Data

Date:: 27-11-2000
Country:: New Zealand
Number:: (2000) NZCA 350
Court:: Court of Appeal of New Zealand
Parties:: Hideo Yoshimoto v Canterbury Golf International Limited

Keywords

SHARE PURCHASE AGREEMENT - BETWEEN A NEW ZEALAND CORPORATION AND A JAPANESE BUSINESSMAN - GOVERNED BY A PARTICULAR DOMESTIC LAW (NEW ZEALAND LAW) - REFERENCE TO CISG AND THE UNIDROIT PRINCIPLES DESCRIBED AS A "RESTATEMENT OF THE COMMERCIAL CONTRACT LAW OF THE WORLD [WHICH] REFINES AND EXPANDS THE PRINCIPLES CONTAINED IN [CISG]”

CONTRACT INTERPRETATION - LIBERAL INTERPRETATION (ART. 8 CISG; ARTS. 4.1-4.3 UNIDROIT PRINCIPLES) - PERMISSIBLE UNDER NEW ZEALAND LAW BUT NOT ENGLISH LAW

Abstract

A New Zealand corporation entered into a contract with a Japanese businessman, owner of all the shares of a business for the planned development of a golf course in New Zealand, for the purchase of all these shares. The contract contained a clause according to which the payment of the last instalment of the price was subject to the condition precedent that the purchaser obtains “all necessary authorizations or resource consents” for the development within a given period of time.

A dispute arose when the New Zealand corporation refused to pay the last instalment on the ground that not all authorizations which turned out to be necessary to commence the development of the project had been obtained. The Japanese seller objected that the clause in question referred only to those authorisations contemplated by the parties at the time of conclusion of the contract, and since the only missing consent was one that had become necessary only afterwards, the condition precedent envisaged in the clause had been fulfilled. Contrary to the court of first instance, the Court of Appeal unanimously decided in favour of the seller. In a very elaborated and learned opinion Thomas J conceded that on the basis of a strictly objective interpretation of the clause in question the conclusion might have been different, while only by taking into account the pre-contractual negotiations between the parties and their declarations of intention would it become clear that the parties actually attached to the clause in question the meaning contended by the seller. However, although pointing out that the admission of such extrinsic evidence would be in accordance with Article 8 of the United Nations Convention on International Contracts for the Sale of Goods (CISG), in force in New Zealand, as well as with Arts. 4.1 to 4.3 of the UNIDROIT Principles which he described as a “document which is in the nature of a restatement of the commercial contract law of the world [and which] refines and expands the principles contained in the United Nations Convention”, he decided not to take a similar approach in the case at hand and to stick to a literal or objective interpretation of the clause in question. Desirable as it may be for the courts in New Zealand to bring the law in line with the international instruments mentioned above, the Privy Council in London would not have permitted them to do so as England has not yet adopted CISG and English common law was traditionally against the admissibility of extrinsic evidence for the purpose of interpreting written agreements.

Fulltext

Court of Appeal of New Zealand

HIDEO YOSHIMOTO v CANTERBURY GOLF INTERNATIONAL LIMITED [2000] NZCA 350 (27 November 2000 )

Judgment:

27 November 2000

THOMAS J

Introduction

[1] The Court faces a difficult question of interpretation. A commercial contract is in issue. A particular clause might be said to have a plain meaning, and was held to have such a plain meaning by the Judge at first instance. The context, the commercial objective of the contract and its contractual matrix, however, point away from that meaning. In addition, reliable extrinsic evidence is available which confirms that this plain meaning is not what the parties actually intended. The question of interpretation, therefore, involves an examination of the contract, the commercial objective of the contract and the contractual matrix. The extrinsic evidence and the admissibility of that evidence must also be considered. Finally, the question arises whether, having regard to the approach of the English courts and bearing in mind that this Court is not the final appellate Court in this jurisdiction, it is open to it to have regard to such evidence and so give effect to the actual intention of the parties.

[2] The appellant, Mr Yoshimoto, is a Japanese businessman. As from November 1995, he owned all of the shares in a company named New Zealand Plan International Limited (NZPIL).NZPIL was formed to promote and develop an international golf course known as "The Lagoons" on the outskirts of Christchurch. The respondent, Canterbury Golf International Ltd (CGI), developed an interest in buying the shares in NZPIL.

