Literal approach was historically adopted by the courts in regard to interpretation of contracts: the four corner rule. The final written agreement is said to reflect the true
nature of the parties express intentions in regard to the legal obligations which they impose on each other. The approach was objective and not subjective. If intention of the parties were to be considered, then the final written word purpose of carrying out the �will of parties� would be defeated. The strict approach in regards to exclusionary principle continues to be applied even in the face of injustice to one party, as illustrated by the case of Lovell and Christmas Ltd V Wall (5).
The major advantage of strict literal approach is the short turn around time within which a decision can be obtained by the courts in regard to dispute, as the only evidence considered is the final written contract. The downside of this is that injustice may prevail in few cases due to the exclusion of evidence which may be able to assist the courts in defining the true meaning and effect of the contract.
The House of Lords in Prenn V Simmonds, diverted from literal approach to purposive approach in interpreting contractual interpretation. (6) This wide approach meant that courts would not be confined to the four corner rule, and would take into account the surrounding background upon which the contract was concluded, when determining the contractual meaning. Despite the wide approach outlined above, the exclusionary rule was maintained. This was justified by Lord Wilberforce on the basis that prior negotiation would be of no use, as the parties position would be constantly shifting till the conclusion of written agreement. Prior negotiations define parties� subjective intentions, therefore serves no function in deducing the objective intention of both parties. The only exception to the exclusionary rule is in regards to evidence of objective facts known to both sides. In words of Lord Wilberforce �previous documents may be looked at to explain the aims of the parties.�
(5) Lovell and Christmas Ltd V Wall (1911) 104 LT 85.
(6) Prenn V Simmonds [1971] I WLR 1381.
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Justification of Exclusionary principle
In the leading case of Chartbrook, Lord Hoffman gave reasons to justify the exclusionary principle, each of which shall be explored below.
Firstly, it has been suggested that removal of the rule would lead to unfairness to the third parties who have acted in reliance of only the final contract. These parties were not privy to the pre-contractual negotiations between the original contracting parties, thus would not have any understanding of the effect that pre contractual negotiations have on the final contract (7) = (34). Although the unfairness to third party is a reason for why exclusionary principle should be upheld, Lord Hoffman disagreed with Briggs J prominence of the issue for the reason that admissibility of any form of background would be unfair on the third party.
The second reason is that admission of pre contractual negotiations during process of interpretation would lead to �uncertainty� surrounding dispute resolution and increase cost in relation to �advice, litigation or arbitration�. All of which would be unfavourable to both parties. Lord Hoffman�s opinion is that the removal of the rule will undermine the predictability and certainty in contract law.
The issue of accepting facts know to both parties can be distinguished from those statements made during the course of pre-negotiations on the basis of subjectivity. In the former, there is no issue of subjectivity as the facts are objectively accepted by both parties. In the latter, the statements are soaked in subjectivity. Therefore, abandoning the exclusionary rule is in one sense abandoning the objective theory upon which English contract is founded .
Another reason that has been employed to justify exclusionary rule is that idea that in the absence of such a rule, would lead to manipulation in the form of �paper trail of self serving documents� by negotiators. Consequences of which would be undesired by all parties involved: increase litigation fees. (8)
Lord Hoffman has highlighted that �safety devices� of rectification and estoppel by convention could be utilised to prevent injustices being suffered by parties due to exclusionary principles. The fact that these devices have to be pleaded and established to have effect means that there will be conformity and predictability in the manner in which situations in which injustices may occur will be dealt.
(7) Masood Ahmed 'Arbitration Clauses: Fairness Justice and Commercial Certainty' (2010) Arbitration International, Vol 26 (3) 409-419.
(9) Chartbrook Limited v Persimmon Homes Limited [20081 EWCA Civ 183 at Ill.
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One may argue that English contract law should follow international treaties such as Principles of European Contract Law (10) or Unidriout Principles of International Commercial Contracts (11), in regards to admitting the evidence of pre contractual negotiations. Lord Hoffman has rejected this idea on the basis that the difference in philosophy of approach between English contractual interpretation and that on French law: �One cannot in my opinion simply transpose rules based on one philosophy of contractual interpretation to another. . ."
One may state that the case of The Karen Oltman has created an exception to the exclusionary rule (12). In this case, it was held by Kerr J that pre contractual negotiations between parties can be considered for the sole purpose of deducing the meaning that the parties attributed to the words in the final contract: private dictionary principle. (13) Although this case was followed Shell Tankers (UK) Ltd v Astro Comino Armadora SA (The Pacific Colocotronis) (14). Lord Hoffman stated that the decision in The Karen Oltman is an �.an illegitimate extension of the 'private dictionary' principle which, taken to its logical conclusion, would destroy the exclusionary rule and any practical advantage which it may have."
