus on the words of the contract itself. However, the decision is unlikely to be the last word on the subject. New Zealand courts have taken a much broader approach over the past decade and a half, and the Court of Appeal's decision arguably does not sit well with existing Supreme Court authority. Indeed, the Court of Appeal's decision is likely to provide the Supreme Court with an opportunity to have the last word on how the New Zealand courts should approach this issue.

Background

Traditionally, the courts have not looked to evidence from outside a contract in determining what the contract means. In England, Lord Hoffmann led a revolution that allowed the courts to use evidence from outside a contract to determine the meaning of the contract, even in the absence of ambiguity.2 This approach was enthusiastically adopted by the New Zealand courts.

However, the English courts still did not allow evidence of the parties' prior negotiations or subsequent conduct to determine meaning. The New Zealand Supreme Court, by contrast, did not set similar limits. In Vector Gas Ltd v Bay of Plenty Energy Ltd, the Supreme Court ruled that evidence of prior negotiations is potentially admissible.3 And in Wholesale Distributors Ltd v Gibbons Holdings Ltd, the Supreme Court held that evidence of post-contractual conduct was admissible in interpreting what the contract meant.4 Although they have consistently affirmed the primacy of the written agreement, Courts at every level have had regard to the surrounding context, including negotiations, when interpreting that agreement.

Although evidence from before and after the contract may occasionally produce a nugget of gold, experience has shown that, more often than not, such evidence consisted of nothing more than worthless shingle. The need to review this evidence made it difficult to advise as to the meaning of a contract in the absence of all of this background material. And if a dispute was litigated, this evidence could add significantly to the costs of the dispute, and often obscured rather than illuminated the issues.

The Supreme Court had an opportunity to adopt a narrower approach five years ago, in Firm PI 1 Ltd v Zurich Australian Insurance Ltd,5 but declined to do so. The Court of Appeal has now taken that step, in the Bathurst decision.

The Bathurst decision

The dispute was whether a contractual reference to coal being “shipped" required the coal to be extracted and moved by Bathurst, or whether it required it to be transported on a ship. L&M Coal Holdings alleged before the High Court that evidence of pre-contractual negotiations was admissible in interpreting the contract, and the High Court largely allowed it in.6

The Court of Appeal, by contrast, ruled that the pre-contractual conduct was inadmissible. It said:

“The contract is the governing instrument and must be made to yield a solution. Notably, that solution is not reached by looking at prior negotiations — perhaps the best evidence of actual intention, yet inadmissible in interpretation."

The Court of Appeal did not refer to the Supreme Court's decision in Vector on this point, or any other New Zealand case over the past 15 years, in which evidence of prior negotiations have been looked at in order to determine the meaning of the contract.

The Court of Appeal did refer to the Supreme Court's decision in Gibbons, which had approved the admissibility of subsequent conduct to ascertain the meaning of the contract. But the Court was highly dismissive of such evidence, writing that subsequent conduct by a party in support of one interpretation:

“may … be indicative of a merely mistaken perspective of obligation. Such a perspective ought not to bind, and the actor ought to be able to renounce it, unless their conduct creates an estoppel by convention, apart from the contract itself."

Accordingly, the Court of Appeal rejected the use of prior negotiation entirely, and adopted a much more limited role for subsequent conduct evidence in interpreting a contract.​

What's next?

Many commercial parties will welcome this decision. It refocuses the interpretive exercise on the contract itself. It also avoids reliance on highly costly and often distracting evidence as to negotiations and subsequent conduct.

As we have said, however, the Cour​t of Appeal's decision is unlikely to be the last word on the subject. Lower courts will need to apply in light of earlier Supreme Court authority until such time as the Supreme Court has the opportunity to reconsider the rules.

If the Supreme Court does reconsider those rules, it remains to be seen whether it will rein in the existing approach to contract interpretation in a way that is consistent with the Court of Appeal's decision in Bathurst, or whether it will breathe new life into the Vector Gas and Gibbons decisions.

If you have any questions about the matters in this article please get in touch with the cont​acts listed, or your usual Bell Gully advisor.


1 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2020] NZCA 113.

2 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL).

3 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.

4 Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37, [2008] 1 NZLR 277.

5 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.

6 See the discussion at L&M Coal Holdings Ltd v Bathurst Resources Ltd [2018] NZHC 2127 (annexure at end of judgment).​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • David Friar

    Partner Auckland
  • Tim Fitzgerald

    Partner Auckland
  • Jenny Stevens

    Partner Wellington
Related areas of expertise
  • Litigation and dispute resolution
  • Commercial