Contract interpretation what is it about mclauchlan

Similarly, a response to an offer will amount to a binding acceptance, notwithstanding that the offeree did not intend it to be an acceptance, if the offeror reasonably so regarded it.

Further, at common law a mistake by a promisor as to the terms of the contract does not prevent the formation of a binding contract where the promisee reasonably believes that the terms have been assented to.

A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party , when he used the words, intended something else than the usual meaning which the law imposes on them, he would still be held, unless there were mutual mistake or something else of the sort.

But the test is objective and impersonal. The common intention is to be ascertained by reference to what a reasonable person would understand by the language used by the parties to express their agreement. If the contract is in the form of a document, then it is the meaning that the document would convey to a reasonable person that matters. This latter person may be one who is a party to the agreement, the judge, or any other third person.

Until a word, phrase or sentence is understood in the light of the surrounding circumstances, it is rarely possible to know what it means. In my view evidence of surrounding circumstances will generally be admissible if it is known to both parties or sufficiently notorious to be presumed to be within their knowledge.

This in turn leads to the assumption that one must identify an ambiguity as a pre-condition to taking into account evidence of the setting of a legal text. Enormous energy and ingenuity is expended in finding ambiguities.

This is the wrong starting point. Language can never be understood divorced from its context. One does not, therefore, start with the language and ascertain from the language alone whether or not there is ambiguity: one looks at the language together with the context.

This is because words may seem clear and unambiguous when read in isolation, but may seem quite unclear and ambiguous when one knows the context in which they were used Nor did he say that reference to extrinsic evidence is permissible only to resolve ambiguity. On the contrary, his Lordship regarded the exercise of construing the words of the text as necessarily requiring the Court to understand the setting in which the words of the text were used.

This is so because, according to his Lordship, the exercise of interpretation requires the Court to enter the mind of the hypothetical reasonable person possessed not only of the knowledge which the parties actually had at the time of the contract, but also of the knowledge which they reasonably had available to them. On the objective approach, there is, in that case, no agreement at a price per [pound], even if the plaintiff had no actual knowledge of the mistake.

If the rule that knowledge of a fundamental mistake prevents an offeree from enforcing the mistakenly communicated promise were a subjective test, then it ought to make a difference if an offeree who ought to have known was genuinely oblivious.

A party who alleges the formation of a binding contract because a reasonable person in her position would have been entitled to infer a contractual offer can only succeed if, in addition, she subjectively understood that there was an offer, although in practice this will be assumed in the absence of a challenge from the alleged offeror. Extrinsic evidence is also admissible to show that a document containing contractual terms was intended to be binding.

His Honour adopted a strict objective test of intention, treating the actual intention of the parties as irrelevant, whilst at the same time accepting that evidence of their subsequent conduct is admissible. The plaintiff owners protested, arguing that the option to redeliver could only be exercised when the vessel had been trading for 12 months and that accordingly the necessary notice had to be given nine months from the commencement of the charter.

Kerr J. There had been a series of telex exchanges prior to the contract in which various charter durations and option periods for redelivery were proposed. Where there is convincing evidence that at the time of the contract the parties attached the same meaning to the words in dispute, the task of the court is to give effect to that meaning, regardless of whether those words on their face are ambiguous or have a plain meaning. Also, why should the exception be limited to evidence of actual common intention?

Surely the position should be no different where, for example, the evidence may establish that one party intended the particular meaning and that party reasonably believed that the other party accepted this meaning. It would be a strange twist in the law if such an objectively determined agreement as to meaning did not suffice.

However, close analysis of the judgment of Richmond J in Eastmond reveals that the distinction is devoid of substance. Thus, evidence of the conduct of one party alone, which is consistent with the meaning which the other party alleges was held at the time of the contract, would apparently not be admissible. In this strange case one of the issues was whether a contract for the management of a waste disposal depot regulated the charging of fees for liquid waste. Compelling evidence that the parties actually held the contrary intention was dismissed as irrelevant and inadmissible.

This included pre-contractual conduct the parties had made an arrangement for higher charges in respect of liquid waste some months prior to the contract , post contractual conduct that was consistent with the latter arrangement and, most significantly, testimony from both contracting parties that they understood that the contract did not relate to liquid waste. Even more remarkable for present purposes was the judgment of Ipp AJA. His Honour accepted that the parties did not intend that the contract should regulate fees for liquid waste [] but said that they were wrong as to what the contract actually provided!

Furthermore, his judgment seems internally inconsistent. 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. 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….

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 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…. 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 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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In my view, the principle excluding evidence of the parties' negotiations and subjective intentions, though enshrined by authority, is simply unacceptable. There is no sensible reason why the interpretation process required to determine whether a contract was formed should differ so fundamentally from the process required to determine the meaning of that contract. The strict objective approach which seeks to discover the "presumed intent" is fair enough when, as frequently happens, the parties did not contemplate the situation which has arisen, but it is entirely another matter to elevate it to a universal rule and to reject out of hand what may be relevant and reliable evidence from the negotiations of the meaning they actually attributed to the words of the contract.