[3] On 14 March 1996, Mr Yoshimoto and CGI entered into a contract whereby Mr Yoshimoto agreed to sell all the NZPIL shares in return for a total sum of $3.4 million. This sum was payable in three instalments. Two million dollars was payable by 22 April 1996.This sum was duly paid. A further $1 million was payable provided the necessary planning authorisations or resource consents were secured within 12 months so as to enable the development to proceed. The final $400,000 was payable when CGI signed unconditional agreements for the sale of ten of the proposed 30 villas on the course.

[4] The main issue in this appeal is whether the condition precedent for the payment of the $1 million, that is, securing the necessary authorisations or resource consents within 12 months, was satisfied. There is no dispute as to the sum of $400,000 which is not yet due. Notwithstanding that the development can proceed, CGI rely upon what it claims are the plain terms of the contract to resist this claim. The second issue in this appeal is related to the first. It is whether CGI misrepresented to Mr Yoshimoto that the various consents would be obtained by approximately September 1996.It is alleged that this was an untrue statement about a present fact and that it induced Mr Yoshimoto to enter into the contract. CGI denies making any such misrepresentation and also denies that anything its representatives said induced Mr Yoshimoto to enter into the contract.

The factual background

[5] In the early 1990s, NZPIL acquired an area of roughly 160 hectares located near Johns Road, Christchurch. This site was only a "couple of kilometres" north-east of Christchurch International Airport. It could be easily approached from Johns Road. Johns Road is connected to State Highway 1.

[6] The site, however, did not have direct access to Johns Road. It fronted onto another road, Coutts Island Road, but the detour required to get from State Highway 1, and from the Airport, to the site via this road made it an unattractive option. For the project to be commercially viable access from Johns Road was essential. NZPIL proposed to achieve this access via an unformed paper road running direct from its property to Johns Road.

[7] By late 1995 NZPIL experienced considerable financial difficulties. In November of that year, Mr Yoshimoto , together with the two other shareholders in the company at the time, entered into negotiations with representatives of CGI.A sale and purchase agreement was completed on 22 November .Under this agreement control of the resource consent process passed to CGI, subject only to the requirement that it consult with Mr Yoshimoto .The agreement was also conditional on CGI completing due diligence to its satisfaction within 60 days.

[8] Due diligence was carried out at premises rented by CGI in Christchurch. It uplifted all NZPIL's documents and plans. The project manager of CGI took positive steps to revive the resource consent process which had stalled under the management of NZPIL. Notwithstanding an agreed extension of the 60 day period, however, time for the completion of due diligence expired on 26 January 1996.In the result the agreement did not become unconditional. But CGI did not return NZPIL's documents and plans to Mr Yoshimoto as negotiations continued.

[9] Two further meetings took place without any positive outcome being achieved. It was not until a meeting on 28 February at Mr Yoshimoto 's lawyers' offices in Auckland that a heads of agreement was signed.Mr Yoshimoto was at this stage the sole shareholder in NZPIL. The meeting was apparently tense.The purchase price was the main bone of contention. Mr Yoshimoto wanted more for the land than CGI was willing to pay. His position throughout was that the land was worth $3 million.After Mr Yoshimoto slammed a notebook shut, the representatives of CGI left the meeting, but before doing so they advised Mr Yoshimoto of the departure time of their later flight to Christchurch and how they could be contacted. They were invited back at about 4.30 or 5 pm and duly returned. The impasse as to price continued until the CGI representatives stepped outside the meeting room and then returned to suggest a compromise whereby the value of the land would be linked to whether the project proceeded or not. Mr Yoshimoto agreed to this proposal.

[10] In the result, the heads of agreement provided for the manner in which the purchase price of $3,400,000 would be paid. Paragraph 1(c) reads as follows:

(c)The sum of $1,000,000 will be paid to the Vendor immediately upon NZPIL or its successors or assigns obtaining the necessary consents to proceed with the development of the Lagoons. The definition of "necessary consents" is to be acceptable to the Vendor. ....

[11] The heads of agreement was made subject to the execution of a formal contract. The formal contract went through numerous drafts, but was finally executed on 14 March 1996.On that day, the draft before them was amended in handwriting by both parties and signed.

The relevant contractual terms

[12] The relevant provisions of the contract may be set out. Although the critical provision is cl 6.3 of the contract, it is pertinent to first set out recital D.

D. The Company has made application for resource consents, has promoted plan change number 11 to the Christchurch City Transitional Plan, has made submissions on the proposed Christchurch City Plan and has applied for other consents as are necessary to enable the Development (as later defined) to proceed.(Emphasis added).

