Pre-Contract Material: When Can You Rely On It As Aid To Interpretation?
The vital importance of ensuring all key information is expressly included in your commercial contract documents cannot be underestimated in view of the recent, but unsuccessful, attempts of one party to rely on pre-contract material.
In this case1, the court clarifies the limits to which a business can rely on pre-contract negotiations and material to support their arguments in the case of a contractual dispute.
What happened in this case?
A dispute arose in relation to the commercial arrangements between a local authority and an open cast mining company in Wales. The company was granted planning permission for mining works on condition that, once the works were completed, it paid for the restoration of the site.
The company later agreed to make quarterly payments into a cash escrow account fund for the restoration costs. Under the escrow agreement, if a payment was missed - the next quarterly amount due would increase by the amount outstanding, and if the final payment was missed, the full amount due was to be paid by a long-stop date.
However, no deposits were made by the company and the local authority asked the court for an order for specific performance compelling the company to make the payments.
Despite what appeared to be, on the face of it, clear contractual obligations, the company sought to rely on pre-contract negotiations and documentation to argue that it was under no enforceable obligation to pay any money into the escrow account. Particularly, the company referred to a passage in its proposal for the escrow account arrangements to the effect that should the company be unable to make a quarterly payment, it could roll it forward (subject to full payment by the longstop date).
The Court rejected this argument on the basis of business common sense. The result was an interpretation that was not consistent with the language of the clause, in what was a professionally draft contract, and made no commercial sense at all.
And what of the attempts to rely on the pre-contract proposal? The company attempted to convince the court that evidence of pre-contractual negotiations is admissible to show the ‘genesis’ and objective ‘aim’ - not just of the transaction as a whole but of a specific provision.
The Court disagreed and found the material to be inadmissible as an aid to interpretation. It could consider pre-contract negotiations and documents to determine what the surrounding circumstances were at the time of the contract to understand the genesis and commercial aim of the transaction as a whole - but not for the purpose of understanding what the contract or a specific clause was supposed to mean. The company was ordered to pay £6,250,000 into the escrow account.
What does this mean for businesses?
Businesses need to note that only in limited situations can they bring up discussions with the other party to a dispute and other pre-contract material to bolster their argument over a contract.
This means it is prudent to incorporate all important elements of those discussions into your final contractual arrangements – otherwise you are unlikely to be able to rely on them in order to interpret the meaning of a specific clause.
You should also ensure that all your contracts terms are clear and unambiguous to minimise the risk of an expensive dispute.
1 Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council [2019] EWCA Civ 526
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