Such evidence should be equally as relevant as evidence of their actual intention to be bound to a contract. This is particularly so when it is considered that disputes over the meaning of contractual language will very often call into question whether, due to misunderstanding between the parties, a binding contract was formed in the first place.

Two observations are immediately prompted by these examples. First, in the former it is artificial in the extreme to talk about a reasonable third party with knowledge of the background if the most pertinent circumstances, the pre-contract exchanges, are excluded.

The position would presumably be different if, for example, S were aware from previous dealings between the parties that when B used the word "chicken" he meant young birds. These previous dealings would be admissible as relevant background in determining the meaning which the words would convey to a reasonable person in S's position.

It is difficult to fathom why negotiations should be treated differently in this regard. Secondly, and more importantly, in the latter example it will usually be a short step from a finding that S ought to have known B's intention to a conclusion that S led B reasonably to believe that the subject of the sale was young chicken.

If so, that surely was the contract. We are back then to square one. The answer to the first example must be wrong. B's counterclaim for damages should succeed. There are numerous other reasons why it is necessary to reject the principle that evidence of the parties' negotiations and subjective intentions is not receivable in an interpretation dispute. There can be no objection in principle to the parties to a written contract being able to choose their own private, and perhaps secret, code or convention as to the meaning of the terms of the contract.

As Corbin points out: [26]. There may be clear unimpeachable evidence that the parties, perhaps because they wished to keep the nature of their dealings secret from others, had a long-standing private code whereby "apples" did mean "pears".

Of course, the existence of such a code is inherently unlikely. But, as I have argued elsewhere, [28] that is a matter going to the weight of evidence needed to rebut the presumption that the parties used language bearing its ordinary meaning. There is authority for an important exception to the rule that evidence of the parties' negotiations and subjective intentions is inadmissible, an exception which has the potential to "swallow up the rule". I have fully discussed the implications of this principle elsewhere, [32] but a number of points perhaps bear repetition.

First, as the Court of Appeal acknowledged, there is a "fine line. Should the parties' common intention be defeated because the words in question appear to the court to have a plain meaning? Where there is convincing evidence that at the time of the contract the parties attached the same meaning to the words in dispute, the task of the court is to give effect to that meaning, regardless of whether those words on their face are ambiguous or have a plain meaning.

On this approach, just as "parties may for the purposes of a particular transaction agree. Thirdly, why should the exception be limited to evidence of actual common intention? Surely the position should be no different where, for example, the evidence may establish that one party intended the particular meaning and that party reasonably believed that the other party accepted this meaning. It would be a strange twist in the law if such an objectively determined agreement as to meaning did not suffice.

Even the staunchest advocates of the strict objective approach to contract interpretation would probably acknowledge the need for exceptions. Thus, in the leading decision of the High Court of Australia in Codelfa Construction Pty Ltd v State Rail Authority of NSW , [35] Mason J, after stressing that evidence of statements and actions in the course of the parties' negotiations "which are reflective of their actual intentions and expectations" is not admissible, was prepared to concede that "[t]here may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention".

It is difficult to see any sensible basis for limiting the admissibility of evidence of the parties' actual intention to the situation where they have refused to include a particular provision in the contract.

Their actual intention, if clearly proven, surely ought to prevail regardless of the form or manner in which that intention happens to be manifested. Why allow evidence of the fact that the parties have "united in rejecting" a particular meaning but disallow evidence of the fact that they have united in accepting a particular meaning?

It will be recalled that in Investors Compensation Scheme Ltd v West Bromwich Building Society [39] Lord Hoffmann referred to, but did not elaborate on, "reasons of practical policy" for excluding "from the admissible background the previous negotiations of the parties and their declarations of subjective intent".

His Lordship perhaps had in mind the observation of Lord Wilberforce in Prenn v Simmonds that the reason: [40]. This reasoning is entirely unconvincing. As the examples discussed in this paper demonstrate, evidence of the parties' negotiations will sometimes be very helpful and, in my view, the points made by Lord Wilberforce are only valid as cautionary factors to be taken into account in determining the weight to be given to evidence of prior negotiations, not its admissibility.

Lord Hoffmann may also have had in mind the kind of practical and policy reasons which have been used over the years to justify the plain meaning rule of contract interpretation, albeit that he viewed the latter more as a commonsense starting-point rather than a "rule". These reasons relate to the need for certainty, particularly in commercial transactions, and the desirability of not prolonging civil trials through the reception of vast quantities of extrinsic evidence, much of which may be unhelpful, irrelevant or unreliable.

Such considerations tend to have found a receptive ear in the New Zealand courts of late, particularly in the Court of Appeal. However, this observation was made not in the context of an interpretation dispute but in response to an attempt to establish the existence of contractual terms not recorded in the parties' written contract.

Given the numerous well established exceptions to the parol evidence rule under which such a result can be achieved nowadays, the judge's sentiments are hardly persuasive. The argument from certainty might have some merit were it not for the fact that the outcome of interpretation disputes is so notoriously difficult to predict anyway.

The policy reasons for not allowing parol evidence to be admitted in aid of interpretation when the words appear to be plain and clear have been expressed by Kirby P as he then was as follows: [48].