Pre-contractual negotiations: rarely a gold mine

Published Date
Jun 3, 2019

The Court of Appeal in Merthyr (South Wales) Limited v Merthyr Tydfil County Borough Council provides a concise restatement of the circumstances in which pre-contractual negotiations may (and may not) assist in construing a contract. The case concerned the interpretation of an escrow agreement under which the mining company had to pay funds into an escrow account for restoration work that would need to be done following the closure of its coal mine.

The agreement was entered into as a condition to a corporate reorganisation of the mining company's holding structure, as a result of which the original parent company guarantee for restoration work had fallen away.

The local council argued the obligation under the escrow agreement was to pay GPB 625,000 into the account every quarter. The mining company argued the contractual language about the quarterly payment was permissive and the obligation was limited to depositing GBP 15m on the long-stop date.

The court agreed with the council on a literal interpretation of the provision - the words used were clear, making further interpretative enquiries redundant. Nevertheless, the judgment also considered in detail the argument "put at the forefront of the grounds of appeal" that the "genesis" of the disputed provision supported the mining company's interpretation. This analysis serves a reminder that the circumstances in which English courts will be willing to take into account evidence of pre-contractual negotiations are few and far between.

The mining company sought to rely on a passage, put in identical terms in two pre-contractual documents, one prepared by it and one by the council, purportedly showing consensus as to its preferred meaning of the disputed provision. This was held to be contrary to the so-called "exclusionary rule", which prevents evidence of what was done or said in the course of the negotiations, even when capable of showing consensus, from being used to infer what the provisions of the contract should be understood to mean.

What the exclusionary rule does not prevent is the using of evidence of the contract's negotiations to establish the "genesis" and objective "aim" of the contract as a whole (as opposed to a particular provision, as was the mining company's contention). There may of course be borderline cases where the distinction is hard to draw, but this was not one of them, the commercial objective of the contract as a whole clearly being to secure funds for restoration works.

The exclusionary rule likewise does not prevent parties from using evidence of contractual negotiations for the purpose of establishing that a fact relevant to the interpretative exercise was known to the parties, to support a claim of estoppel by convention, or to establish a claim for rectification. These uses are not exceptions to the rule, but operate outside of it. It is therefore important to bear in mind that, despite its inadmissibility in this and many other cases, evidence of negotiations can be relied upon before the English courts in appropriate circumstances.

Content Disclaimer
This content was originally published by Allen & Overy before the A&O Shearman merger