IN
A DISPUTE, THE CONTRACT ALONE IS LAW
Toby
Robinson a litigator in the London office of
Travers Smith, advises on how to resolve disputes
IN
ANY business, contracts formalise agreements. But
whatever understanding the parties may have reached
regarding a particular term during their negotiations,
if that understanding is not recorded in the executed
contract, a party is unlikely to be able to rely
on it in the event of disagreement as to the meaning
of the term in question. A recent judgment highlights
the point and demonstrates the pitfalls of careless
drafting.
Lawyers are frequently asked to advise clients on
the meaning of disputed contractual terms, and whether
the parties are able to interpret them by reference
to the pre-contractual negotiations. After all,
a disputed term may well have been the subject of
detailed discussion and the intention underlying
it may well be apparent from previous drafts, correspondence
and lawyers’ attendance notes. But can these
materials be deployed in evidence to lend support
to a reading of the contract?
Consider the following scenario. After several years
of negotiations, A and B enter into a contract whereby
A agrees to develop land owned by B for the purpose
of selling flats to third parties. The contract
contains a clause setting out how the sale proceeds
are to be split between A and B. A dispute arises
between them as to the amount payable by A to B.
On A’s reading of the pricing provision, B
is owed £900,000. B on the other hand claims
to be entitled to £4.6 million. Read in isolation,
B’s construction appears to be correct. However,
the pre-contractual negotiations point strongly
in favour of A’s construction, which appears
to have been the commercial intention of the parties
throughout. The dispute goes to court. Surely justice
requires that the court finds in favour of A, while
to find in favour of B would be to give B an undeserved
windfall?
Not so. These were, broadly, the facts underlying
the dispute in the recent Court of Appeal decision
in Chartbrook Limited v Persimmon Homes Limited.
In that case, the Court felt that the pre-contractual
materials favoured the construction put forward
by the developer, Persimmon. However, these materials
were held to be inadmissible. Consequently, the
pricing provision was to be read in isolation and
Chartbrook recovered £4.6 million.
The message is clear – for those drafting
contracts in any sphere, not just property: failure
to record accurately the parties’ intentions
in the contract could have disastrous consequences,
as it did for Persimmon. The party adversely affected
is unlikely to have recourse to the pre-contractual
negotiations to support its position. Chartbrook
is the latest in a long line of cases that make
it clear that, subject to what is known as the “private
dictionary” exception – which applies
where it can be demonstrated with certainty that
the parties were negotiating on an agreed basis
as to the meaning of a particular term (and which
will only apply in the rarest of circumstances)
– evidence of pre-contractual negotiations
is inadmissible for the purposes of construing a
contract. Furthermore, compelling evidence will
be required for a rectification claim to succeed.
Accordingly, when negotiating and finalising the
terms of a contract, you should:
•ensure that the contract accurately reflects
the parties’ intentions •bear in mind
that evidence of pre-contractual negotiations is
unlikely to be admissible •nevertheless keep
an accurate written record of pre-contractual negotiations,
particularly discussions concerning the key provisions:
such a record may assist in a rectification claim
or in persuading a court that the “private
dictionary” exception should apply.
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