So said the March Hare to Alice at the Mad Hatter’s tea party, in her Adventures in Wonderland. This is sound advice that is not always heeded by those who draft commercial contracts. The common law courts have long wrestled with the extent to which pre-contract negotiations and discussions between the parties, or their personal understandings and aspirations, may to be used to determine what the contract actually means. This issue has come again before the English Court of Appeal in the recent case of Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council which confirms that whilst it is permissible to take into account pre-contract material for the limited purpose of understanding the genesis and commercial aim of the transaction as a whole, it may not be taken into account for the purpose of construing a particular contractual provision. This is a fine line that may be virtually invisible in practice.
Such material is excluded, not because it is irrelevant, but because of the practical difficulties and uncertainties that would arise were it to be admitted in evidence in the construction of the contractual provisions themselves. The Merthyr case involves a mining company’s obligation to restore land after cessation of mining works, and to provide funds for that purpose. The contract provided for payment of the funds in specified installments, with provision for roll-over of missed installments, and payment of any outstanding balance by a specified date. The company paid no installments, and the Council sought specific performance of the obligation to pay them. The company argued, in effect, that having regard to the provisions of the contract relating to missed installments, payment of the installments was optional and not an enforceable obligation.
The Court at first instance found for the Council and the Court of Appeal agreed. The Company’s argument was rejected, both on the construction of the wording of the contract relating to the Company’s obligation to pay the installments, and having regard to business common sense. The Company’s argument that it could rely on pre-contract material in the form of sections of its proposal for the contract and the Council’s acceptance of that proposal, to support its interpretation of the contract, was also rejected, in effect on the ground that to allow the company to do so, would fall on the wrong side of the invisible line. The moral is clear: if you want to rely on background pre-contract material or on assumptions as an aid to understanding the intended operation of a contractual provision, set them out in the recitals to the contract. Better still, specify in detail and with clarity in the operative provisions of the contract precisely how they are to operate - and always heed the advice of the March Hare.