Clause 6.3 (a version of which had been agreed at the 28 February meeting) then reads:

“6.3 It shall be a condition precedent to the Vendor's right to demand payment of the sum of $1,000,000 being part of the balance of the Purchase Price owing under this Agreement that the Company [CGI] obtains all necessary authorisations or resource consents to the Development within 12 months of the date of this agreement.”

[…]

For completeness, cl 6.5 of the contract may also be set out:

“6.5 The Purchaser and the Guarantor undertake, covenant and agree with the Vendor that they shall take all practicable and reasonable steps and shall procure the Company or any associated party having responsibility for obtaining the necessary approvals to take all practicable and reasonable steps to procure the satisfaction of the conditions referred to in clause 6.3 above.”

[13] On the face of it, the arrangement was a recipe for disaster. Making every allowance for the exigencies of the time, unknown facts or factors, and the beneficent perception of hindsight, it is difficult to understand how Mr Yoshimoto or his legal advisers ever came to contemplate accepting the format which was adopted. The $1 million was only payable if and when planning approval for the development was obtained. But responsibility for obtaining that planning approval was vested in the purchaser, CGI, and a strict finite time was fixed within which that approval had to be obtained. If the necessary approvals, which were under the control of CGI, were not obtained within that time CGI stood to save $1 million, roughly a third of the value of the land if the development was to proceed. The very oddness of the arrangement suggests that there is more to it than meets the eye.

[14] In the event, CGI did not obtain a resource consent under the Christchurch City Proposed District Plan within the 12 month period stipulated in cl 6.3. That consent was not obtained until some five months later. Mr Yoshimoto nevertheless demanded payment of the $1 million in October 1996.CGI disputed that the sum was due and owing, and Mr Yoshimoto commenced proceedings against CGI in January 1997.

[15] The dispute was heard by Panckhurst J in the High Court at Christchurch on 9 February 1999.In short, the learned Judge held that the condition precedent in cl 6.3 had not been met as the resource consent under the Proposed Plan was necessary for the development and had not been obtained within the time specified in the contract. CGI was therefore not liable for the extra $1 million. He also held that Mr Yoshimoto 's claim that he was induced to enter into the contract by a misrepresentation failed. The statement relied on by Mr Yoshimoto was a genuinely held opinion, albeit optimistic, and was proffered with a significant reservation.

[…]

A question of interpretation

[30] The essential question is whether cl 6.3 is to be construed to include, as a necessary consent, approval for the deletion of the notation showing the paper road as a road to be stopped under the Proposed Plan.

[31] Panckhurst J cannot be criticised for concluding that he was obliged to interpret and give effect to what he perceived to be effectively the plain meaning of the clause. The operative words in cl 6.3 are; "obtains all necessary authorisations or resource consents to the development". The learned Judge held, however, that the clause, as finally drafted, required a pragmatic approach. Payment of the extra $1 million was not dependent upon CGI obtaining every authorisation or consent but only those which were required to enable the project "in essence" to proceed. More technical authorities or consents relating to the detail of the project, as opposed to its broad essential character, need not be in hand. Noting that the definition of the development in the contract (para [12] above) included access off Johns Road, the learned Judge concluded that a resource consent under the Proposed Plan was essential if the development project was to proceed. Notwithstanding that he suspected that this consent was assured, it was a "necessary authorisation or resource consent to the development".

[32] I approbate Panckhurst J's pragmatic approach and readily agree that payment of the extra $1 million was not dependent upon CGI obtaining every authorisation or consent. In my view, while the resource consent was necessary in the sense that the development could not commence without it being in place, it was not "necessary" within the meaning of that term in the contract. In other words, as at 14 March 1996 the parties did not contemplate or intend that a consent under the Proposed Plan was "necessary" before the obligation to pay the further $1 million arose. The consent fell on the other side of the literal divide.

[33] It may be noted in passing that no convincing reasons were advanced in evidence as to why consent under the Proposed Plan was necessary in the sense of being "in essence" necessary to proceed. The suggestion that it was not inevitable that the Proposed Plan would be brought into line with Plan Change 11 as that Plan Change was based on different objectives and policies may be true as a general proposition. But it is simply unrealistic to think that once Plan Change 11 had been endorsed, and endorsed so recently, the unfavourable designation of the road would not be removed in the absence of some very good or unexpected reason to the contrary. Nor was any indication given as to which objectives and policies of the Proposed Plan might preclude the development or place approval of the removal of the notation relating to the road in doubt. The parties, I believe, were correct to anticipate that if Plan Change 11 were approved any changes required to the Proposed Plan would realistically follow.

