Relevance of pre-contractual negotiations in contractual interpretation

Supreme Court touches on relevance of pre-contractual negotiations in contractual interpretation

Lakes International Golf Course Management Limited v Vincent [2017] NZSC 99 (29 June 2017) (See Downloads below) provided the Supreme Court with a timely opportunity to further clarify the New Zealand position in respect of the relevance of pre-contractual negotiations in contractual interpretation. The opportunity was not fully utilised, but nonetheless, this is a case of interest and relevance to both contracting parties and lawyers and saw the Court helpfully restate the existing principles in respect of the relevance of pre-contractual negotiations in contractual disputes.

Brief background

The case concerned a covenant registered against a residential property title in the Lakes Resort residential development in Pauanui. The covenant required the owner to join, remain a member of, and meet all levies imposed by the "Golf Club" (Covenant). “Golf Club” was defined as meaning “the golf club to be incorporated as an incorporated society to provide for playing rights on the golf course.”

The golf course had been operating since 2004 but no incorporated society had ever been formed. In 2009 the Lakes International Golf Course Ltd (Golf Course) acquired the resort and leased the golf course to an associated company, Lakes International Golf Management Limited (Golf Management). Golf Management established the Lakes Resort Golf Club through which it operated and managed the golf course.

Golf Course and Golf Management claimed to be entitled to enforce the Covenant against Mr Vincent and imposed levies. Mr Vincent refused to pay the levies on the basis that the Covenant was enforceable only by a “Golf Club” as contemplated by the Covenant – that is, one which is was an incorporated society, rather than a limited liability company.

Golf Course and Golf Management succeeded in the High Court. Mr Vincent successfully appealed to the Court of Appeal. Golf Course and Golf Management then appealed to the Supreme Court.

Mr Vincent again succeeded in the Supreme Court, with the Court finding that the definition of "Golf Club" as set out in the covenant was unambiguous, and the parties had expressly agreed that only an incorporated society could be the "Golf Club" for the purposes of the covenant.

Legal lessons

To what, if any, extent can the Court take into account extrinsic material in the construction of a clear contract?

Mr Vincent sought to adduce pre-contractual evidence in the form of documents he was provided before the Covenant was entered. These documents further clarified the fact that the “Golf Club” had been intended to be incorporated society.

The company argued the pre-contractual documents were irrelevant to the interpretation of the Covenant on the basis that the extrinsic evidence demonstrated why Pauanui Lakes Properties chose the incorporated clubs structure, which was evidence as to its subjective intentions, which is usually inadmissible. Golf Course and Golf Management also had no involvement in the interactions which produced the extrinsic material relied on.

The Supreme Court noted that these issues give rise to some conceptual difficulty, but did not find the present case warranted extended consideration because the meaning of "Golf Club" was clear so there was no "genuine interpretation issue" to which the extrinsic evidence might be relevant.

Does the position change where there are third parties relying on the contract?

The case concerned the Covenant, which was in effect a contract registered against the owners' title. For that reason, the case was more complex than a simple contract.

The Court acknowledged that such circumstances raise the question as to whether the Court can properly consider extrinsic material if the material will be relied on by a third party who did not reasonably have access to the material at the time the contract was entered (and here, when the Covenant was registered against the title).

The Court also noted this issue arises in relation to contracts which may be assigned, formed by offers to the public, or are customary relied on by third parties (e.g. bills of lading).

Again, the Court declined to determine this issue in this case. The Court did helpfully provide some guidance and held that extrinsic material cannot be relevant in a case where:

  • the extrinsic material relates solely to one party's subjective intentions (i.e. why Pauanui Lakes Properties provided for the “Golf Course” to be an incorporated society), and those intentions are of no practical moment to the other party;
  • the other parties were not aware of the extrinsic material at the time of the contract was formed, had no ability to access the extrinsic material, and had no reason to make inquiry as to the existence or relevance of the extrinsic material (i.e. Golf Course and Golf Management were not original parties to the Covenant).

Conclusion


This case provided the Supreme Court with a good opportunity to further develop the New Zealand position in relation to pre-contractual negotiations. Unfortunately, the Court did not consider the facts of this case warranted further in-depth analysis of the legal position. As a result, the law since the Supreme Court’s decision in Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC) remains uncertain.

The Court's decision does however helpfully restate the existing principles in respect of pre-contractual negotiations. Namely:

  • any material relevant solely to the subjective intention of one contracting party is not relevant in the interpretation of the contract; and
  • any material which was not reasonably available to one of the contracting parties at the time of contracting is not relevant to the interpretation of the contract.
As a result, while this case is unlikely to have significant practical implications on litigation involving such issues, it is clear that many internal documents drafted by a contracting party before a contract is entered will not meet the requisite threshold in terms of relevance, unless those documents were shared with the other contracting parties at the time.

For further information, please contact Tom Pasley

Image courtesy of Sonny Abesamis

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