- United Kingdom
- 2008 EWCA Civ 183
- Court of Appeal (Civil Division)
- Chartbrook Limited v. Persimmon Homes Limited
LONG-TERM CONTRACTS - CONSTRUCTION CONTRACT - BETWEEN TWO ENGLISH COMPANIES - CONTRACT INTERPRETATION ACCORDING TO ENGLISH LAW - TRADITIONAL RULE THAT EVIDENCE OF PRE-CONTRACTUAL NEGOTIATIONS TO INTERPRET CONTRACT CLAUSE INADMISSIBLE - TO BE APPLIED WITH FLEXIBILITY - REFERENCE TO UNIDROIT PRINCIPLES (ART. 4.3) AND CISG (ART. 8)
A, an English construction company, entered into a contract (“Agreement”) with B, an English company, according to which B would construct a number of apartment buildings on property owned by A and subsequently sell them. According to the Agreement the price B had to pay to A was to be made up of two parts, the “Minimum Guaranteed Residential Unit Value” and a balancing payment termed "Additional Residential Payment" (“ARP”).
A dispute arose between the parties as to the meaning of the ARP. The Agreement defined it 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”. A, basing itself on the ordinary meaning of the definition, argued that it was entitled to a 23.4% share of the net proceeds of sale of each apartment in excess of the minimum guaranteed residential unit value. On the contrary B, invoking a different understanding allegedly reached by the parties in the course of the negotiations, objected that A was only to receive either a fixed percentage (23.4%) of the sales revenue or the minimum guaranteed residential unit value, whichever was the greater.
The High Court decided in favour of A. In so doing it first of all reiterated the traditional rule of English law according to which pre-contractual negotiations are not admissible as evidence in interpreting a written document, all the more so if the disputed wording is contained – as it was in the case at hand – in a definition section. Moreover it pointed out that since B was ultimately seeking a rectification of the Agreement if should have produced clear and unambiguous evidence that the parties were mistaken in the recording of their real intention and that the alleged intention continued in their minds until the execution of the Agreement.
The Court of Appeal took a more flexible approach with respect to the question of the admissibility of extrinsic evidence for the purpose of contract interpretation. In particular LJ Lawrence Collins, though admitting that the general rule was that extrinsic evidence was inadmissible, pointed out that the policy reasons for the exclusionary rule were by no means self-evident and compelling. In this respect not only did he recall that the US Restatement Second on Contracts expressly admits negotiations as evidence to establish the meaning of the writing (§ 214) but referred also to both the UNIDROIT Principles of International Commercial Contracts (Article 4.3) and the U.N. Convention on Contracts for the International Sale of Goods (1980) to demonstrate that the traditional exclusionary rule is not accepted in international instruments dealing with private law contracts either. The latter two instruments had also been cited by Thomas J in a decision by the New Zealand Court of Appeal (Yoshimoto v Canterbury Golf International Ltd : see UNILEX) to argue in favour of a flexible application of the exclusionary rule whenever a cautious use of the pre-contract material would enable the court to arrive at a meaning of the contract which accorded with the ascertainable intention of the parties. LJ Lawrence Collins further recalled a number of English decisions [one of which likewise had referred to both the UNIDROIT Principles and the U.N. Sales Convention: Court of Appeal (Civil Division) in Proforce Recruit Ltd. V The Rugby Group Ltd : see UNILEX] admitting that negotiations may be looked at to see whether the parties had negotiated on an agreed basis that the words used in their contract bore only one of two possible meanings and concluded that this basically amounted to admitting evidence of prior negotiations in construing a contract. However in the case at hand the Court, with LJ Lawrence Collins dissenting, rejected B’s appeal on the ground that B had failed to produce sufficient evidence that the parties had actually reached a common understanding as to the meaning of the ARP or that rectification of the Agreement was justified for other reasons.
Case No: A3/2007/0621
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
MR JUSTICE BRIGGS
Royal Courts of Justice
Strand, London, WC2A 2LL
LORD JUSTICE TUCKEY
LORD JUSTICE LAWRENCE COLLINS
LORD JUSTICE RIMER
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CHARTBROOK LIMITED Claimant/
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(1) PERSIMMON HOMES LIMITED
STEPHEN VANTREEN Part 20 Defendant/ Second Respondent
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Mr Christopher Nugee QC and Mr Julian Greenhill (instructed by Mayer Brown International LLP) for the Appellant
Mr Robert Miles QC and Mr Timothy Morshead (instructed by Herbert Smith LLP) for the Respondent
Hearing dates : December 18 & 19, 2007
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Lord Justice Lawrence Collins:
On October 16, 2001 an agreement for the development of Nos 1, 3, 5, 7 and 9 Hardwicks Way, Wandsworth (“the Agreement”) was entered into between (among others) Chartbrook Ltd (“Chartbrook”) and Persimmon Homes Ltd (“Persimmon”). The other parties were Persimmon plc as guarantor of Persimmon’s liabilities, and Mr Stephen Vantreen (a shareholder and director of Chartbrook) in his capacity as adjoining owner.