[34] In my view, therefore, the parties did not intend that consent to the removal of the designation under the Proposed Plan was a necessary consent to the development before the $1 million became due and payable. As a result, whilst CGI may seek to morally justify its retention of that sum on various extraneous grounds, as it has done, this sum represents a windfall to the company. It has obtained the land for the sum of $2.4 million having agreed that the value of the land with its development potential affirmed was $3.4 million.

[35] I believe that the meaning which I have identified is indicated by the contract, the commercial objective of the arrangement, and the matrix to the contract. Each may be examined in turn.

(1) Assistance from the contract

[36] It is to be emphasised at the outset that, notwithstanding his perception that the clause could be given a plain meaning, Panckhurst J himself did not give cl 6.3 a literal construction. A literal construction would mean that all authorisations and resource consents required for the development would need to be obtained before the additional sum became payable. The development could not proceed if any authorisation or consent, however routine, had not been obtained. Yet, the learned Judge recognised that this literal meaning was not tenable. Indeed, Mr More, appearing for CGI, did not seek to maintain this construction. He accepted that, although certain of the outstanding authorisations and consents were of "fundamental importance", they would prove to be attainable, even though terms and conditions which attached to them might dictate some amendments to the project generally. In agreeing that not every authorisation was necessary, but only those which were required to enable the project "in essence" to proceed, the Judge held that the contractual formula was not rigid and that every consent or authorisation need not be in hand. The test was whether in essence the project was viable.

[37] I have already accepted that it is necessary to introduce this flexibility into the construction of cl 6.3.But at once it cannot be said that the plain meaning is the literal meaning. The literal meaning is being modified to make sense of the provision. An assessment is required as to whether the resource consent was "necessary to the essence of the project", or required to enable the project "in essence" to proceed, or whether it "in substance" became viable, or the like. It seems to me that once this point is reached the Court should be reluctant to impose a meaning on to the clause which may not accord with the parties' actual intention. The question is not whether the Court considers the resource consent "necessary", but whether a reasonable person in the position of the parties would have considered it necessary and therefore within the commercial arrangement which they had entered into for the payment of the full purchase price. It therefore becomes imperative to have regard to the context in which the clause appears and the commercial objective which the parties sought to achieve.

[38] The parties' perception of what was to be considered "necessary" is apparent from the wording of recital D. Of course, the recital does not override the terms of the contract. Argument on that issue was largely unhelpful. Rather, reference to the recital is of assistance in indicating what cl 6.3 means. The recital states that NZPIL "has made application for resource consent... and has applied for other consents as are necessary to enable the development (as later defined) to proceed". (Emphasis added).Thus, the recital explicitly referred to applications for consent which had been made at that time and described them as applications which were "necessary" for the development to proceed. The use of the word "necessary" in conjunction with the reference to the applications which had been made, at least to some degree, points to the meaning to be attributed to that word in cl 6.3.Although, as stated in the recital, submissions had been made on the Proposed Plan, no application for a resource consent had then been made in respect of it. The suggestion must be that the parties did not perceive the application to be one which was "necessary" to enable the development to proceed.

(2) The commercial objective

[39] Further, I consider that the commercial objective can be inferred from the overall structure of the arrangement underlying the payment of the purchase price. The commercial objective was to provide a differential purchase price depending on whether the development potential of the land was realisable or not. If the project were able to proceed the parties accepted that the value of the land was worth $1 million more than would be the case if it could not proceed. Certainly, the parties stipulated a 12 month period within which the necessary authorisations and consents had to be obtained. But that short time limit in itself suggests that the parties were addressing applications which were extant. In short, the commercial objective was to recognise the development potential of the land and the assumption (correct as it turned out) was that, with CGI using its best endeavours, that potential would be realised if and when the outstanding consents were obtained. This objective is substantially confirmed by reference to the contractual matrix.

(3) Assistance from the matrix

[40] A number of matters can be fairly said to be part of the matrix to the contract. The first has just been mentioned, that is, the commercial objective of the arrangement. But that objective may now be dealt with on a broader basis. It is clear that Mr Yoshimoto regarded the value of the land for the purposes of a development as being $3 million. That was the purchase price in the conditional agreement which did not proceed. An impasse then resulted as to the purchase price to be inserted in the heads of agreement. This impasse was resolved by recognising that the value of the land would be linked to whether or not the development potential of the land was realised. One million dollars was accepted by the parties as the difference in value with the parties expressly agreeing in the heads of agreement that the definition of "necessary consents" was to be acceptable to Mr Yoshimoto .This arrangement, then, represented the essence of the bargain which the parties had agreed. If the parties had intended that the consents to which cl 6.3 related would be open-ended, they would have had to contemplate the real possibility that the fundamental arrangement as to price could be thwarted and that CGI would obtain a windfall. Realistically speaking, any such notion is so improbable that it can be safely concluded that it was beyond the parties' contemplation.

