What evidence will the court consider when determining the terms of a contract?
Fraser King |  25/10/2021

Contracts can be made orally or in writing, or a combination of both. There are specific types of contracts that must be made in writing, such as contracts for the disposition of land. A common problem that leads to legal disputes is determining the essential terms of the contract. This article will discuss which material that the court will consider when determining those contractual terms.

Broadly speaking, the prerequisites to forming a contract are:
1. An offer and an acceptance;
2. An intention to be immediately and legally bound;
3. Certainty as to essential terms[1]; and
4. Valuable consideration is given.

Originally the courts looked solely at the plain and ordinary meaning of the words contained within the contract to determine the terms of the contract. The court looked at the exact words used and the ordinary meaning of those words in isolation – any factual background or subjective intention of the parties is irrelevant.

However, in recent years the court has started to consider other relevant facts to interpret and determine the terms of the contract. This is called the matrix of facts. Lord Hoffmann described the matrix of facts as:

“includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.”[2]

The courts began to inquire beyond the contract’s words to see what the circumstances were with reference to the words that were used, and the object that the person using them had in mind.[3]

One of the leading cases on contractual interpretation is Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy Ltd [2002] 2 NZLR 433, (2001) 7 NZBLC 103,477, 2001 WLA document called a Heads of Agreement was signed on behalf of Fletcher Challenge Energy Ltd and Electricity Corporation of New Zealand Ltd. The judges determined that the Heads of Agreement was valid and there was a binding contract for the sale and purchase of gas. The court looked at whether the negotiating parties intended the product of their negotiation (Heads of Agreement) to be immediately binding upon them, either conditionally or unconditionally. When looking into whether the Heads of Agreement was binding, the court stated that the established rule is that in interpreting a contract it is permissible to look to the factual matrix, but that evidence of negotiations and statements of subjective intention must be disregarded.

Another influential case that discusses contractual interpretation is that of Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5. Vector Gas Ltd entered into an informal agreement contained in an exchange of letters to supply gas to Bay of Plenty Energy Ltd at a price of $6.50 per gigajoule. The question arose whether or not this price included transmission costs.

Tipping J considered what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean and stated that the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.
 

Tipping J went on to state that the “appropriate contextual meaning, if disputed, will, almost invariably, involve consideration of facts and circumstances not apparent solely from the written contract. While displacement of an apparently plain and unambiguous meaning may well be difficult as a matter of proof, an absolute rule precluding any attempt would not be consistent either with principle or with modern authority.”

Wilson J found that “the general principle is that words of an enforceable commercial contract should be given their ordinary meaning in the context of the contract in which they appear, because the parties are presumed to have intended the words to be given that meaning. This general principle is however subject to three exceptions, which permit the consideration of evidence extrinsic to the contract to aid in its interpretation, and to the possibility of rectification.”

a) The first exception is that, if there is ambiguity within a contract because the words are not clear or because of internal conflict, resort can and indeed must be had to material outside the contract to resolve the ambiguity. The extrinsic material is objectively assessed;

b) The second exception is that if the meaning makes no commercial sense, it must yield to an interpretation which is commercially sensible;

c) The third exception is that a party asserting that the words of the contract should carry their ordinary meaning may be estopped by convention from doing so, if that would be a departure from the parties’ common understanding that the words were not to carry their ordinary meaning.

However, whether the matrix of facts is required to supplement the plain and ordinary meaning of a contract can be case dependent. For example, the case of Malthouse Ltd v Rangatira Ltd [2018] NZCA 621 concerned whether an implied term could be read into a contract. The court took into account the matrix of facts and found that it was not appropriate to depart from the natural meaning of the contractual words in that case. Further, in Technix Group Ltd v Fitzroy Engineering Group Ltd [2011] NZCA 17 the court held that the plain and ordinary meaning of the contract could not have been what the parties intended given it flouted commercial sense. So the contractual term containing the words “at any time during the lease” was modified to enable the option to purchase in a lease to be exercised and not frustrated by an attempted subsequent trigger of a pre-emptive right of purchase.

Conclusion

Initially the courts would not look past the plain and ordinary meaning of the language used within the contract. However, in more recent times, the courts have started looking at the surrounding facts – but only if there was ambiguity in the contract’s words. Then came cases such as Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy Ltd where the court considered material other than the written contract, however the court would not give weight to subjective evidence (what one party considered the situation to be at the time).

The court in Vector Gas Ltd v Bay of Plenty Energy Ltd confirmed that the wording of the contract is to be interpreted as it would be by a reasonable person with full knowledge of the circumstances in which the contract was made and that an objective approach was taken. The court in Vector Gas Ltd confirmed that the general principle is the plain and ordinary meaning, but there are three exceptions (ambiguity, the contract makes no commercial sense, the plain and ordinary meaning departs from the parties’ common understanding that the words were not to carry their ordinary meaning). This shows that there has been progress over the years and the court will consider the matrix of facts for reasons other than ambiguity, the court now considers the commercial context in which the agreement was made when interpreting a contract. When the courts are considering the evidence, that evidence must be reasonably relevant, and it must be objective.

If there is a dispute as to the contractual terms, the courts will consider whether the matrix of facts applies or whether the plain and ordinary meaning of the contract is to be given. If you would like any advice on the terms of your contract and what material the court will take into account, please contact McKenna King to discuss it further.

 

[1] A term is to be regarded by the parties as essential if one party maintains the position that there must be agreement upon it and manifests accordingly to the other party. Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy Ltd [2002] 2 NZLR 433, (2001) 7 NZBLC 103,477, 2001 WL

[2] Investors Compensation Scheme Ltd v West Brunswick Building Society [1998] 1 WLR 896.

[3] Prenn v Simmonds [1971] 1 WLR 1381 at pp 1384.