In its landmark decision, Bathurst Resources Ltd v L & M Coal Holdings Ltd, a unanimous Supreme Court has confirmed that, in principle, both pre-contractual negotiations and the parties' post-contractual conduct can be admissible when interpreting a contract.
In its decision, the Court noted that the admissibility of such evidence is an evidential issue rather than one strictly governed by the law of contract. On that basis, the Court held that the admissibility of this evidence must be examined through the framework of the Evidence Act 2006. That is, the evidence must be relevant and probative, and outweigh any prejudicial effect and not needlessly prolong the proceeding.
The Court was careful to confirm that contractual interpretation remains an objective exercise: to determine the meaning the contract would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract. However, pre-contractual negotiations or the parties' post-contractual conduct may assist a court in this exercise.
While the Court's decision is clear that there is no blanket rule prohibiting the use of pre-contractual negotiations or post-contractual conduct when interpreting an agreement, such evidence will not always be admissible. For instance, the Court stated that evidence relating to pre-contractual negotiations will be inadmissible to the extent that it proves only a party's subjective intention or belief as to the meaning of the words, which were not communicated to the other party. Similarly, the Court noted that post-contractual conduct will often not assist a court to interpret the parties' objective intention as to meaning of the contract at the time it was made.
Likely impact of the decision
The Bathurst decision provides useful clarification to outstanding issues that were identified with the Supreme Court's seminal decisions in both Vector Gas Ltd v Bay of Plenty Energy Ltd and Firm PI 1 Ltd v Zurich Australian Insurance Ltd.
While the Court's decision may initially appear to greatly expand the evidence that a court may consider when interpreting a contract, the emphasis on the framework created under the Evidence Act and the strict application of the rules of evidence is likely to provide a gatekeeping function to avoid unnecessary information from being considered by a court.