[41] Secondly, NZPIL had already advanced the planning process before CGI assumed responsibility for that process. NZPIL had made the essential application to change the Transitional Plan and it had lodged submissions in respect of the Proposed Plan. CGI did not start the planning process afresh. In effect, it took over the procedures which had been initiated by NZPIL, together with the relevant plans and documents. Planning advice then obtained by CGI focused almost exclusively on the flood plains issue and the change required to the Transitional Plan. The Proposed Plan was to be left to one side. The relatively short period of 12 months within which to obtain full approval to Plan Change 11 was not unreasonable. Indeed, that proved to be the case, if only by 17 days. In short, CGI was effectively stepping into NZPIL's shoes, and it was believed that what NZPIL had begun could be completed by CGI in 12 months.

[42] Thirdly, it is to be noted that the consent required under the Proposed Plan did not require approval for a zoning change to permit the project as such. As recited by Panckhurst J, the Proposed Plan was favourable in relation to the Lagoons site in that it contained a special "Open Space 3D Zone" which was similar to the Special Resort and Recreation Zone introduced by Plan Change 11 into the Transitional Plan. Submissions to the Proposed Plan were required to ensure only that there were no "loose ends" and that the zoning matched the zone introduced by Plan Change 11.In substance, all that was required under the Proposed Plan was the removal of the notation of the paper road as a "road to be stopped" so that access to the site would be brought into line with that which had been agreed to in Plan Change 11.Hence, the nature of the consent required under the Proposed Plan is not to be overstated.

[43] Fourthly, I have already pointed out that the arrangement under which CGI became responsible for obtaining the necessary consents and on which the payment of $1 million depended, was a recipe for disaster. Notwithstanding its obligation under cl 6.5 to take all practical and reasonable steps to obtain the consents, CGI had a $1 million incentive to prolong the process for which it was responsible beyond the year. It is virtually inconceivable that NZPIL would deliberately place such power in the hands of CGI, or that CGI could reasonably expect such control, unless it was thought by both parties that all "necessary" applications for the purposes of cl 6.3 had been identified and, indeed, were in train.

[44] Fifthly, while for the reasons given by Panckhurst J, Mr Yoshimoto must fail in his claim that CGI misrepresented to him that the outcome of the various consents would be obtained by approximately September 1996, that does not mean that the allegation is irrelevant to the question of interpretation. It is not denied that at the critical meeting on 28 February 1996 a representative of CGI indicated that the necessary approvals would or could be obtained by "September approximately". Nor can it now be questioned that this assurance was not a genuinely held opinion. But such a statement could only have been made if the parties accepted that all "necessary" consents had been identified. A period of no longer than seven months would elapse from the date of the meeting until the end of September. To contemplate that the necessary consents could be obtained within that time without being alert to what those consents were would have been unrealistic.

[45] Finally, the reference to the making of submissions in respect of the Proposed Plan in recital D shows that this Plan was not overlooked. Submissions were being made in respect of it. Yet, if it had been intended that the consent under the Proposed Plan was a necessary consent, it could be expected that the reference to the submissions on the Proposed Plan would have been replaced by a reference to an application for a resource consent under that Plan. Moreover, CGI were required by cl 6.5 to use its best endeavours to obtain the necessary consents. It is unlikely that the company would have been prepared to expose itself to liability under this provision without a clear understanding as to what it had to do in the ensuing year.

[46] All in all, therefore, the contractual matrix would suggest that the parties did not intend to include a consent under the Proposed Plan within the purview of cl 6.3.

[47] Since writing and circulating a draft of this judgment, Doogue and Salmon JJ have written concurring judgments agreeing with this conclusion. This being the case, the appeal will be allowed. I wish to go further, however, and examine the argument that reliable extrinsic evidence confirms that the parties did not intend a consent under the Proposed Plan to be a "necessary" consent for the purposes of cl 6.3.

