Shona Foster
James & Wells
A recent decision of the Supreme Court heralds a significant shift in the rules of contract interpretation in New Zealand.
In Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277 (SC), New Zealand's highest court held that evidence of subsequent, i.e. post-contractual, conduct may be admitted as an aid to interpretation of a written contract, whereas it had previously been admissible only for rectification, formation and estoppel.
The general rule of interpretation
The general rule regarding interpretation of a written contract in New Zealand is this: the parties' intention is that which would have been held by a reasonable person in possession of all the background facts that would reasonably have been available to the parties at the time of contracting. This means that the test is an objective one and the subjective intention of either party is irrelevant.
The objective intention of the parties is to be ascertained by giving words their natural and ordinary meaning, and in some circumstances referring to the "matrix of fact" surrounding the signing of the contract.
Subsequent conduct
However, the matrix of fact has not, until recently, extended so far as to include subsequent conduct, on the basis that the court's role is to establish the parties' intention at the time of contracting rather than after signing the contract.
For some time, New Zealand courts appear to have been open to change on this issue, with the Court of Appeal noting as far back as 1996 that admitting evidence of subsequent conduct would accord with international practice. As a result, there was fertile ground for reconsideration of the issue when the Supreme Court heard Gibbons v Wholesale Distributors.
The decision in Gibbons v Wholesale Distributors
The factual situation in Gibbons v Wholesale Distributors was a complex one involving leasehold interests in land. Although it was not strictly necessary for the Court to deal with the issue of subsequent conduct, several members of the Court took the opportunity to consider the issue at length.
The majority held that such evidence does not negate the rule against subjectivity because it provides objective evidence of the parties' actual intentions. One of the two minority members reserved his position and the other remained silent on the issue.
Some key principles can be distilled from Tipping J's judgment:
(1) Unless there are strong policy reasons to the contrary, the Court should admit material which may be helpful in ascertaining the parties' intention.
(2) Extrinsic material must shed light on the shared intention of the parties. Material which only sheds light on the meaning intended or understood by one party should be excluded.
(3) Shared or mutual post-contractual conduct may be admitted if it is objectively capable of shedding light on the words in dispute.
However, Thomas J did not agree that conduct need always be shared in order to be admissible: "Conduct which is not, and has not been, 'shared' or 'mutual' may nevertheless point to a meaning contrary to the meaning later asserted by one of the parties. That party has acted inconsistently with the meaning it seeks to persuade the court to place upon the contract. The value of the evidence stems from the inconsistency."
Thomas J also appeared to suggest that a similar approach might apply to pre-contractual conduct.
Conclusion
Contracting parties should be aware that under New Zealand law, any conduct that can illustrate the parties' intention, whether pre- or post-contractual, is now potentially admissible before a court that is asked to interpret their contract.
James & Wells
Level 9 James & Wells Tower, 56 Cawley Street, Ellerslie
Private Bag 11907, Ellerslie, Auckland, New Zealand
Tel: +64 914 6740
Fax: +64 914 6760
Email: shonaf@jaws.co.nz