Funny things, contracts. They start their lives in a honeymoon of smiles and happy expectation, as the parties individually believe their interests have been buttoned down firmly and fortified with ‘hoops of steel’. But time passes, events happen, and the document is eventually pulled out of a dusty cupboard to see what it actually says. Then lawyers are brought in and instructed from different sides to pore microscopically over words in the contract, words which now seem to mean different things to different parties.

C’est la legal vie, but when textual ambiguities like these arise, is it not reasonable to bring into play the pre-contract discussions to try and get a handle on parties’ intentions at the time? Perhaps, for the purposes of negotiations and discussions, but not if the matters come before the courts. This was reinforced recently by the House of Lords, when on 1 July 2009 in Chartbrook Limited and anor v Persimmon Homes Limited and anor [2009] UKHL 38 the Lords reaffirmed the rule confirmed in Prenn v Simmonds [1971] 1 WLR 1381 that pre-contractual negotiations are inadmissible.

Why so? Lord Hoffman noted that ‘the admission of pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration’, and everyone ‘engaged in the exercise would have to read the correspondence, and statements would have to be taken from those who took part in oral negotiations’. Not only ‘would this be time-consuming and expensive but the scope for disagreement over whether the material affected, the construction of the agreement… would be considerably increased’.

Lord Hoffman pointed out that the rule ‘reflects what may be a sound practical intuition that the law of contract is an institution designed to enforce promises with a high degree of predictability and that the more one allows conventional meanings or syntax to be displaced by inferences drawn from background, the less predictable the outcome is likely to be’.

And while ‘the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute’. Lord Hoffman referred to the analogous experience concerning Hansard under the principles in Pepper v HartK [1993] AC 593. He observed that this ‘suggests that such evidence will be produced in any case in which there is the remotest chance that it may be accepted and that even these cases will be only the tip of a mountain of discarded but expensive investigation'. In the circumstances, the Lords declined to exercise their power under Practice Statement (Judicial Precedent) [1966] 1 WLR 1234 to depart from ‘a rule which has been in existence for many years and several times affirmed by the House’.

Nevertheless, Lord Hoffman did mention two ‘legitimate safety devices’ which, he observed, ‘will in most cases prevent the exclusionary rule from causing injustice’. These are rectification and estoppel by convention. However, he warned, these have to be specifically pleaded and clearly established. In Lord Hoffman’s view, these remedies both fall outside the exclusionary rule ‘since they start from the premise that, as a matter of construction, the agreement does not have the meaning for which the party seeking rectification or raising an estoppel contends’.

As to estoppel, if ‘the parties have negotiated an agreement upon some common assumption, which may include an assumption that certain words will bear a certain meaning, they may be estopped from contending that the words should be given a different meaning'. And as for rectification, per Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71, the party seeking rectification must demonstrate four things. These are that:So when it comes to dragging those dusty contracts to court, one cannot play at being Lewis Carroll’s Humpty Dumpty, who scornfully observed to Alice: ‘When I use a word… it means just what I choose it to mean – neither more nor less.'

  • ‘the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
  • there was an outward expression of accord;
  • the intention continued at the time of the execution of the instrument sought to be rectified;
  • by mistake, the instrument did not reflect that common intention.’

The Lords take a very different view, noting (per a previous decision in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896) that the principles by which ‘a contract (or any other instrument or utterance) should be interpreted’ are well known and the issue is ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’.

The House will ‘not easily accept that people have made linguistic ­mistakes, particularly in formal ­documents’. So, apart from the ­exceptions mentioned, evidence of pre-contract negotiations and ­discussions remains out of court.

Nicholas Dobson is a practising solicitor specialising in local government