News —

Supreme Court settles law on contract interpretation – two members of Chambers acting


July 22, 2021

On 14 July 2021, the Supreme Court delivered its judgment in Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85 (link).  Member Jack Hodder QC was counsel for Bathurst and member Alan Galbraith QC was counsel for L&M.  The case concerned the interpretation of a contract for the sale of coal mining rights. Bathurst purchased mining rights from L&M but, shortly after the coal mine began operating, Bathurst effectively ceased its operations and denied it was liable under the contract to pay a USD $40m payment to L&M for mining 25,000 tonnes of coal.  

The judgment settles a longstanding legal uncertainty concerning the admissibility of evidence of prior negotiations and subsequent conduct when interpreting a contract.  While the Judges split on their interpretation of the contract, all agreed on the principles to be applied.  

The Court confirmed that contractual interpretation is an objective task that gives primacy to the words of the contract but also recognises the importance of reading words in their broader context.  The parties’ subjective beliefs as to what the contract means are irrelevant.  

The Court held that the admissibility of extrinsic evidence to determine the meaning of a contract is an evidential issue determined under ss 7 and 8 of the Evidence Act 2006 and in light of the substantive law of contract.  In a contractual interpretation case, extrinsic evidence is relevant under s 7 if it tends to prove or disprove anything of consequence to determining the meaning the contract would convey to a reasonable person having all the background knowledge available to the parties at the time they contracted.  But such evidence may also be excluded under s 8 if its probative value is outweighed by the risk will needlessly prolong the proceeding.  There is also no need for ambiguity in the contract’s wording before a court can refer to extrinsic evidence.  

As to prior negotiations, if evidence shows what a party intended the words to mean, and that this was communicated, it may tend to show a common mutual understanding as to the meaning of the contract, and may be admissible.  The mutual understanding is relevant to the objective search for meaning.  

As to subsequent conduct, the conduct need not be that of both parties, but conduct of only one party is more relevant to an estoppel claim.  The question is whether the subsequent conduct tends to prove anything relevant to the objective approach to interpretation, but this would not be often. Any conduct post-dispute is also very unlikely to be admissible.  

The judgment also settles the law relating to the implication of terms in fact.  The Court confirmed the test laid down by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.  The legal test for the implication of a term is a standard of strict necessity.  The starting point is the words and if the contract does not provide for an eventuality, the usual inference is that the contract does not cover it.  A term can only be implied if it would spell out what the contract, against the background, must be understood to mean.  

A majority of the Court found for Bathurst.  The contract required Bathurst to pay the USD $40m to L&M if a certain amount of coal was “shipped” out of the mine area and Bathurst did not pay royalties at a higher rate to L&M.  All members of the Court found that the word “shipped” included other methods of transport, not just “by ship” in its literal sense.  But a majority found that if Bathurst continued to pay royalties – even if those royalties were effectively nil as no coal was being mined – it did not need to pay the USD $40m to L&M.

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