The site was owned by Chartbrook. Under the Agreement Persimmon was to obtain planning permission, construct a mixed residential and commercial development on the site (with commercial premises below, flats above and basement car parking), and then sell the flats. Persimmon did not acquire any interest in the land, but (although contracting to sell on its own account and not as agent for Chartbrook) was able to require Chartbrook to grant leases to complete the flat sales.
II The Agreement and the dispute
By clause 11 of the Agreement: “The Price shall be calculated and paid in accordance with Schedule 6.” By clause 1.1: “‘Price’ means the sums calculated in accordance with Schedule 6.”
In Schedule 6, paragraph 1, “‘Price’ means the aggregate of the Total Land Value and the Balancing Payment.” The elements of the Price are also defined in paragraph 1.
The first element, Total Land Value, means “the aggregate of the Total Residential Land Value the Total Commercial Land Value and the Total Residential Car Parking Land Value.” Those terms are defined as follows:
“Total Residential Land Value” shall be £76.34 per square foot multiplied by the Residential Net Internal Area (less the Section 106 Money and less the Rights of Light Money and less the Sub-Structure Assumptions Additional Cost)
“Total Commercial Land Value” shall be £38.80 per square foot multiplied by the Commercial Net Internal Area plus VAT.
“Total Residential Car Parking Land Value” shall be £3,024 multiplied by the Residential Car Parking Spaces
The second element in the price is “the Balancing Payment” which is defined in paragraph 1 of Schedule 6 as “the Additional Residential Payment,” where:
“Additional Residential Payment” means 23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives.
“Residential Unit” means each of the flats forming private residential accommodation for which Planning Permission is granted
“Minimum Guaranteed Residential Unit Value” means for each Residential Unit the Total Residential Land Value divided by the number of Residential Units for which Planning Permission is granted.
“Costs and Incentives” means the aggregate of all costs and incentives provided by the Developer for the purchasers of the Residential Premises and the Residential Car Parking Spaces including the cost or allowance given to purchasers for enhancements or variations to the specification for such premises.
The dispute turned on the construction of the definition of Additional Residential Payment, which for convenience I repeat:
“Additional Residential Payment” means 23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives.
In common with the judge, I refer to the Additional Residential Payment as the “ARP”, the Minimum Guaranteed Residential Unit Value as “the MGRUV”, to the price achieved for each Residential Unit as “the Unit Price” and to the Costs and Incentives as “the C&I”.
Chartbrook’s case was that it was entitled to a 23.4% share of the net proceeds of sale of each Residential Unit in excess of a minimum guaranteed amount (being the unitised Total Residential Land Value of £76.34 per square foot of Residential Net Internal Area), i.e. its stake in the residential part of the development was to be the whole of the first £76.34 per square foot of net sales value, and 23.4% of the surplus. Since the sales proceeds were bound to exceed the minimum amount by a long way this was bound to throw up a substantial extra payment in any event. This payment was referred to for convenience in this case as “super overage.”
Persimmon’s case was that Chartbrook was to receive either a fixed percentage (23.4%) of the sales revenue or the minimum guaranteed amount, whichever was the greater. There would only be a Balancing Payment if 23.4% of the net sales proceeds of the flats exceeded the minimum amounts. This had the effect of giving Chartbrook a share of the upside if sales exceed expectations (i.e. a “sales overage”). Chartbrook was to receive an additional payment only if 23.4% of the net sales price amounted to more than the Minimum Guaranteed Residential Unit Value, i.e. Chartbrook’s stake in the residential part of the development was whichever was the greater of: (1) 23.4% of the net residential sales price; and (2) the guaranteed minimum of £76.34 per square foot of Residential Net Internal Area.
