Spoiler alert, it’s actually a really important decision that could impact all New Zealand contracts, particularly if things don’t go as planned.
The brief background is that two significant coal mine investors/operators, Bathurst Resources and L&M Coal, have been involved in a contractual dispute about the development of a coal mine on the West coast of New Zealand’s South Island.
While clearly important to the parties (L&M was claiming USD$40 million), the reason everyone who does business in New Zealand should pay attention is the Supreme Court’s findings regarding whether “extrinsic evidence” (i.e. material outside the contract itself) should be taken into account when deciding what the parties actually agreed to, and so what a contract means.
We’ve summarised its 88 pages of goodness here.
Prior to this decision, New Zealand law was a little unclear about the admissibility of extrinsic evidence, and how terms could be implied into contracts.
The Supreme Court’s decision clarifies that extrinsic evidence can be used in contractual interpretation, but only if it is relevant, which is governed by the law of contract focused through the lens of the Evidence Act. Essentially, whether extrinsic evidence is admissible when assessing what a contract means, is an evidential issue.
The Court’s main finding was extrinsic evidence is admissible if it:
- “has a tendency to prove or disprove anything of consequence to determining the meaning the contractual document would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract”; and
- is not otherwise excluded, primarily because its probative value is outweighed by the risk that it will be unfairly prejudicial or needlessly prolong a proceeding.
So what does that mean for the most common types of ‘extrinsic evidence’?
- Prior negotiations: these are generally considered to be relevant, if they showed a common understanding or help an objective assessment of what a contract means, but material relating to your subjective intention or belief is unlikely to be.
- How you have acted: again, if your actions when you’re just getting on with the commercial deal can help an objective assessment of what the contract means, those actions will be relevant.
Thankfully the Court reaffirmed the principle that if, on an objective basis, a strict interpretation of a contract’s words produces a commercially absurd result, it’s unlikely that’s what the parties could have intended, and so the Court may look for a different interpretation.
That’s all well and good, but what if a contract doesn’t deal with an issue that has cropped up. Luckily the Court also clarified the approach to implying terms into a contract. It confirmed that the bar to imply a term into a contract is a high one, and it must also be:
- Reasonable and fair to do so;
- Necessary to imply the term to ensure the contract makes commercial sense;
- So obvious the term goes without saying;
- Must be capable of clear expression; and
- Not contradict any express term in the contract.
Whether a term should be implied or not must be assessed objectively, which takes the contract wording as the starting point. Terms cannot be implied where a contract deals with the eventuality.
The Court has not however given parties to an agreement a get out of jail free card, just because they don’t like the result. The Supreme Court found that, although its decision appeared to be harsh on L&M, it was an experienced coal mine investor who should have known better and was stuck with the wording of the contract itself.
What does this mean in practice?
Unsurprisingly, contract wording is really important. You need to negotiate an agreement that reflects the deal you think you are doing, because it’s likely you’ll be stuck with any agreement you sign.
Your negotiations are likely to be relevant when looking at what a contract means, so ensure you set out your position clearly.
How you have acted during the term of the agreement is also relevant, so be careful. Admissions will count against you, as will acting in a way that now doesn’t suit you.
If you are concerned about an agreement or delivery under that agreement, you should probably check with a lawyer before you fire off an email to the other side.
Social media image credit: Kelly Sikkema
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