Contractual Interpretation

April 1st, 2019

The issue before the Court of Appeal (Longmore, David Richards and Leggatt LJJ) in Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council (2019) EWCA Civ 526 was one of interpretation of a contract to establish an escrow account.

The appellant (“the mining company”) is a company which carries on open cast coal mining at a site in South Wales for which the Council is the LPA. The planning permission granted by the Council in 2005 for this use of the land included conditions that (1) all coal extraction must cease no later than 6 September 2022; (2) final restoration of the land must be completed no later than 6 December 2024; and (3) “after care” must be undertaken for not less than five years after each phase of a progressive restoration scheme has been certified as complete. The mining company also entered into an obligation to carry out restoration works at the site under an agreement made with the Council pursuant to Section 106 of the Town and Country Planning Act 1990.

In or about August 2015, a written proposal was presented to the Council on behalf of the mining company entitled “Proposal for the Replacement of Parent Company Guarantee and the Establishment of an Escrow Account”. The Proposal was approved at a Council Meeting on 9 September 2015. On 21 December 2015 the Escrow Account Agreement was executed. The critical clause of the Escrow Account Agreement for present purposes was headed “Funding the Account”.

Since the Escrow Account Agreement was executed, the mining company has made no deposits at all into the escrow account. The Council sought an order for specific performance to compel the mining company to do so. The mining company sought to rely on a defence that, on the proper interpretation of the agreement, the mining company is not under an enforceable obligation to pay any money into the escrow account. The Judge rejected this defence as having no real prospect of success. The Court of Appeal ruled that he was plainly right to do so.

The argument at the forefront of the appeal was that the Judge failed to have appropriate regard to the “genesis” of the Funding Clause. Leggatt LJ stated the law as follows (from paragraph 52):-

“(1)       Previous documents may be looked at to show the surrounding circumstances and, by that means, to explain the commercial or business object of a contract;

(2)       The approach is, by considering the circumstances which led to the execution of the contract, to identify the purpose of the transaction and to construe the    language used in the light of that purpose;

(3)       Evidence of negotiations, or of the parties’ intentions, ought not to be received;

(4)       What is not permissible, is to seek to rely on evidence of what was said during the course of pre-contractual negotiations for the purpose of drawing inferences about what the contract should be understood to mean;

(5)        It is also clear that it is not only statements reflecting one party’s intentions or aspirations which are excluded for this purpose, but also communications which are capable of showing that the parties reached a consensus on a particular point or used words in an agreed sense;

(6)        In other words, there is a line between referring to previous communications to identify the “genesis and aim of the transaction” and seeking to rely on such evidence to show what the parties intended a particular provision in a contract to mean, may be hard to draw.

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