Extrinsic evidence

[48] I am mindful that the question whether there is sufficient indication in the contract, the commercial purpose of the differential price, and the contractual matrix as discussed above to conclude that the necessary consents referred to in cl 6.3 are those which had already been contemplated is not an open and shut question. Along with the other members of the Court I consider that this meaning emerges securely enough. But it is a question on which I imagine judicial opinions could differ. It could still be asserted that the use of the word "necessary" gives cl 6.3 a "plain meaning" which would include the consent in issue. If reference is made to certain extrinsic evidence, however, there cannot be any real doubt that this view is at odds with the parties' actual intention. The scope of cl 6.3 was intended to be restricted to those consents which the parties had identified and which CGI had taken over from NZPIL. I therefore wish to confront the question whether regard may be had to that extrinsic evidence.

[49] This Court is fully aware of the problems associated with evidence of the parties' precontractual negotiations. Precontractual negotiations may not be unequivocal. They may simply indicate the changing thinking and position of the parties up to the time a final consensus is reached and the contract is executed. I will therefore approach the evidence which was adduced by both parties relating to their conduct prior to 14 March 1996 with considerable caution. No evidence which can be said to be simply evidence of the parties' subjective intention need be considered. For this reason, I have confined my consideration to the earlier draft contracts, the changes made to cl 6.3, and an earlier recital relevant to that clause.

[…]

Receipt of the extrinsic evidence?

[59] It is accepted that for reasons of commercial convenience the law insists on an objective theory of contract. Lord Steyn, writing extra-judicially, has pointed out that this involves adopting an external standard given life by using the concept of the reasonable person. Thus, in contract law effect must be given to the reasonable expectations of honest people. The expectations which will be protected are those that are, in an objective sense, common to both parties. Generally the law of contract is not concerned with the subjective expectations of a party. Thus, the function of the law of contract is to provide an effective and fair framework for contractual dealing, a function which requires an adjudication based on the reasonable expectation of parties.(Johan Steyn, "Contract Law: Fulfilling the Reasonable Expectations of Honest Men" (1997) 113 LQR 433, at 433-434).

[60] By and large, Lord Steyn continues, the objective approach to questions of interpretation serves the needs of commerce. It tends to promote certainty in the law and predictability in dispute resolution. The rule that evidence of the precontractual negotiations of the parties or their subsequent conduct cannot be used in aid of the construction of a written contract follows from the primary rule that the task of the court is simply to ascertain the meaning of the language of the contract. But, the distinguished jurist adds, the rationality of the law is important, and if this rule was absolute and unqualified it would sometimes defeat the reasonable expectations of commercial men. There has been, he observes, a shift away from a black-letter approach to questions of interpretation. The literalist methods of Viscount Simmonds are in decline. The purposive approach of Lord Reid and Lord Denning MR has prevailed.(Ibid, at 440).

[61] This shift away from the black-letter approach in the interpretation of contracts is most noticeably evident in the recent decision of the House of Lords in ICS Investors Compensation Scheme Ltd v West Bromwich Building Society Ltd [1998] 1 All ER 98.In what must be regarded as a landmark statement - or restatement - of the law relating to the construction of contracts, Lord Hoffman begins by observing that a fundamental change has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237, at 240-242, and Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570, which is not always sufficiently appreciated. Subject to an important exception, the result has been to assimilate the way in which such documents are interpreted by judges to the common-sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of legal interpretation has been discarded. The five principles which Lord Hoffman articulated are now so well known that it is not necessary to set them out. They were repeated and adopted by this Court in Boat Park Ltd v Hutchinson [1999] 2 NZLR 74, at 81-82.

[…]

The intention of the parties

[71] While it may be presumed that the parties have intended what they have in fact said in the contract, the objective, enshrined in ancient authority, is to discover from the written agreement the intention of the parties. See, for example, Cholmondeley (Marquis of) v Clinton (1820) 2 Jac & W 1, at 91.To refer to extrinsic evidence to assist that objective would not seem to be a radical suggestion. As Wigmore has said: "The history of the law of interpretation is the history of a progress from a stiff and superstitious formalism to a flexible rationalism" (Wigmore on Evidence, (1981, Chadbourne rev., Boston) Vol 9, at para 2461).I agree. The cardinal rule of contractual interpretation must be to ascertain the intention of the parties. To the extent this rule is not implemented, the courts must incur the criticism of failing to give effect to the reasonable expectations of the parties. Surely the parties are reasonably entitled to expect that the courts will strive to ascertain their true intention or, certainly, not to arrive at a meaning of their contract which is at variance with their actual intention. They cannot expect that the judicial exercise of construing their contract will be buried under a stockpile of excessive formalism.

[…]

[84] This Court is not a final court of appeal.A right of appeal remains to the Privy Council sitting in London. It may not therefore be open to this Court to have regard to the extrinsic evidence to which I have referred.

