by Ms Lorna Richardson, Senior Lecturer in Commercial Law
Scots law, like English law, generally prohibits the use of pre-contractual negotiations when interpreting a contract. This is in contrast to the position in many civilian systems where such negotiations are taken into account in determining what a contract means. The DCFR also permits reference to pre-contractual negotiations, as part of the circumstances in which the contract was entered into, when interpreting a contract (Art II-8:102(1)). The exclusion of such evidence in Scots law is not however absolute and it can be referred to in certain circumstances, for instance, to show that a fact was known to both parties at the time of contract formation, such fact forming part of the “factual matrix” against which the words of the contract must be considered.
Entire agreement clauses are common “boilerplate” clauses in commercial contracts. Their effect is generally to prevent either of the parties from claiming that the written contract entered into between them does not include all of the terms of their agreement (see Contract (Scotland) Act 1997 s1(3)).
In a recent Outer House decision, Dragados (UK) Ltd v DC Eikefet Aggregates AS ([2021] CSOH 117; 2021 GWD 39-518), the court had occasion to consider both of these matters.
Facts
The parties were in a contract in terms of which the defender was obliged to deliver amourstone to the pursuer for use in the pursuer’s construction work on the Aberdeen Harbour expansion project. A dispute arose as to the stone delivered in performance of the contract. The contract expressly provided for Category A stone. The defender had delivered category B stone. The defender’s position was that category B stone was required, notwithstanding the express terms of the contract, when regard was had to the parties’ pre-contractual discussions. The defender argued that the parties’ shared understanding was that category B stone was to be supplied.
Decision
The defender’s argument was given short shrift by the Lord Ordinary (Braid). He began by noting that there was no fundamental disagreement between the parties as to the law, which had most recently been re-stated in Luminar Lava Ignite Ltd v MAMA Group plc [2010] CSIH 1; (2010 SC 310). The general rule was that a court would not have regard to statements of parties or their agents in the course of negotiation of a contract as an aid to interpretation of the words which the parties had used in their final version of the contract, which alone expressed their consensus (Dragados, para 15). However, he noted that the rule was not absolute: evidence of the factual background was relevant where there were facts known to both parties and those facts could cast light on either (i) the commercial purpose of the transaction, objectively considered; or (ii) the meaning of the words used in the contract (para 15). Lord Braid was of the view that the evidence the defender wished to lead would be inadmissible. The defender was seeking to ascertain the proper construction of the contract by reference to what the parties thought it meant, to be gleaned from examining communications between them before and after the contract was formed. Evidence of subjective intention was not relevant to the objective meaning of the words of the contract. The defender had not offered to prove background facts known to the parties as an aid to construction (para 16).
In relation to evidence of prior communings, Lord Braid questioned how the court’s task in construing a contract, which expressly required the supply of category A stone, would be assisted by knowing that in pre-contractual negotiations the parties had referred only to category B stone? Such an inquiry would simply add time, expense and confusion (para 17). Such evidence might have been relevant to an action for rectification (in terms of which one of the parties asks the court to alter the terms of the written contract to accurately reflect the agreement between the parties that has not been captured in the written contract as entered into) but no such action was pled.
Lord Braid concluded by noting that the entire agreement clause, which provided that neither party had relied on any prior representation by the other in entering into the contract, precluded reference to any other document or representation in ascertaining its meaning (para 18).
Discussion
In this case Lord Braid took a strict line as to the admissibility of the parties’ pre-contractual communications. As they did not go to show facts that were known to both parties at the time the contract was entered into they were inadmissible for the purpose of interpreting the contract (a similarly strict approach was recently taken by the English Court of Appeal in Schofield and Ors v Smith and Ors [2022] EWCA Civ 824). For the judge there was a clear divide between interpretation and rectification. This will be welcomed by many. Yet, the stance taken is more stringent than the existing authorities suggest. Pre-contractual communications can form part of the relevant background circumstances when they show the objective meaning of the words used. They may also be used to show that a particular word or phrase was understood as having a particular meaning by the parties (see the New Zealand Supreme Court case, Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 referred to with approval in The Centre for Maritime and Industrial Safety Technology v Ineos Manufacturing Scotland Ltd [2014] CSOH 5). While it is unclear from the reported judgement perhaps it was the nature of the evidence that influenced Lord Braid. Some of the evidence that the defender sought to lead related to previous draft contracts. Such evidence has been held to be inadmissible in that what the parties did not agree to is unhelpful in interpreting the contract that they did agree to (Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101). It however appears that the defender intended to lead some further evidence of pre-contractual negotiations but what those were is unclear from the judgement (Dragados, para 10).
One also questions the extent to which the entire agreement clause precluded reference to the parties’ prior negotiations for the purpose of interpretation. While the effect of an entire agreement clause depends upon the precise terms of the clause in question (MacDonald Estates plc v Regenesis (2005) Dunfermline Ltd [2007] CSOH 123; 2007 SLT 791) it is not apparent that the clause in this case should have had the effect of excluding reference to the factual matrix for the purpose of interpreting the contract (see ADLAQ Ltd v Scottish Power Energy Retail Ltd [2016] CSOH 162; and Gatsby Retail Ltd v The Edinburgh Woollen Mill Ltd [2019] CSOH 49). As noted above, the general purpose of an entire agreement clause is to prevent a party from seeking to lead evidence that there are terms of the contract, other than those set out in the written document containing the entire agreement clause. Section 1(3) of the Contract (Scotland) Act 1997 provides that where one of the terms in the document is to the effect that the document comprises all the express terms of the contract, that term shall be conclusive in the matter. Generally such clauses do not exclude all reference to extraneous material, although an entire agreement clause can be drafted so widely that no reference can be made to matters beyond the terms of the contract itself (see NHS 24 v Capgemini UK plc [2015] CSOH 54).
In this case the court held that pre-contractual negotiations had a very limited role in interpretation and that they were not admissible as evidence to interpret this contract. It has been said that there may be uncertainties between the boundaries of the rule excluding prior communings. Here Lord Braid took what might be described as a “traditional” stance to the matter, but one which did not take account of more recent, albeit non-binding authority in The Centre for Maritime and Industrial Safety Technology v Ineos Manufacturing Scotland Ltd ([2014] CSOH 5).
