The Lords recently heard the appeal case of Chartbrook Limited ("C") v Persimmon Homes Limited and others ("P") and considered, amongst other things, pre-contractual negotiations in the context of construing a contract.
C and P disagreed on the proper interpretation of one term in a contract, with this particular term worth approximately £3.7 million to either party. Unable to resolve their differences, the parties went to court where C's claim was successful in the first instance and upheld in the Court of Appeal. P appealed to the House of Lords, where their Lordships upheld the appeal on the grounds that there was a clear mistake on the face of the contract and it was clear what correction ought to be made.
In the course of the hearing, P adopted a position that challenged the long standing rule that it is not competent to consider negotiations that took place between the parties prior to entering into a contract for the purpose of construing the terms of a contract. This argument was rejected by Lord Hoffman, who stressed that to abandon the general rule would lead to greater uncertainty of outcome in disputes over contractual negotiations and increased expense and duration.
It is incompetent to consider pre-contractual negotiations when construing the terms of a contract. This rule is embedded in contract law and is premised on the notion that it is the formal contract that records a bargain as opposed to what is said or written between the parties throughout negotiations.
This case highlights the importance of precision and clarity when negotiating and drafting a commercial contract. Great care must be taken if one is to avoid the risks of ambiguity and error.