Keeping up with contract law

In the past few years the appellate courts in New Zealand, Australia and England and Wales have revisited, reviewed or revised some important principles of contract law. Differences in approach have emerged and there have been advances and retreats in certain areas.

Lawyers are well advised to keep up with these changes and trends. So, a forthcoming ADLS seminar on contract law, is timely.

Contractual interpretation

It might have been thought that enough has been said on the subject of contract interpretation in the five separate judgments delivered by the Supreme Court in the case of Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC). While differences in approach are discernable, it can be said that all the Judges considered that ascertaining the commercial purpose of a contract to be central to the interpretative task.

There was general consensus that in searching for the commercial purpose a wide range of contextual and extrinsic material can be taken into account, including evidence of pre-contractual negotiations. It was also confirmed that it is legitimate to rely on such material, even though there might be no ambiguity in the language used in the contractual document itself. In Tipping J’s view, even evidence of subsequent conduct, which may not be mutual, can be relevant to the construction of a contract.

So, why is it necessary to focus on commercial purpose? The language used by the parties must be understood in its context and commercial setting. The parties may have used words to mean something other than their plain meaning. Further, in cases where the adoption of the ordinary meaning of the words will lead to a commercially absurd result the plain language must yield to commercial common sense.

Four years after Vector, the Supreme Court more or less followed the same approach in Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2015] 1 NZLR 432 (SC), although on this occasion the Chief Justice and William Young J preferred not to say any more about the principles of contract interpretation.

In the relatively recent English Supreme Court decision of Arnold v Britton [2015] UKSC 36, [2015] AC 1619, the Law Lords cautioned against the risk of rewriting the parties’ bargain by resort to the concept of commercial common sense: the difference between a commercially absurd deal and an unwise bargain may only be a matter of degree. Where the line should be drawn is far from clear.

Does Arnold signal a retreat? Where to from here?

Interpretation of public instruments

An important related issue is whether the Vector approach should apply to the interpretation of public documents such as those appearing on the Land Transfer register.

The High Court of Australia decided in Westfield Management Ltd v Perpetual Trustee Company Ltd [2007] 233 CLR 528 that in such cases the approach to the interpretative task should be different. It held that extrinsic material not identifiable on a public register should not be taken into account. It reasoned that such material is not information which will ordinarily be known to third parties or successors in title.

The Australian approach has not been followed in New Zealand or the UK. At this stage, however, it remains unclear what the New Zealand Supreme Court may decide when an appropriate case comes before it.

Implication of terms into contract

The concept of “contractual interpretation” appears to be getting even more expansive in light of recent judicial dicta to the effect that the implication of terms is merely part of the process of interpreting a contract.

In July this year, the New Zealand Supreme Court has said that the exercise of implying terms can be viewed as one of interpretation: Mobil Oil New Zealand Ltd v Development Auckland Ltd (formerly Auckland Waterfront Development Agency Ltd) [2016] NZSC 89. It is an interesting question as to whether this view will impact the way in which New Zealand Courts approach the implication of contractual terms in the future.

Contractual mistakes, assignment of burdens and frustration

New Zealand appellate courts have also handed down notable decisions in the areas of contractual mistakes, assignment of contractual burdens and frustration.

In Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] 2 NZLR 750 the Court of Appeal had occasion to consider the interpretation of exclusion clauses in the context of the Contractual Mistakes Act 1977. The parties had entered into an agreement in full and final settlement of an insurance claim. The insured subsequently argued that the parties had reached agreement on the quantum of the claim by mistake. The insurer argued that the settlement agreement had allocated the risk of mistake to the insured. The Court sided with the insurer. Interestingly, the Court appeared to suggest that exclusion clauses within agreements reached in full and final settlement of a dispute or claim warrant a lower level of judicial hostility than typical exclusion clauses. It is to be noted that the Supreme Court has granted the insured leave to appeal.

In Savvy Vineyards 3552 Ltd v Kakara Estate Ltd [2015] 1 NZLR 281, the Supreme Court considered whether contractual burdens may be assigned. It affirmed the traditional view that a novation is needed for contractual burdens to be transferred. In doing so, the Court overruled an earlier Court of Appeal decision in SB Properties Ltd (in liq) v Holdgate [2011] 1 NZLR 633, which had held that burdens were assignable as a result of a change in the law effected by section 11 of the Contractual Remedies Act 1979.

In relation to the doctrine of frustration, the Supreme Court made authoritative and illuminating statements of law in the recent case of Planet Kids Ltd v Auckland Council [2014] 1 NZLR 149.

Remedies, damages and penalties

In Cavendish Square Holding BV v El Makdessi [2015] 3 WLR 1373, the Supreme Court of England and Wales reviewed whether or not the “rule” against penalty clauses (the “penalty rule”) should survive. The Court upheld the decision of the House of Lords in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 in deciding that it should.

The Court did not, however, follow the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205. Andrews decided that the rule against penalty clauses should extend to cases where a penalty clause is triggered even though there has not been a breach of contract.

It remains to be seen whether or not the penalty rule in New Zealand will survive in its current form, as there is now a considerable body of consumer protection and fair trading legislation arguably providing potential remedies or relief.

Learn about the new developments and gain insight into these and other areas of contract law in ADLS’s popular seminar on 13 September 2016, from 4.30pm-6.45pm, entitled “Keeping Up With Contract Law”. The seminar presenters are Graham Kohler QC and Paul David QC. The seminar will be chaired by the Hon Justice Edwards.

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