Criticisms to Exclusionary principle:
The justification that uncertainity and unpredictability is avoided by the employment of exclusionary principle holds no weight. In areas of law such as misrepresentation action, the courts go through vast amount of pre-contractual evidences to deduce the reliance element of the claim. In these cases, there is no evidence to suggest that consideration of the pre- contractual evidence has lead to �uncertainty and unpredictability�(*) On the contrary, consideration of such evidence has enable the courts to view valuable evidence to clearly deduce whether or not misrepresentation has occurred and prescribe the correct remedy to innocent party. Therefore, the admission of evidence of pre-contractual to for contractual interpretation purpose will result in only greater certainty over decisions as the courts will have access to complete evidence and can therefore to deduce the correct meaning of the contract. In may be argued, that to do otherwise would create unfairness and uncertainty as it leave the path free for one party to attribute a meaning which was clearly not intended during preliminary negotiations ( Chartbrook).
(10) Principles of European Contract Law 1999, article 5.102
(11) Unidroit Principles of International Commercial Contracts 2010, article 4.3.
(12) Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd's Rep 708.
(13) David McLaughlan "Contract Interpretation: What is It About?" (2009) 31 Syd LR 5
(14) Shell Tankers (UK) Ltd v Astro Comino Armadora SA (The Pacific Colocotronis) [1981] 2 Lloyd's Rep. 40
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Exclusionary principle conflicts with the principle of interpretation. The principle of interpretation as outlined in the case ICS, requires the courts to take into account all relevant �background knowledge� that would have be available to the parties at the time of contracting. There will be situations where the pre- contractual negotiations are � background knowledge�, here the exclusion of such evidence would lead to unfairness as the evidence will be of up most importance to the issue at hand.
Furthermore, the exclusionary rule has not progressed in its evolution to purposive approach. In the case of Inglis, it was stated by Lord Moncreiff that evidence of prior negotiations are admissible as the "the court is entitled to be placed in the position in which the parties
stood before they signed." . This idea was rejected by Lord Blackburn in the same case. Lord Blackburn approach was by Lord Hoffman in Chartbrook. This is in contradiction to the evolution of the rest of construction principles gravitating from literal to purposive approach. It can therefore be concluded, that exclusionary principle is a misfit that does not belong with other contractual interpretation principles.
One may argue that pre-contractual negotiations are unhelpful. This argument is weak, even Lord Hoffman who concluded that there exclusionary principle should be maintained, acknowledge that not all such evidence would be unhelpful: �"In principle, however, I would accept that previous negotiations may be relevant"
The practice of pleading rectification and pleading construction of written agreements together is commonly accepted practice for counsel. This practice raises issues as rectification allows the admission of pre-contractual negotiation evidence, while interpretation does not on the basis of subjectivity. Furthermore, there is no clear explanation for discrepancy in regards to what evidence is admissible in regards to plea of construction and rectification. Judicial comments further highlight this issue. In the cases of Oceanbulk, Lord Clarke stated that the �problems with which both the principles of rectification and construction� grapple are closely related. Flaux J in Excelsior Group V Yorkshire Television stated that �the line between admissible and inadmissible evidence was a fine one(15).�
One may argue that the reliance of �safety devices� of rectification and estoppel by convention as a method to prevent injustice to party on construction issue, due to prior negotiation being excluded is not reasonable (16). Instead, rectification should transcend from safety net position to �occupy the whole field when it is necessary to correct errors in formal expression of a contractual consensus.� (17)
(15) Excelsior Group V Yorkshire Television [2009] EWHC 1751 (Comm)
(16) Masood Ahmed, The interpretation of commercial contracts: time for reform 21 21 Nottingham L.J. 26 2012.
(17) Richard Buxton, "'Construction" and the Rectification after Chartbrook' (2010) CLJ 69(2), 253-262..
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One justification for exclusionary rule is on the basis that admission of pre- contractual negotiations would result in uncertainty of outcome. One may argue that uncertainty in the law and to the parties exist in the present form of the rules. This is clearly illustrated by Baroness Hale�s:
But I have to confess that I would not have found it quite so easy to reach this conclusion had we not been made aware of the agreement which the parties had reached on this aspect of their bargaining during the negotiations which led to the formal contract. On any objective view, this made the matter crystal clear. This, to me, increased the attractions of accepting counsel's eloquent invitation to reconsider the rule in Prenn v Simmonds [1971]
From the confession of Baroness Hale, it can clearly be inferred that reform of exclusionary principle is a must, to enable the court to be flexible in approaching the issue of assessing the relevance and strength of evidence prior to negotiations.
