In the case of Chartbrook Limited v Persimmon Homes Limited, the House of Lords has reaffirmed that the exclusionary rule will apply when a court is asked to interpret an ambiguous contract.
Chartbrook and Persimmon entered into a contract for the development of land. The contract price to be paid by Persimmon to Chartbrook consisted of two elements; a fixed element and a ‘Balancing Payment’ the amount of which depended on the number of properties sold and the price achieved for each. Balancing Payment was defined in the contract as:
“23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives”.
There was a dispute over how this clause worked in practise. Chartbrook’s interpretation was that the Minimum Guaranteed Residential Unit Value and the Costs and Incentives should be deducted from the price achieved for each Residential Unit and Persimmon should pay 23.4% of the balance. Persimmon’s interpretation was that the Costs and Incentives should be deducted from the price to find the net price. 23.4% of the net price should then be calculated and Persimmon should pay the amount by which this sum exceeded the Minimum Guaranteed Residential Unit Value. On its interpretation, Persimmon would be obliged to pay £900,000. On Chartbrook’s interpretation, Persimmon would be obliged to pay £4.6 million.
The dispute made its way to the House of Lords. On the facts, Persimmon’s interpretation was preferred as the “rational meaning” but the decision has wider implications in relation to what was said about how the courts should go about interpreting an ambiguous contract.
The House of Lords emphasised that the approach to be taken to the interpretation of ambiguous contracts is that set out in the Investors Compensation Scheme v West Bromwich case, namely that the courts should give the contract the meaning that a reasonable person would give it having all of the background information that was available to the parties at the time that the contract was made. The courts say, rather confusingly, that in making an objective assessment of the contract in this way they are giving effect to the intentions of the parties.
The courts have created the ‘exclusionary rule’ which means that, when called on to interpret a contract, they will accept evidence of the background information that was available to the parties when they made the contract but not evidence of the pre-contractual negotiations that took place. In this case, Persimmon sought to challenge the exclusionary rule arguing that it was illogical and actually prevented a court from ascertaining the parties’ intentions.
The House of Lords refused to overturn the exclusionary rule. It said that the rule reduced the cost and duration of trials and lead to greater certainty of outcome in disputes of this nature. It also said that evidence of precontractual negotiations would be unhelpful as this correspondence would be “drenched in subjectivity” and it would be difficult for the court to separate out what was “aspirational” and what was “consensus”. The court said that it did have the power to depart from established judicial authority where an earlier decision was impeding the development of the law but it did not believe that the exclusionary rule was doing that. This rule, if it were to be amended or abolished, would need to be amended or abolished by legislation.
This decision has unequivocally affirmed that the exclusionary rule is firmly entrenched in English law. However, practically, it is likely that parties to an interpretation dispute will put evidence of pre-contractual negotiations before a court. Parties in such a dispute often seek rectification of the contract and evidence of pre-contractual negotiations is admissible where such a claim is made. Also, the parties are able to submit evidence of the background information that was available to them when they made the contract. In this case, Lord Hoffman stated that there were “no conceptual limits to what could be regarded as background information” which leaves the door open for pre-contractual negotiations to arguably form part of this background information. However, there is always a risk that such evidence will be rejected and this could have a direct impact on the interpretation reached. This case is a useful reminder, therefore, that commercial agreements should always be carefully drafted to avoid the likelihood of questions of interpretation coming before a court.