The Interpretation of Commercial Contracts: Time for Reform (2012)

INTRODUCTION In 2005 Lord Nicholls, writing extra-judicially, spoke of the need to give a 'gentle stir' to the debate concerning the exclusionary principle in English contract law: the long established but controversial rule that evidence of prior negotiations cannot be admitted when courts are tasked with interpreting the meaning of a contract (1). His Lordship's arguments for the need to reconsider the legitimacy of the exclusionary principle within the jurisprudence of contractual interpretation were persuasively and forcefully presented. Despite this valuable contribution to the debate, the House of Lords in Chartbrook v Persimmon Homes Limited (2) reaffirmed the exclusionary principle. To some, this was not only inevitable but necessary as the rules of interpretation as formulated by Lord Hoffmann in Investor Compensation Scheme Ltd v West Bromwich Building Society (No. 1) (3) (which reaffirmed the exclusionary principle) have provided a clear framework within which the courts are able to conduct the complex task of interpreting contracts. (4) However, in the opinion of the author, the House of Lords in Chartbrook missed a valuable opportunity to reform the exclusionary principle in the interest of greater certainty and fairness. This paper is a call to reform the exclusionary principle. Section one of this article will explore the origins, development, and justification for the exclusionary principle. In section two a detailed critical analysis is made of the exclusionary rule and the judicial comments which were made in Chartbrook in defending the rule. Finally, in section three the author will seek to put forward a case for how the exclusionary principle could be reformed. In particular, the author will seek to rely upon the approach taken by the Supreme Court in Oceanbulk Shipping & Trading SA v TMT Asia Limited (5) (in which the Court permitted an exception to the without prejudice rule on the grounds of justice) in arguing that the exclusionary rule should be relaxed from its current position as an absolute rule and this would be justified (in the light of the arguments in section two) in the interest of justice. This article will also consider how the court's case management powers can be utilised in controlling the relevance and quantity of evidence of pre-contractual negotiations which may be admitted as part of the interpretation process. HISTORICAL DEVELOPMENTS OF THE EXCLUSIONARY RULE The rule that prior negotiations are prohibited from forming the body of evidence, which the courts will consider when tasked with interpreting contractual terms, can be traced back over a lengthy period of time. However, the orthodox approach taken by the majority of contract law textbooks begins with the comments of Lord Wilberforce in Prenn v Simmonds, (6) which comments are taken to have--at least--laid the foundations to the modern approach to contractual interpretation and which reaffirmed the exclusionary principle. It would, however, be useful for our purposes to delve deeper into the past as this will be relevant to our discussion of the judgments in Chartbrook and for the wider consideration of the issue of reform. This is especially the case as Lord Hoffmann in Chartbrook feared that to remove the exclusionary principle from the rules of contractual interpretation would require the House of Lords to ... depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged. (7) Our starting point is the case of Millers v Miller (8) in which the Earl of Eldon LC, when interpreting a marriage contract, dismissed correspondence which had passed between the parties before the marriage contract was concluded. To allow such correspondence was 'dangerous' (9). This strict adherence to the exclusionary principle was later followed by the House of Lords in Inglis v John Buttery & Co (10). That case concerned the question of whether the shipbuilders to a commercial contract could put before the court various correspondence which had passed between the parties before the contract was concluded in order to assist in the interpretation of the contract. …