The difference had a major impact on the amounts payable to Chartbrook:
(1) Persimmon’s case
Net sales proceeds £23,848,788
23.4% of net proceeds £ 5,580,616
Minimum guaranteed sums £ 4,683,565
Balancing Payment £ 897,051
Minimum + Balancing payment £ 5,580,616
(2) Chartbrook’s case
Net sales proceeds £23,848,788
Minimum guaranteed sums £ 4,683,565
excess £19,165,223 23.4% of excess (Balancing Payment) £ 4,484,862
Minimum + Balancing payment £ 9,168,427
Briggs J after a trial of the action and counterclaim held in favour of Chartbrook’s construction and rejected a counterclaim by Persimmon for rectification.
IV The judge’s conclusions and the appeal
This is an unusual and difficult case, and I understand well why the judge came to his conclusion on rectification “after considerable difficulty” (paragraph 163). Mr Robert Miles QC, for Chartbrook, rightly reminded the court that there was a full trial before the judge, in which all of the individuals concerned with the conclusion of the Agreement gave evidence, and that this court should not in effect re-try the case on the documents.
Yet this is a case in which, if one puts aside the drafts of the Agreement, every contemporary document prior to the conclusion of the Agreement, and every piece of paper which throws light on the commercial purpose of the provision, supports Persimmon’s case that the deal which was on the table was Persimmon’s offer to Chartbrook of either a fixed percentage of the sales revenue or the minimum guaranteed amount, whichever was the greater.
The case is on the borderland between construction of a written agreement, the admissibility of prior negotiations as an aid to construction, and the equitable remedy of rectification, based on common or unilateral mistake. I propose to deal with the issues in that order.
A Construction of the Agreement
(1) On the basis that the prior negotiation materials are not admissible
The judge’s conclusions
The judge found that the ordinary meaning of the definition of ARP pointed clearly towards Chartbrook’s rather than Persimmon’s construction.
ARP meant 23.4% of the excess of the price achieved for each Residential Unit over the MGRUV, less C&I. Persimmon’s construction required the words “the amount by which” to be added after the word “means”, and the word “is” to be added before the phrase “in excess of”.
Persimmon’s position on the appeal
Persimmon concentrated its attack on the judge’s refusal to take account of the correspondence. But in its notice of appeal and Mr Nugee’s skeleton argument Persimmon also took issue with the judge’s textual analysis and Chartbrook responded to those criticisms.
Persimmon’s case is that Chartbrook’s construction gives Chartbrook a windfall of some £4 million more for its land than Persimmon ever offered, and bears no relation to what Persimmon offered and Chartbrook agreed; it was not what, objectively considered, the parties were trying to do; and it makes no commercial sense.
On Persimmon’s construction the commercial purpose of schedule 6 was to deliver guaranteed minimum payments to Chartbrook (and with a guaranteed timetable for payment) together with the possibility of an extra payment if sales exceeded expectations. By contrast it was impossible to discern what the commercial sense behind Chartbrook’s construction was. On Chartbrook’s case the MGRUV appeared to be entirely arbitrary – it made no sense to specify it as the figure of 23.4% of a realistic price and then provide for Chartbrook to receive 23.4% of the excess not over that price but over the MGRUV.
Chartbrook’s position on the appeal
Chartbrook’s reading was the natural and obvious one. Persimmon’s approach required the reading of extra words into the clause, so that it would read “ ‘Balancing Payment’ means the amount if any by which 23.4% of the price achieved for each Residential Unit is in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives.” This re-writing of the clause would change its meaning, so that instead of applying 23.4% to the excess of the net price achieved over the MGRUV, Persimmon says that a Balancing Payment arises only to the extent that 23.4% of the price achieved was in excess of the MGRUV. On Persimmon’s version there is no grammatically viable way of applying the profit share both to the price achieved and the C&I.
The words “if any” in paragraph 3.3 of Schedule 6 could not materially affect the meaning to be derived from the definitions themselves. The judge was over-generous to Persimmon in saying that these words were a significant pointer. The words used in the label did not help as they were consistent with each side’s case. The words “minimum” and “guaranteed” were consistent with Chartbrook’s case – there was to be a minimum fixed amount plus a further variable amount, and so it was a minimum and it was guaranteed. The word “balancing” was consistent with Chartbrook’s reading.
The clause as interpreted by Chartbrook made sense: it simply involved a higher price than Persimmon contends for. If the purpose of the provisions was to provide Chartbrook with a share of the price achieved (which is all it purported to do) then there was nothing uncommercial at setting the trigger at one level rather than another.
