Rules of Interpretation have led to “the parlous state of modern commercial litigation”.

To what extent should a Court look at “surrounding circumstances” when interpreting a contract or determining whether a Trust has been established?

That was the question the Hon. Justice J D Heydon addressed at a Conference that I attended recently in Adelaide.

It was organised by the South Australian branch of STEP (the Society of Trust and Estate Practitioners).  No less than nine Judges participated in the sessions at this worthwhile conference.

Heydon J is a combination of academic lawyer and practical Judge.  A Professor of Law at the age of 30, he has written widely on many areas of the law.  In the area of Trusts and Equity he is the primary author of Jacobs’ Law of Trusts in Australia 7th ed – a leading Australian text - and one of the current editors of Meagher, Gummow and Lehane’s Equity – Doctrines & Remedies, 4th ed, a leading international text.

The catalyst for his paper was the House of Lords’ decision in Chartbrook Ltd v Persimmon Homes Ltd [2009]1 AC 1101. 

Heydon spoke of what he calls “ the Chartbrook compromise”.  It focuses on the circumstances when evidence can be given of the “surrounding circumstances” that relate to a contract or equitable obligation.

Its first limb says that a contract means what a reasonable person, having all the background knowledge of the surrounding circumstances would understand the language that the parties used, to mean.  The second limb says that evidence of pre-contractual negotiations is not admissible to explain what a contract means unless it demonstrates knowledge of “surrounding circumstances”.

It is common to allow evidence of pre-contractual negotiations to explain the intentions of the parties to a contract.  But the search for a party’s intentions is problematic.

Quoting Charles Fried, a former Solicitor-General in the USA, Heydon says “we would not consider an account of Shakespeare’s mental state at the time he wrote a sonnet to be a more complete or better account of the sonnet itself.  The texts of the sonnet or of the Constitution would be a kind of second best; we would prefer to take the top off the heads of authors or framers – like soft boiled eggs – to look inside for the truest account of their brain states at the moment the texts were created.”

Quoting a USA case he said that “Congress did not enact its members’ beliefs; it enacted a text.” 

He also criticises reliance upon “common and general knowledge” which:

“raises uneasy suspicions about whether [Lord Hoffmann in Chartbrook] was construing a contract made by the parties or making for them a different contract he thought they ought to have made, and about whether he was conjuring up materials for doing so out of fairly thin air.”

And he additionally criticises attempts by Judges to discover “what the parties must have had in mind.

Heydon appears to suggest that the Courts should look at the meaning of the words that were used and not try to speculate about the intention of the parties at the moment they used them – “Where contracts are concerned, there is a public and private interest in matters being speedily determined without recourse to every detail of the negotiations.”

If the benefit of a contract is assigned to third parties, they will not usually have access to the knowledge and intentions of the contracting parties.  He suggests it would be wrong for the Courts to treat an agreement as meaning one thing to the parties (who have access to the pre-contractual information) and another to assignees (who don’t).

The trouble with “the Chartbrook compromise” - in Heydon’s words – is that it is “so liberal as to invite parties to tender negotiation material in the hope that all or part of it will be admitted as background material”.  This in turn leads to excessive discovery, unnecessary evidence and excessive cost.

As a consequence, he says that “commercial litigation is running off the rails.”  The Courts’ willingness to allow such evidence has contributed to “the parlous state of modern commercial litigation.”

The notion that rules of interpretation are driving litigants from the Courts deserves respect – and investigation.

At the same Conference, the Chief Judge of the Supreme Court of South Australia said quite independently that “Civil litigation as we know it will cease to exist in the years to come since the costs associated with it are unsustainable.”

The time has come for some serious thinking about ways to resolve civil disputes less expensively.

Heydon’s Paper is 55 pages long and this article does not begin to do it justice.  Amongst other things, it refers to several NZ cases and one NZ academic text, from which it is possible to discern his assessment of the worth of our law on this subject.

Because his Paper is not accessible by NZ lawyers, I asked him if he would let me put it on my website in conjunction with an article that I proposed to write about it and he kindly agreed that I could.  It’s on the page “Trusts” alongside a copy of this article.     

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