The Court of Appeal reaffirmed the exclusionary rule that evidence of parties' prior negotiations is inadmissible as an aid to construction of a contract and resoundingly rejected an attempt to carve out an exception to this rule on the basis that evidence as to the genesis and object of a provision was admissible (on which there had been conflicting High Court dicta). The judgment of Leggatt LJ provides a principled distinction between evidence of background facts (that may be referred to in negotiations), which illuminate the commercial object of a contract, and evidence which is sought to be admitted to clarify what the parties meant by the words they used.
MSW is a mining company. It operates the largest open cast mine in Europe at Ffos-y-Fran, just outside Merthyr Tydfil. It carries out this activity pursuant to planning permission which provides for restoration of the land, and aftercare obligations. In addition, it entered into a section 106 planning obligation with the Council which set out those restoration obligations in detail.
In December 2015, it entered into an Escrow Account Agreement ("the Agreement") by which it agreed to pay quarterly instalments of £625k into an escrow account. The schedule of payments provided for a total sum of £15m to be deposited into the account by 30 June 2022. It was agreed that the purpose of this fund was to provide partial security for MSW's restoration obligations.
MSW failed to pay the sums due under the Agreement. Accordingly, the Council brought proceedings for specific performance. By their Defence, MSW argued various points, including:
(a) that the operative payment provision in the Agreement permitted a 'roll over' such that a missed payment, would be rolled over into the next quarterly sum due, rather than creating a breach capable of enforcement;
(b) that there had been an excess of authority on the part of MSW's former directors in executing the Agreement; and
(c) that the Agreement should be set aside for undue influence.
The Council applied for summary judgment. HHJ Keyser QC, sitting as a Judge of the High Court granted its application:
In the course of that hearing, MSW argued that evidence of the parties' pre-contractual negotiations was admissible in or to construe the relevant provision. In particular, they sought to rely upon documents that referred to the payment obligation being 'rolled forward' "in the unlikely event MSW were unable to pay" a relevant quarterly instalment. That wording was not used in the final provision, nor was it MSW's case that it was "unable" to pay.
In rejecting the various arguments advanced by MSW, Judge Keyser QC held that evidence of the parties pre-contractual negotiations was inadmissible as an aid to construction of the relevant provisions. He doubted some judicial dicta suggesting that such negotiations could be referred to as the 'genesis and object' of a provision, and considered that unlikely to be helpful. Moreover, he concluded that in any event the documents sought to be relied upon were unhelpful as they dealt with a different scenario: MSW being unable to pay.
MSW appealed to the Court of Appeal on the construction issue alone. In dismissing its appeal, Leggatt LJ delivered a judgment with which Longmore LJ and David Richards LJ agreed:
(a) One should usually start with an analysis of the words used in the Agreement. MSW's textual argument essentially required not just that a new 'rolled forward' obligation was created upon each quarterly payment that was missed, but that the prior quarterly obligation was either reduced or extinguished. There was nothing in the language of the provision that provided for this. Moreover, it made no commercial sense at all.
(b) The decision of the Supreme Court in Arnold v Britton  UKSC 36 signalled a need for caution in relying on considerations of commercial common sense in interpreting contracts. However, in the current context, that caution was unnecessary as it did not affect the clear meaning of the words used. In any event, the argument that one obligation should be extinguished for another here was an irrational intention to attribute to the parties.
(c) The logical extension of MSW's argument was that there was only one enforceable obligation: to pay £15m by the funding longstop date. This would defeat the commercial purpose of the Agreement.
(d) The payment provision was clumsily worded and could be considered to contain surplusage on either of the competing analyses. Leggatt LJ restated judicial dicta that the presumption against surplusage was of little value in the interpretation of commercial contracts. Further, he adopted what Sir Kim Lewison had said on the point: "an argument based on surplusage cannot justify the attribution of a meaning that the contract, interpreted as a whole, cannot bear."
(e) The parol evidence rule prevents reliance upon the parties' negotiations as an aid to the written contract they finally reached. In the most notable passage of his Judgment, Leggatt LJ considered the provenance of the exception to the general exclusionary rule that evidence of the 'genesis and aim' of a contract was admissible. MSW contended that this exception also permitted reliance upon negotiations to explain the genesis and aim of a provision within a contract. They relied upon judicial dicta to this effect in Investec Bank (Channel Islands) Ltd v The Retail Group Plc  EWHC 476 (Ch) and Jones v Bright Capital Ltd  EWHC 3151.
Leggatt LJ rejected this argument:
i. "It is established law that, as stated by Lord Wilberforce in Prenn v Simmonds  1 WLR 1381, 1384-5, previous documents may be looked at to show the surrounding circumstances and, by that means, to explain the commercial or business object of a contract."
ii. "What is not permissible, as the decision of the House of Lords in the Chartbrook case confirms, is to seek to rely on evidence of what was said during the course of pre-contractual negotiations for the purpose of drawing inferences about what the contract should be understood to mean. It is also clear from the Chartbrook case that it is not only statements reflecting one party's intentions or aspirations which are excluded for this purpose but also communications which are capable of showing that the parties reached a consensus on a particular point or used words in an agreed sense. The exclusion of such evidence was justified in the Chartbrook case, not on the ground that it will always or necessarily be irrelevant, but because of the costs and other practical disadvantages that would result from relaxing the rule and because the "safety devices" of rectification and estoppel will generally prevent the exclusionary rule from causing injustice."
iii. "...there may be borderline cases in which the line between referring to previous communications to identify the "genesis and aim of the transaction" and relying on such evidence to show what the parties intended a particular provision in a contract to mean may be hard to draw. The present case, however, is not one of them."
A copy of the judgment can be found here.
Matt Hutchings QC and Shomik Datta represented the Council, instructed by Geraint Morgan of Merthyr Tydfil County Borough Council.