The starting point is not controversial. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. Subject (a) to the requirement that the background should have been reasonably available to the parties, and (b) the exclusion of previous negotiations of the parties and their declarations of subjective intent, it includes anything which a reasonable man would regard as relevant and which would have affected the way in which the language of the document would have been understood by a reasonable man: Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896 at 912; BCCI v Ali  1 AC 251, 269; and also Mannai Investment Co Ltd v Eagle Star Life Assurance Ltd  AC 749, 779.
If a semantic analysis of words in a commercial contract leads to a conclusion which flouts business common sense, it must be made to yield to business common sense: Antaios Cia Naviera v Salen Rederierna AB  AC 191, 201, per Lord Diplock. This does not mean, however, that the language can be rewritten in order to make the language conform to business common sense: Co-operative Wholesale Society Ltd v National Westminster Bank plc  1 EGLR 97.
It seems to me that three factors lead to the conclusion that the judge’s decision was wrong. The first factor is that I do not consider that the judge was right to consider that it makes a decisive difference that the words appear in a definition clause. The process of interpretation is the same. The Agreement is not a statute. The fact that the terms appear in a definition section is simply one of several factors in the exercise of construction.
The second factor is that it would then follow that the judge was wrong not to give weight (which he said that he would have done had they not been contained in the definition clause) to the point that the MGRUV is described as (i) a minimum and (ii) a guaranteed amount. I accept the submission for Persimmon that these words indicate what purpose the MGRUV was intended to serve. Persimmon was agreeing to a “guaranteed” payment that Chartbrook would be entitled to receive regardless of the success or failure of the development; this was the “minimum” that Chartbrook would get whatever the flats sold for.
The third factor is that it is very difficult (and probably impossible) to discern the commercial sense behind Chartbrook’s construction […]
In my judgment these factors lead me powerfully to the conclusion that Persimmon’s construction is the right one. […]
(2) Admissibility of negotiations
The judge did not express a view on what effect the admissibility of the pre-contract negotiations would have had. The judge referred to the well known authorities (to which I shall revert) and concluded that the adverse effect on third party rights was a compelling reason for not admitting evidence of prior negotiations. If the parties’ negotiations were to be routinely admissible as an aid to contractual construction, then third parties reading, dealing with or having transferred to them rights or obligations under the contract could not make any safe assumptions about its meaning without themselves carrying out an inquiry as to those negotiations, so as to put themselves in the same state of knowledge as the parties to the contract.
Even if there were an exception to the basic rule in “private dictionary” cases (The Karen Oltmann  2 Lloyd’s Rep 708) it did not extend to any case in which the word, phrase, clause or term is itself the subject of an express definition in the contract itself. The private dictionary principle should not be used for the construction of words, phrases or terms which are already defined in the Agreement. The parties themselves may, by using an express definition, reasonably be taken to have agreed that the definition should prevail over any competing definition arrived at during the course of their negotiations, but then not adopted in the contract. The existence of a definition is a clear signal to any third parties seeking to construe the contract that the meaning of the word, phrase or term in question is to be found within, rather than without, the four corners of the contract itself. The very existence of detailed definition in a commercial contract is a pointer towards the understanding of the parties to it that others who, unlike them, need education as to its finer meaning, will be expected to use those definitions, rather than to investigate the parties’ negotiations.
There is no doubt about the starting point, which is that “for reasons of practical policy” the law excludes from the admissible background the previous negotiations of the parties: Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896 at 913. In Alexiou v Campbell  UKPC 11, para 15, Lord Bingham referred to “ … the principle, vouched by such compelling authorities as Prenn v Simmonds … and Investors Compensation Scheme Limited v West Bromwich Building Society … that evidence of prior negotiations not leading to any antecedent agreement is inadmissible to construe a contract.” See also Moschi v Lep Air Services  AC 331, 354; Schuler v Wickman Machine Tools  AC 235, 261.
The policy reasons have not been fully articulated. In Prenn v Simmonds  1 WLR 1381, 1384-5, Lord Wilberforce said:
“ … The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does the construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back; indeed, something maybe lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense it is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact … The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is to admit evidence of one party’s objective - even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised…
In my opinion, then, evidence of negotiations …ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction.”
In Britoil plc v Hunt Overseas  CLC 561, 573 Hobhouse LJ said (in the context of a claim for rectification): “The process of negotiation and progressing towards a complete and formalised agreement is one which may contain many ambiguities. The purpose of the final document is to remove those ambiguities and to define authoritatively and clearly what the parties’ respective rights and obligations are to be.”