[85] Lord Hoffman's summary in West Bromwich case is the most up-to-date and progressive statement of the principles applicable to the interpretation of a contract. Yet, even though it is acknowledged that the boundaries of the exception are in some respects unclear, Lord Hoffman holds that the rule is absolute if the evidence relates to prior negotiations. The Bromarin case illustrates the reluctance of the English Courts to look at extrinsic evidence as an aid to interpretation. I therefore suspect that the principles as enunciated by Lord Hoffman will be as far as their Lordships in London will be prepared to go. They will not displace the curt reminder to this Court of the correct approach in Malanesian Mission Trust Board v Australian Mutual Providence Society [1977] 1 NZLR 391.Lord Hope stated (at 394-395):

The approach which must be taken to the construction of a clause in a formal document of this kind is well settled. The intention of the parties is to be discovered from the words used in the documents. Where ordinary words have been used they must be taken to have been used according to the ordinary meaning of these words. If their meaning is clear and unambiguous, effect must be given to them because that is what the parties have taken to have agreed to by their contract. Various rules may be invoked to assist interpretation in the event that there is an ambiguity. But it is not the function of the Court, when construing a document, to search for an ambiguity. Nor should rules which exist to resolve ambiguities be invoked in order to create an ambiguity which, according to the ordinary meaning of the words, is not there. So the starting point is to examine the words used in order to see whether they are clear and unambiguous. It is of course legitimate to look at the document as a whole and to examine the context in which these words have been used, as the context may affect the meaning of the words. But unless the context shows that the ordinary meaning cannot be given to them or that there is an ambiguity, the ordinary meaning of the words which have been used in the document must prevail.

[86] Nor, in line with this approach, will ambiguities be lightly recognised. In the present context, for example, the fact that the word "necessary" may mean "necessary to proceed", or "necessary as identified" or "necessary to complete in essence ... the development" will not be universally accepted as constituting an ambiguity. In the result, notwithstanding the genuine controversy surrounding the words used in cl 6.3, the language is likely to be vested with a "plain meaning" and extrinsic evidence excluded from consideration.

[87] If that is the case, the rule against the admission of evidence relating to prior negotiations will be applied without qualification. I do not have any presentment that English law is about to revisit this rule.

[88] It would, of course, be open to this Court to seek to depart from the law as applied in England on the basis of this country's implementation in 1995 of the United Nations Convention on Contracts for the International Sale of Goods. Liberal provisions for the interpretation of international sales contracts are included in this Convention. Article 8(1) provides that statements made by a party "are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was". Article 8(2) stipulates that, if the latter provision is inapplicable, a party's statements "are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances". Under Article 8(3) "[i]n determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. "Professor McLauchlan has correctly pointed out that it is odd that evidence of the parties' negotiations are admissible to aid the interpretation of international sales agreements but not commercial or other domestic contracts.(See McLauchlan, "A Contract Contradiction", at 193).

[89] Reference may also be made to the Unidroit Principles of International Commercial Contracts published in 1994.This document, which is in the nature of a restatement of the commercial contract law of the world, refines and expands the principles contained in the United Nations Convention. Particularly relevant for present purposes is Article 4.3.Having stipulated that a contract is to be interpreted according to the common intention of the parties (4.1), and that the statements and other conduct of a party shall be interpreted according to that party's intention if the other party knew or could not have been unaware of that intention (4.2), Article 4.3 provides that, in applying these general principles, regard should be had to all the circumstances including "preliminary negotiations between the parties". Clearly, it is desirable that the approach of the Courts in this country to the interpretation of statutes should be consistent with the best international practice.(See Attorney General v Dreux Holdings Ltd (1997) 7 TCLR 617, at 627 and 642).

