Two weeks ago, the Supreme Court delivered its decision in Bathurst Resources Ltd v L&M Coal Holdings Limited  NZSC 85. Bathurst addresses two unsettled aspects of contractual interpretation; admissibility of extrinsic evidence and implied terms.
This article outlines the general principles articulated by the Supreme Court, but not the facts of the case.
The general principles of contractual interpretation have been quite settled in New Zealand since the Supreme Court delivered its decision in Firm P1 Ltd v Zurich Australian Insurance Limited  NZSC 432. Briefly:
- The approach is objective
- The aim is to ascertain the meaning the document would convey to a reasonable person, having all the background knowledge, which would reasonably have been available to the parties in the situation they were in at the time of contracting
- The context is provided by the contract, and any relevant background informs meaning
- If the language at issue, construed in the context of the contract, has an ordinary and natural meaning - that will be a powerful, albeit not conclusive, indicator of what the parties meant
- If a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language might suggest. But this should only be "in the most obvious and extreme of cases."
In Bathurst, the Supreme Court took the opportunity to provide a basic framework for the admissibility of extrinsic evidence as an aid to contractual interpretation.
The types of extrinsic evidence most often disputed fall into one of three categories:
- Declarations of subjective intent
- Prior negotiations
- Subsequent conduct
As a general proposition, the Supreme Court found that admissibility of extrinsic evidence is governed by the Evidence Act. The touchstones for admissibility in New Zealand are relevance and probative value. Relevant evidence is, of course, evidence that tends to provide or disprove anything that is of consequence to the determination of the proceeding. 3
The exercise for the Court is to assess the probative value of the relevant evidence, weighed against the risk that it will needlessly prolong the proceeding. 4
While not laying down hard and fast rules, the Court said:
- Evidence of what one party subjectively understood, or intended the meaning of the contract to be, will not be admissible if that was not communicated to the other party prior to contract formation
- However, evidence of prior negotiations will be admissible if they tend to prove anything relevant
- If the evidence showed what a party intended the words to mean and that was communicated, this may tend to show a common mutual understanding of the meaning of the contract. However, the party having made the communication will need to point to something, even just silence, on behalf of the other party, to bring the intention into the realm of common intention
- The approach to the admissibility of evidence, of subsequent conduct, should be the same as the approach to admissibility of prior negotiations.
- Subsequent conduct need not necessarily be mutual, but non-mutual conduct is more likely to be relevant to a claim in estoppel
- Conduct that occurs post dispute is very unlikely to be admissible
Implication of terms
The "general points" governing implication of terms were also canvassed by the Supreme Court:
- The test for implication of a term is a standard of strict necessity; "a high hurdle to overcome."
- The starting point is the words of the contract. If the contract does not allow for the eventuality in dispute, a term may be implied if the court finds that the term would spell out what the contract, read against the relevant background, must be understood to mean
- The implication of a term is part of the construction of the contract. There is no bright line between interpretation and implication
- BP Refinery5 is still a useful test, with conditions 4 and 5 being prerequisites to implication of a term. They are:
- The term must be capable of clear expression
- The term must not contradict any express term of the contract
This case is obviously relevant for anyone contesting the meaning of a contract, but also to those negotiating contracts, as evidence of prior negotiations may be cited as evidence of mutual intention. Communication of one party's subjective, intended meaning may, in some circumstances, assist in establishing the meaning was actually mutually intended. 6
1 S.7(3) of the Evidence Act.
2 A general ground for excluding evidence under s.8(1) (b) of the Evidence Act.
3 BP Refinery (Westernport) Pty Ltd v President, Councillors, Ratepayers of the Shire of Hastings (1977) 180 CLR 266 (PC)v
4 This seemed to assist 'Riskpool' in the recent decision of Grice J in Napier City Council v Local Government Mutual Funds Trustee Limited  NZHC 1477.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.