The reasons for the exclusionary rule are by no means self-evident. The American Law Institute, Restatement Second: Contracts, section 214, states that “…. negotiations prior to …the adoption of a writing are admissible in evidence to establish … the meaning of the writing …” In the United States, contract law is generally a matter of State law, and the courts of the majority of States retain the “plain meaning rule,” namely that where the meaning of the language taken in context is clear, evidence of prior negotiations cannot be used in its interpretation. But there is a division of authority as to whether evidence of prior negotiations can be used to show whether contract language lacks the required degree of clarity: Pacific Gas and Electric Co v G W Thomas Drayage and Rigging Co, 442 P.2d 641 (Cal. 1968). See Farnsworth, Contracts, 4th ed. 2004 para 7.12. See also Corbin On Contracts, 1998, paras 24.7 et seq; Williston on Contracts (4th ed 2007, Lord) Vol 11, para 33.42.
Nor is the exclusionary principle accepted in international instruments dealing with private law contracts, such as the UNIDROIT Principles of International Commercial Contracts (Art 4(3)) and the UN Convention on Contracts for the International Sale of Goods (1980). That material was referred to by Thomas J in the New Zealand Court of Appeal in an important criticism of the exclusionary rule in a decision in which he expressed the view that his construction was supported by provisions in earlier drafts of the contract: Yoshimoto v Canterbury Golf International Ltd  1 NZLR 523, paras 59 et seq. Thomas J’s view was that the general exclusionary rule should stand, but that there should be flexibility in its application where cautious use of the pre-contract material would enable the court to arrive at a meaning of the contract which accorded with the ascertainable intention of the parties: at , . The point was not addressed on appeal to the Privy Council:  UKPC 40,  1 NZLR 1.
The UNIDROIT Principles and the UN Convention were also relied on in a lecture by Lord Nicholls arguing for a more flexible approach, reprinted as My Kingdom for a Horse: the Meaning of Words (2005) 121 LQR 577. He said (at 583)
“… there will be occasions where the pre-contract negotiations do shed light on the meaning the parties intended to convey by the words they used. There will be occasions, for instance, when the parties in their pre-contract exchanges made clear the meaning they intended by language they subsequently incorporated into their contract. When pre-contract negotiations assist in some such way, the notional reasonable person should be able to take that evidence into account in deciding how the contract is to be interpreted.
This would not be a departure from the objective approach. Rather, this would enable the notional reasonable person to be more fully informed of the background context. This would recognise that pre-contract negotiations are themselves part of the background of a contract and that, like other background material, they may be relevant when interpreting a contract. They differ from other background material in that, unlike other background material, they may afford direct evidence of the parties’ actual intentions. That is not a reason for banning their use. That would be perverse. That would mean that in deciding the meaning intended to be conveyed by the language chosen by the parties the notional reasonable person would always be barred from having regard to what may be the best evidence of all. He must always conjecture, he must never know. The preferable approach is to recognise that pre-contract negotiations are relevant and admissible if they would have influenced the notional reasonable person in his understanding of the meaning the parties intended to convey by the words they used.”
Lord Nicholls suggested ((2005) 121 LQR at 587-588) that the policy reasons put forward for the proposition that pre-contract negotiations were inadmissible were as follows: (1) increased uncertainty and unpredictability in dispute resolution; (2) adverse effect on third party rights; (3) the use of the evidence would be unhelpful (Lord Wilberforce’s reason); (4) subversion of the objective approach. Lord Nicholls accepted that these were important practical considerations, but that they were not conclusive. To that I would add a further one, which is that without such a rule sophisticated and knowledgeable negotiators would be tempted to lay a paper trail of self-serving documents.
The judge in this case was particularly impressed by the second of Lord Nicholls’ reasons, the effect on third parties. But, as Lord Nicholls recognised (at 588), the same objection would apply (although perhaps with less force) to the admissibility of other background material, which might be equally unavailable to third parties. The Law Commission, Law of Contract: The Parol Evidence Rule (Law Com No 154, 1986), when concluding that the parol evidence rule did not have the effect of excluding evidence which ought to be admitted if justice was to be done between the parties, did not consider that assignees would be prejudiced: para 2.43. It is also significant that the effect on assignees does not prevent (as I have indicated) the admissibility of pre-contract negotiations for the purposes of interpretation in the practice of the world’s greatest capitalist nation, the United States.
In Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, at 913, Lord Hoffmann accepted that the boundaries of the exception were not clear. In BCCI v Ali  UKHL 8,  1 AC 251, at para 31 Lord Nicholls added that whether the reasons of practical policy referred to by Lord Hoffmann still held good had been increasingly the subject of debate, and he said that he desired to keep the point open for consideration on a future occasion.
