Pre-contractual communications and contractual interpretation: Court of Appeal confirms a fine, but hard, line

1st August 2019

Why is Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council of interest to commercial contracting parties and practitioners?

When disputes as to the meaning of contractual provisions arise, parties often wish to rely on communications made during pre-contractual negotiations to evidence their intentions and understanding of the contract, so as to support their own interpretation. However, whether evidence of pre-contractual communications is admissible is a nuanced legal question which can have very significant practical and commercial implications.

In the recent Merthyr Tydfil case [1], the Court of Appeal has confirmed that there is a fine, but hard, line as to when evidence of pre-contractual communications will, and will not, be allowed.

What are the key takeaways?

In this case the parties had entered a contract to create a fund for land restoration following mining operations. The mining company made no payments and the council applied to court to compel payment.  A dispute as to the meaning of the relevant contractual provisions arose.  The mining company sought to rely on pre-contractual communications to argue that no enforceable payment obligation had arisen.  The Court of Appeal rejected the mining company’s approach; focused on the wording and commercial purpose of the contract; and determined that outstanding sums in the £several millions were due immediately.  The following key takeaways arise:

• The Court of Appeal has confirmed that pre-contractual communications may be admissible to explain how a contract came about and/or its commercial aims…
• …but that such communications may not be adduced to aid the interpretation of particular contractual provisions.
• This rule applies not only to communications which reflect a party’s intentions or aspirations in relation to a contract…
• …but also to communications which are capable of showing that the parties reached a consensus on a particular point or words used in an agreed sense.
• Whilst the rule may seem harsh and unhelpful in one sense, in fact significant practical difficulties, uncertainty and a lack of predictability as to contractual interpretation would inevitably arise without it.

Practical advice

Commercial contracting parties and practitioners should note the following practical advice:

• Contracting parties should ensure, from the outset, that the contract is drafted to clearly and accurately reflect both parties’ intentions and understanding. Where any underlying pre-contractual assumptions, intentions or other information might assist with the proper understanding of a contract, these should be included within the contract’s ‘recitals’. All of this should minimise the scope for an interpretation dispute arising in the first place.
• If a dispute does arise, the starting point must be the wording of the contract itself. If there is real ambiguity, then commercial common sense can be taken into account and may assist with the interpretation exercise. In accordance with the Merthyr Tydfil case, pre-contractual communications may be adduced to demonstrate the genesis and aim of a contract (and an understanding of that may help a court to correctly construe a contract).
• If the wording in the contract is clear, but still it does not reflect a party’s understanding, there may have been a mistake in the drafting of the contract and there may be the potential to pursue a claim for rectification and/or professional negligence. Alternatively, if the provision was entered into in reliance on any misrepresentations, there may be some potential to have the contract set aside and financial compensation could be payable. In any of these scenarios, specialist advice will be required.
• It is rare for any contractual interpretation dispute to be clear cut, so it is always worth considering whether there is any scope for settlement. Interpretation disputes often arise by virtue of the fact that there is an ongoing contractual relationship between the parties, plus the litigation risk which is inherent in such cases can often be exploited in negotiations to encourage a commercial compromise. It is therefore usually in the interests of all concerned for the parties to an interpretation dispute to behave in a reasonable and commercially sensible manner.

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[1] 2019] EWCA Civ 526