Interpretation of contracts : admissibility of pre-contractual negotiations

Abstract

Differing interpretation of contract requirements is among key causes of construction contractual disputes. Generally interpretation of a contract is confined to the four corners of the document. In reality, commercial contracts do not artificially live in isolation from context, and courts have already subscribed to contextual approach in construing a contract. Despite this approach being applied in interpretation of contracts, pre-contractual negotiation evidence have been conventionally excluded from being considered to help understand the meaning of the words in the contract, except in action for rectification. This research aimed to comprehend the current state of law with respect to admissibility of pre-contractual negotiations in interpretation of contracts, and whether there are exceptions to the rule. Based on examination of case law, the highest court in England remains with status quo, which received mixed reactions from other common law jurisdictions. It was found that Malaysia continues to follow the approach set in England albeit with reservation. Decisions from other common law countries reveal circumstances that provide for prior negotiations’ admissibility. They are; reference to private dictionary; harmonisation with international contract convention; when evidence is relevant, reasonably available to all contracting parties and relates to an obvious context; when it illuminates the genesis of the transaction; when used to construe without prejudice settlement negotiations; and when the evidence provides consistency with commercial common sense. A common theme underlying the exceptions, is that prior negotiations, if referred to, must be objective and reflective of the parties’ mutual understanding prior to contract.