A potentially relevant exception which is open to this court derives from The Karen Oltmann  2 Lloyd’s Rep 708. In that case the owners let the vessel for “for a period of 2 years 14 days more or less.” The charter provided that the charterers would have the option to redeliver the vessel “after 12 months trading subject to giving 3 months’ notice.” After trading for 19 months, the charterers gave 3 months notice of their intention to redeliver. The owners said that the redelivery provision meant that the charterers had the option to redeliver on the expiry of 12 months from the inception of the charter. The charterers said that it meant that they could terminate at any time after 12 months, and that their notice was therefore a good one.
The striking point about the case is that telexes between the parties showed that when they used the word “after” they meant “on the expiry of” and not “at any time after the expiry of.”
Kerr J accepted, first, that pre-contract telex exchanges were inadmissible to interpret the contract. Second, he accepted that the telex exchanges could be looked at to determine whether there had been an estoppel by representation, but held that they did not support the allegation of an estoppel.
His final conclusion (at 713) was that as a matter of impression the contract on its face meant “on the expiry of”, but said that if he should be wrong about that the construction which he preferred, he found that it was confirmed by the way in which the parties were themselves understanding and using the word.
His reasoning on the latter point has given rise to much discussion and some misunderstanding. Having accepted the general exclusionary rule, he said:
“...the principle can be stated as follows. If a contract contains words which, in their context, are fairly capable of bearing more than one meaning, and if it is alleged that the parties have in effect negotiated on an agreed basis that the words bore only one of the two possible meanings, then it is permissible for the Court to examine the extrinsic evidence relied upon to see whether the parties have in fact used the words in question in one sense only, so that they have in effect given their own dictionary meaning to the words as the result of their common intention. Such cases would not support a claim for rectification of the contract, because the choice of words in the contract would not result from any mistake. The words used in the contract would ex hypothesi reflect the meaning which both parties intended.”
He went on (at 713):
“However, on the basis that the word ‘after’ … is capable of bearing two meanings as a matter of construction, I do not think that there is any authority precluding the Court from examining the pre-charter-party exchanges in order to see whether the owners can make good their contention that the parties were in agreement in using this word in only one of its two senses, and having in effect both given it the same dictionary meaning to the exclusion of the other meaning. Having then considered the pre-charter-party exchanges on this basis I find that this contention is established. In these circumstances it seems to me that the charterers cannot now depart from this common meaning by asserting that this word has the opposite meaning in the charter-party.”
Kerr J referred to the negotiation on “an agreed basis that the words bore only one of two possible meanings” and used the expression “their own dictionary meaning.” But it is plain from the facts that there had been no actual agreement on the meaning of the word “after”. What happened was that the parties were negotiating on a common understanding of what the point in contention between them was, namely the period within which the notice had to be given so as to expire at the end of a period which the owners wanted to be of maximum duration and minimum flexibility where the charters wanted the precise opposite. There was no agreement on the word “after” except in this sense: because they were negotiating on a common understanding of what each was endeavouring to achieve they were using the word in the same sense.
On analysis, in my judgment, The Karen Oltmann does not lay down any special “private dictionary” exception. All that Kerr J was saying was that the negotiations could be looked at to see whether the parties had negotiated on an agreed basis that the words bore only one of two possible meanings. I doubt whether this differs in any material respect from admitting evidence of prior negotiations in construing a contract.
Kerr J suggested (at 712), obiter (because there was no claim for rectification) that private dictionary cases
“would not support a claim for rectification of the contract, because the choice of words in the contract would not result from any mistake. The words used in the contract would ex hypothesi reflect the meaning which both parties intended.”
Briggs J was right to point out that cases such as Re Butlin’s Settlement Trust  Ch 251 show that rectification may be available even if words have been deliberately used, but where it was mistakenly considered that they bore a different meaning from their correct meaning as a matter of true construction. But I do not think he was right to suggest that The Karen Oltmann should have been decided on that basis. In my judgment, the problem in The Karen Oltmann was that the words in the contract were capable of bearing more than one possible meaning. There was no mistake either as to the words used or as to the consequence of the words used.
The decision of Kerr J, a very experienced and eminent commercial judge, has been referred to with apparent approval by this court, although its reasoning does not appear to have been the ratio of any decision: see, e.g. Ham v Somak Travel Ltd, February 4, 1998, unreported (CA); IRC v Botnar  EWCA Civ 1652, 72 TC 205; Proforce Recruit Ltd v The Rugby Group Ltd  EWCA Civ 69.
