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30 April 2019
In Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council,(1) the Court of Appeal reiterated that while evidence of pre-contractual negotiations can be adduced to demonstrate how a transaction came about or what its commercial aims were, it cannot be adduced to aid the interpretation of the contractual provisions themselves.
The appellant company, Merthyr (South Wales) Ltd, operated open cast coal mining in South Wales. The respondent was the local planning authority, Merthyr Tydfil County Borough Council. In 2005 the council granted planning permission for mining operations on the condition that the land would be restored following the conclusion of those operations.
On 21 December 2015 the mining company, the council and HSBC Bank Plc entered into an escrow account agreement to create an escrow fund to secure £15 million for land restoration.
Clause 4.2(a) of the agreement provided that:
subject to clause 4.2(b) and (c), on each [quarterly funding date] the Company [the mining company] shall deposit an amount equal to £625,000 (as adjusted pursuant to clause 4.2(b) and (c)) into the account.
Clauses 4.2(b) and (c) provided that if a deposit or consecutive deposits were missed, the amount due on the following funding date would increase by the amount outstanding.
Clause 4.2(d) provided that if a deposit was not made on the final funding date, the company must pay the council the full £15 million by 30 June 2022 (which was the contractual longstop date).
The mining company made no deposits into the escrow account. The council applied for specific performance to compel the company to make the deposits.
The council was granted summary judgment for the accrued amounts due under the agreement and the mining company was ordered to pay the outstanding quarterly payments of £6.25 million into the escrow account.
The mining company appealed on the ground that Clause 4.2 of the escrow agreement did not create an enforceable obligation to pay any money into the escrow account until the contractual longstop date.
In support of its interpretation of Clause 4.2, the company sought to rely on a passage which appeared in certain pre-contractual documents. The gist of the passage was that if the company was unable to meet a quarterly payment, outstanding payments would be rolled forward, with the full £15 million being deposited into the escrow account by the longstop date.
The Court of Appeal analysed the applicable legal principles on the admissibility of evidence of pre-contractual negotiations. It concluded that pre-contractual documents may explain the commercial or business object of a contract, but that a party may not use pre-contractual communications as evidence of what the contract should be understood to mean, nor can that evidence be used to try to demonstrate that the parties reached a consensus on a particular point or used words in an agreed sense.
The Court of Appeal accepted that these pre-contractual documents could be adduced as evidence of the escrow agreement's commercial purpose. However, the court found that the passage cited by the company shed no light on that matter and that it had instead been introduced only to support the company's interpretation of Clause 4.2.
Accordingly, the Court of Appeal held that the passage was inadmissible by virtue of the exclusionary rule and, even if it were admissible, it would provide no guidance as to Clause 4.2's meaning, since the passage contemplated a scenario where the company was unable (rather than unwilling) to pay.
Without reference to the pre-contractual documents, the Court of Appeal held that the appellant mining company was obliged to pay the outstanding sums immediately, because:
(a) The interpretation of the contractual provision put forward by the company was inconsistent with the language of clause 4.2, where the use of terms such as 'shall', 'fails to pay', 'payable' and 'outstanding' signified that payment of sums into the escrow account on a funding date was intended to be a legal obligation, and not a matter of choice;
(b) the company's interpretation would defeat the commercial purpose of the escrow account, which was to build up a fund of money for land restoration while coal mining activity was being carried on; and
(c) it was contrary to business common sense that a sum due from a contracting party would cease to be due because the paying party chose not to pay on the agreed date.
If such a confirmation is necessary, this case confirms that the English courts continue to take a doctrinal approach to contractual interpretation. In particular, this decision confirms and reiterates the robustness of the exclusionary rule and provides a helpful illustration of the almost imperceptible distinction between using evidence of pre-contractual communication to shed light on the business aim of a contract (on the one hand) and to interpret the meaning of a contractual provision (on the other).
For further information on this topic please contact Geraldine Elliott or Matthew Evans at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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