New uncertainty in the construction of commercial contracts?

In this article, solicitor Rachel Woods discusses a recent Supreme Court case which indicates that courts are prepared to look at the subsequent conduct of parties as an aid to interpreting a contract's provisions.

Until recently, the courts only considered the conduct of parties after entry into a contract (subsequent conduct) where questions arose as to the interpretation of the contract involving rectification, estoppel and contract formation. In Wholesale Distributors Ltd v Gibbons Holdings Ltd¹ (Gibbons), however, the Supreme Court has accepted subsequent conduct as a legitimate tool for the interpretation of contracts more generally.

The background

In Gibbons the court was required to interpret a complex deed of lease, which had been "unhappily" adapted from a standard form.² Wholesale argued that their obligation to pay rent under the lease terminated in 2002, while Gibbons argued that the obligations continued until 2010. The language of the lease was equivocal.

In support of its interpretation of the contractual language, Gibbons relied on the following subsequent conduct as evidence of the parties' intentions when entering into the lease:

• Wholesale had entered into a sublease of the property which included rights of renewal to extend the sublease to 1 November 2008.

• Wholesale later assigned its interest under the lease as part of the sale of its business. Documents referring to the assignment of lease stated that the lease was to expire on 31 October 2010.

• Internal documents created by Wholesale following entry into the lease stated that the lease continued beyond 2002.

The decision

The majority of the Supreme Court held that subsequent conduct was admissible for the purposes of contract interpretation.³ The court held that subsequent conduct formed part of the factual matrix which is used to objectively assess the parties' intentions when entering into the contract.

Some uncertainty remains, however, as to what will constitute admissible subsequent conduct. In Gibbons, the court was divided as to whether the conduct relied upon was admissible as the conduct was unilateral, in that it related solely to conduct of Wholesale which did not involve Gibbons.

Justice Tipping held that such unilateral conduct did not illustrate the mutual or shared intentions of the parties, and therefore could not be relied on. His Honour would only have permitted conduct that involved both parties to be used in interpreting the contract. However, a broader approach to the admission of subsequent conduct was adopted by Justice Thomas. His Honour held that unilateral conduct would be admissible where, as in this case, it contradicted the interpretation advocated by the party that had engaged in the conduct. In this case, Wholesale's entry into a sub-lease and an assignment of lease which purported to grant an interest in the property beyond 2002, was inconsistent with its contention that the parties intended the lease obligations to terminate in 2002. Similarly, the view expressed in Wholesale's internal documents was at odds with the interpretation it proposed. Justice Thomas noted that in this case "[t]he value of the evidence stems from the inconsistency".

Conclusion

Following Gibbons, it would appear that Justice Thomas's approach to the admissibility of subsequent conduct will prevail. His Honour received support from Chief Justice Elias, as well as implied support from Justice Blanchard.

Therefore, where parties have failed to express their contractual obligations unambiguously, they should be aware that their subsequent conduct may be examined to establish the true contractual intentions of the parties.

¹ [2007] NZSC 37

² For a discussion of the factual background of the case see Bell Gully's article Key property rulings from the courts - Who pays the rent? January 2006.

³ Justice Blanchard reserved judgment on the issue.

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