In Proforce Recruit Ltd v The Rugby Group Ltd  EWCA Civ 69 the relevant phrase was “preferred supplier status” in a service cleaning agreement. The question for the Court of Appeal was whether an otherwise unarguable case on construction could be saved (from being struck out or from summary judgment being granted) by reference to the meaning that it was alleged that the parties had in their negotiations placed on that phrase. In concluding that it might, and therefore in allowing the appeal against the striking out of the action, Mummery LJ, after quoting from The Karen Oltmann, said (at ):
“… as stated in Chitty on Contracts para 12.119, evidence of facts about which the parties were negotiating is admissible to explain what meaning was intended and evidence of what the parties said in negotiations is admissible to show that the parties negotiated on an agreed basis that the words used bore a particular meaning.”
Concurring in the result, Arden LJ said (at ):
“In this case, the parties have used a very unusual combination of words (‘preferred supplier status’). These words are undefined and they are not introduced or accompanied by any words of explanation. In those circumstances it is in my judgment reasonably arguable that on their true interpretation those words bear the meaning that the parties in common gave them in their communications leading up to the signing of the agreement. In admitting evidence as to those communications, the court would be hearing that evidence not with a view to taking the parties’ subjective intent into account for the purposes of interpretation (a purpose precluded by the principles laid down by Lord Hoffman in the ICS case) but for the purpose of identifying the meaning that the parties in effect incorporated into their agreement in circumstances where the court was satisfied that on their true interpretation the terms of the agreement were to have this effect.”
Richards LJ said that it was not appropriate at that stage to express any concluded view on the extent to which pre-contract negotiations can be taken properly into account in that case for the purpose of ascertaining the meaning of the contract.
At trial Cresswell J found that there had been no agreed meaning:  EWHC 1621 (QB).
The other most directly relevant decision at first instance is Jones v Bright Capital Ltd  EWHC 3151 (Ch). The issue was as to the meaning of a paragraph in a defence in a claim about pension rights, which had been incorporated as a term of the settlement of those proceedings. Sir Andrew Morritt C referred to the argument for the claimant that correspondence was admissible to show that the parties had used words in a special sense or to show the commercial business genesis or object of the agreement. He cited Prenn v Simmonds, Investors Compensation Scheme Ltd v West Bromwich Building Society, and The Karen Oltmann, and went on (at ):
“In my view each of the letters in question is admissible on the issue of construction. They show the genesis and subject matter of paragraph 38(3) of the defence which became a term of the Compromise. They show the connection between the actuary’s calculations and that paragraph and explain the figures and other terms which appear in it. None of them is relied on as indications of subjective intention and on the face of them they are not objectionable on that account. The mere fact that they were written in the course of inter-solicitor correspondence seeking to agree a redundancy package is not, in my judgment, a sufficient objection. ”
He then went on to say that none of the letters added a great deal on the issue of construction (at ), but (at ) used them to determine what he described as “the subject matter of discussion” to show that what the parties were negotiating about was extra scheme pension (attracting pension increases) rather than a flat rate annual payment. A literal reading of the document would not have led to that result. This was not a “private dictionary” case. The use of the correspondence was justified on the basis that it showed the genesis and object of the provision and provided a ground for treating the parties as having negotiated on an agreed basis.
My conclusions on this aspect of the appeal are as follows. First, this court is bound to accept the exclusionary rule as the starting point. Second, the policy reasons for a strict application of the rule are not compelling, and I do not accept the judge’s emphasis on the effect on third parties as a strong policy reason for the rule. Third, the “private dictionary” and “agreed basis” exceptions established in The Karen Oltmann are open to the court. Fourth, for the same reasons as I gave in the previous section of this judgment, I do not consider that the application of these exceptions is excluded simply because the words at issue are themselves contained in a definition section. Chartbrook makes the point that the judge has found in the rectification claim that there was no common intention, and that it would be wrong by introducing the documents (and only the documents) in the guise of interpretation, to find that there had been an agreement. That in itself would not be conclusive because subjective intention is not relevant under the head of construction, and in any event all that the judge did was to conclude, with evident hesitation, that Persimmon had not proved its rectification claim with sufficient clarity.
The pre-contract material points very strongly in favour of Persimmon’s construction, and if there were no limitations on its admissibility, it would not fall short of being determinative on the construction issue. But I do not consider that this is a case for the application of the “private dictionary” or “agreed basis” exceptions because the pre-contract negotiations do not establish a sufficiently clear evidential basis for them. There is no possible basis for a “private dictionary” approach, and to look for “an agreed basis” in the correspondence and the oral negotiations would be to eliminate any distinction between construction and rectification.