[90] But while this Court could seek to depart from the law as applied in England and bring the law in New Zealand into line with these international conventions, I do not think it would be permitted to do so by the Privy Council.England has not yet adopted the United Nations Convention and has shown little readiness to allow the Courts in this country any latitude in the interpretation of contracts.(As Professor McLauchlan points out, between June 1996 and December 1997, six decisions of this Court, none of which raise issues of general principle, were the subject of appeals to the Privy Council. Of these, four were successful and one was dismissed by a bare three to two majority.(See "A Contract Contradiction", supra, at 190).This Court has, of course, been allowed considerable latitude in certain areas. See e.g., Invercargill City Council v Hamlin [1996] 1 NZLR 513; W v W [1999] 2 NZLR 1; and Lange v Atkinson [2000 ] 1 NZLR 257. Certainly, the contractual environment in New Zealand is significantly different from that which prevails in England. In this country, no less than nine statutes have been enacted since 1944 which impinge upon the traditional common law rules relating to the formation and performance of contractual undertakings. In England the common law remains dominant. But other, perhaps, than fostering a different judicial approach, I am not certain that this different contractual environment bears upon the present point. Being realistic, the law of contract in this country, other than as specifically reshaped by statute, is likely to remain the law of England. Indeed, in 1985 the Privy Council made it clear that, apart from cases involving considerations peculiar to New Zealand or questions of local policy, the Courts of New Zealand must adhere to the law which is of general application as the common law of England. See Hart v O'Connor [1985] 1 NZLR 159, esp. at 165 and 174.

[91] If there were any doubt as to whether the preferred approach is open to this Court, I believe that it is put to rest by the decision of the Privy Council in Lim v McLean [1997] 1 NZLR 641.At issue in that case was the construction of a contractual provision in an agreement for the sale of a one-half share of a fishing vessel along with a one-half share of the individual transferable quota (ITQ) allocated to the vendors under the Fisheries Amendment Act 1986.Although it was not known what the exact amount of the quota would be, the parties knew informally that it would be issued at about 447 tonnes. The agreement purported to sell the fishing boat together with the half-share of the ITQ described in Schedule III to the agreement. Schedule III described the ITQ as that issued by the relevant Ministry "granting the right to catch not less than 447 tonnes of orange roughy per annum". Sometime prior to the agreement the vendors had issued judicial review proceedings against the Ministry claiming a greater allocation of ITQ. Subsequent to the agreement, and indeed much later, the High Court ruled that the original vendors were entitled to a further 130 tonnes of orange roughy. The purchaser claimed a half-share in this increase.

[92] This Court unanimously took the view that the parties to the agreement intended to transfer a half-share of the quota of the order of 447 tonnes. Highly influential in the Court's thinking was the fact that the contract contained no provision for an adjustment of the purchase price in the event that there was a substantial variation to the ITQ.The Judge at first instance had been able to confirm that the purchase price represented an approximation of the value of the vessel and the then market value of the quota.The market value of one tonne of quota was known. This value had been multiplied by the parties to arrive at the value of the 447 tonnes referred to in the Schedule. Half that value added to half the value of the fishing vessel gave the purchase price. This analysis, while well within the bounds of the contractual matrix, provided the clearest possible evidence that the parties intended to sell a half-share in the ITQ of the order of 447 tonnes.

[93] Thus, the parties' actual intention was readily discernible. The overall contract price made sense in the context of a sale of half the ITQ of the order of 447 tonnes. Any significant increase in the tonnage over and above 447 tonnes represented a windfall to the purchaser.

[94] But the Privy Council took a different view and reversed this Court's decision. The majority of their lordships (Lord Browne-Wilkinson, Lord Mustill and Lord Clyde) adopted a literal interpretation. The agreement spoke of the right to catch "not less than 447 tonnes" of the fish. It did not speak of 447 tonnes of ITQ more or less. Lord Nolan and Lord Nicholls dissented, the latter observing that the majority's interpretation made "no sense commercially" and that the Court should be slow to attribute to an ambiguously drawn document a meaning which would require the vendors to sell, for no additional payment, a half-share in an extra 130 tonnes. But the majority's view prevailed.

[95] The decision is comparable to the present case in that it resulted in a construction contrary to the actual intention of the parties and a substantial windfall to the purchaser. It is true that the decision of the Privy Council was a majority decision and may have been different with a different composition of the Board. But it would be foolhardy to ignore the clear tenor of the decisions of the English Courts to press for a plain meaning, even in the face of controversy, and to attribute an intention to the parties which they may not have had and which may, indeed, be contrary to their actual intention. For the moment, therefore, this Court must accept that, until the rule is reviewed by the Privy Council (or, possibly, the House of Lords) the extrinsic evidence relating to the draft agreement must be disregarded as part of the negotiations. The cautious flexibility in the application of the rule which would seem sensible to ensure effect is given to the reasonable expectations of commercial men or women is lacking. This Court must therefore be content with its earlier finding that, having regard to the context of the clause, the commercial objective of the provision, and the contractual matrix a resource consent under the Proposed Plan does not come within the purview of cl 6.3.

[96] For this reason, the appeal is allowed.

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Source

Australasian Legal Information Institute http://www.austlii.edu.au/}}