In 2021, the Supreme Court endeavoured to close out the long running discussion over the use of extrinsic evidence in contract interpretation - starting with Lord Hoffman's judgment in West Bromwich, followed here by Gibbons Holdings v Wholesale Distributors, Vector Gas v Bay of Plenty Energy and Firm PI 1 Ltd v Zurich. In Bathurst Resources v L&M Coal Holdings, the Supreme Court confirmed that (1) the express wording of a contract is paramount, but (2) extrinsic evidence of what that express wording meant to the parties at the time the contract was entered into was relevant.
That approach has been well summarised, and applied, by Justice Katz in Clearmont & Queenstown Gateway v Redwood [2022] NZHC 1567.
The case concerned the interpretation of a tax gross-up clause in a mediated agreement. While the intention of a gross-up was clear, as with many mediated agreements concluded in the dead of night, the precise application of the clause was far from clear. Counsel for both parties endeavoured to give effect to the clause, by reference to evidence of the parties as to what occurred at the mediation, and the commercial reality of how to give effect to the clause. Ultimately, Katz J gave priority to the express words of the agreement, and was disinclined to depart from what the words said.
The judgment is useful in the application of the Supreme Court's approach to contract interpretation (extract below), her comments on the implication of contract terms and the interrelationship between the rules of contract interpretation and the rules of evidence.
From an arbitration perspective, the reference to the Evidence Act 2006 is interesting. Under section 5(3), the Evidence Act applies to "all proceedings", which in turn are limited in section 4 to a "proceeding conducted by a court". For its part, the Arbitration Act 1996 provides in article 19(2) of Schedule 1 that the tribunal is to determine the "admissibility, relevance, materiality, and weight of any evidence". The question therefore arises as to how the tribunal is to determine admissibility, if the Evidence Act isn't to apply.
In her judgment, Justice Katz makes particular reference to ss 7 & 8 of the Evidence Act, which respectively provide that all relevant evidence is admissible, except where it is excluded by the provisions of the Act; and evidence must be excluded if its probative value is outweighed if it is unfairly prejudicial or has the effect of prolonging the proceedings. In the arbitration context, such considerations may be valid, when read with the overriding obligations for equal treatment and the opportunity to be heard.
The ongoing disagreement over the relevance of the Evidence Act to arbitral proceedings is likely to linger until an award is either set aside under article 34 or recognition refused under article 36 on the grounds of a breach of the rules of natural justice. Until that time, the more permissive approach in the IBA Rules on the Taking of Evidence is likely to prevail.
Justice Katz's summary of the approach to contract interpretation:
[5] The relevant principles of contractual interpretation are set out in the Supreme Court’s decision in Bathurst Resources Ltd v L & M Coal Holdings Ltd. On the issue of the admissibility of extrinsic evidence for the purposes of contract interpretation, the Court stated that:
We are satisfied that in New Zealand, the admissibility or otherwise of extrinsic evidence, and the application of any related exclusionary rules, is to be regarded as an evidential issue, to be determined in accordance with the law of evidence in light of the substantive law on contractual interpretation …
[6] The Court confirmed that, in principle, both pre-contractual negotiations and the parties' post-contractual conduct may be admissible when interpreting a contract. The Court noted that the admissibility of such evidence “is determined by the laws of evidence”. However, the law of evidence and the law of contractual interpretation “do not … operate independently”: the law of contractual interpretation “fundamentally shapes what is relevant, and what is therefore admissible, extrinsic evidence”.. On that basis, the Court held that the admissibility of extrinsic evidence must be examined through the framework of the Evidence Act 2006, and in particular ss 7 and 8 which are “the touchstones for admissibility”. That is, the evidence must be relevant and probative, and the probative value of the evidence must not outweigh the risk that the evidence will have an unfairly prejudicial effect on the proceeding or will needlessly prolong the proceeding.
[7] The Court confirmed that contractual interpretation is an objective exercise: the court’s task is to determine the meaning the contract would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract. Pre-contractual negotiations or the parties’ post-contractual conduct may assist a court in this exercise. Evidence of uncommunicated subjective intent, however, is irrelevant under this objective approach. Evidence of the content of prior negotiations will therefore be inadmissible to the extent that it proves only a party’s subjective intention or belief as to the meaning of the words, or what their undeclared negotiating stance was at the time. However, if evidence shows what a party intended the words to mean, and that this was communicated, it may tend to show a common mutual understanding as to the meaning of the contract. Logically, however, the party who claims to have communicated their intention would have to be able to point to something on the part of the other party to bring that intention into the realm of mutual understanding.
[8] As to the parties’ post-contractual conduct, the Court must ask itself whether the subsequent conduct tends to prove anything relevant to the objective approach to interpretation. To the extent that evidence of subsequent conduct may cross the relevance threshold (which the Supreme Court suggested will not be often) care is needed to assess the probative value of the evidence. For example, conduct that occurs after a dispute has arisen is very unlikely to be admissible, as it may well be self-serving.
[9] On the issue of implication of terms into a contract, the Court noted that this issue only arises after the express terms of the contract have been interpreted and found not to provide for the eventuality. The initial process of interpretation, however, includes any logical or necessary inferences from the expressly agreed terms. Only if the contract does not address the eventuality through express language or necessary inferences from that language will the court move on to address whether a term should be implied. The legal test for the implication of a term is a standard of strict necessity, a high hurdle to overcome.
[10] Finally, while the factual matrix or context is a necessary element of interpretation, the text of the contract remains of central importance.