Lord Justice Rimer:
I have read Lawrence Collins LJ’s judgment in draft and gratefully adopt his account of the facts, issues and submissions. He has explained why, differing from the judge, he accepts Persimmon’s suggested interpretation of the definition in Schedule 6 to the October 2001 agreement of the “Additional Residential Payment.” With respect, I am unable to agree. In my judgment, the judge was correct to reject that interpretation.
The definition provides:
“’Additional Residential Payment’ [ARP] means 23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value [MGRUV] less the Costs and Incentives [C&I]”
There is nothing unclear, uncertain or ambiguous about that. It is clear, certain and unambiguous and its arithmetic is straightforward. […]
Persimmon asks for the definition to be read as if it were drafted thus:
“[ARP]” means the amount (if any) by which 23.4% of the price achieved for each Residential Unit is in excess of the [MGRUV] less the [C&I].”
That change of language fundamentally distorts the meaning and arithmetic of the definition. […]
I can see no basis for re-writing the agreement as invited by Persimmon. […]
I would reject any suggestion that this is a case in which it is legitimate, as part of the construction exercise, to have recourse to the pre-contract negotiations. The basic rule is that they are out of bounds (Prenn v. Simmonds  1 WLR 1381; Investors Compensation Scheme Ltd v. West Bromwich Building Society  1 WLR 896, at 913 per Lord Hoffmann). I acknowledge that Lord Hoffmann there recognised that the boundaries of this exception are in some respects unclear. But to the extent that any inroads into it may legitimately be made, I have not been persuaded that any have been made good in this case. If, and to the extent that, recourse can legitimately be had to prior negotiations to unearth any use by the parties of a “private dictionary” said to be explanatory of their contractual language, I agree with Lawrence Collins LJ that there is no scope for it here. I also agree with him that there can be no justification for an attempt to invoke the course of the negotiations for the limited purpose of identifying “an agreed basis” for the transaction. Persimmon’s purpose in going into the archaeology of the transaction is not to derive assistance in the interpretation of the ARP definition, for which there is no need. It is to seduce the court into accepting that the parties’ subjective intentions with regard to the ARP calculation were different from what the ARP definition in the agreement actually provides, and then to invite the interpretation of that definition in a way that is in line with the alleged intentions. In short, the bid is to have recourse to the negotiations for the purpose of rectifying the ARP definition under the guise of interpretation. It in fact has nothing to do with the interpretation of that definition as included in the October 2001 agreement. As Lord Hoffmann made clear in Investors Compensation Scheme, pre-contract material of the nature on which Persimmon seeks to rely can legitimately be invoked only for the purposes of a claim for rectification.
Persimmon did ask to have the agreement rectified. It had what appears to me to have been a powerful case. The judge, however, dismissed it for the reasons he gave; and, despite Mr Nugee’s extremely skilful and cogent challenge to that decision, to which I would pay my tribute, Lawrence Collins LJ has given his reasons why he would dismiss the appeal against it. I respectfully agree with those reasons, to which I can add nothing useful of my own.
I would dismiss the appeal.
Lord Justice Tuckey:
Like Rimer LJ I agree with Lawrence Collins LJ’s conclusion that the appeal against the judge’s rejection of the claim for rectification should be dismissed and his conclusions about the admissibility of negotiations for the reasons he has given. However they disagree about construction.
Having considered the matter afresh in the light of this disagreement I remain of the view which I had formed by the end of the hearing that the judge’s construction was right for the reasons which he and now Rimer LJ have given.
The words used to define ARP are entirely clear. Persimmon’s construction requires the definition to be re-written, not only as Rimer LJ has shown, but also to deal with the striking anomaly about the impact of C+I which he illustrates in para 185 above. So the clause would now have to be read as if it had been drafted:
ARP means the amount (if any) by which 23.4% of the price achieved for each Residential Unit less the [C+I] is in excess of the [MGRUV] less the [C+I].
Short of a good claim for rectification I do not think it is possible to make such radical changes to the clear words used in the agreement by invoking the forces of commercial good sense and hints from other parts of the agreement that Chartbrook would not inevitably have been entitled to ARP. They simply are not up to the major interpretive task for which Persimmon invokes them.
For these reasons I agree with Rimer LJ that Persimmon’s appeal should be dismissed in its entirety.}}