Can an adjudicator consider pre-contract negotiations?

The rule that pre-contract negotiations should not be admitted to aid the interpretation of a contract (the ‘exclusionary rule’) has long been embedded ?in UK law and was reaffirmed in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38.

Lord Hoffman stated in Chartbrook: ‘The rule ?that pre-contractual negotiations are inadmissible was clearly reaffirmed by this House in Prenn v Simmonds... where Lord Wilberforce said... that earlier authorities “contain little to encourage, and much to discourage, evidence of negotiation or of the parties’ subjective intentions.” It is clear that the rule of inadmissibility has been established for a very long time.’ 

At paragraph 29, Lord Hoffman referred to the judgment of Lord Blackburn in Inglis v John Buttery (1873) 3 App Cas 552: ‘[T]he formal contract shall supersede all loose and preliminary negotiations – that there shall be no room for misunderstandings which may often arise, and which do constantly arise, in the course of long, and it may be desultory conversations, or in the course of correspondence or negotiations during which the parties are often widely at issue as to what they will insist on and what they will concede... The written contract is that which is to be appealed to by both parties, however different it may be from their previous demands or stipulations whether contained in letters or in verbal conversation.’

Policy reasons

There are sound public policy reasons that exceptions to the rule are few and far between. ?As Lord Hoffman stated in Chartbrook (quoting from Lord Wilberforce in Prenn v Simmons [1971] 1 WLR 1381): ‘[S]uch evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, through converging, ?still divergent. It is only the final document ?which records the consensus.’ 

Further, the admission of pre-contractual negotiations would create greater uncertainty ?of outcome in disputes over interpretation and ?add to the cost of advice, litigation, or arbitration. ?As Lord Hoffman put it in Chartbrook: ‘Everyone engaged in the exercise would have to read the correspondence and statements would have ?to be taken from those who took part in oral negotiations. Not only would this be time consuming and expensive but the scope for disagreement over whether the material affected the construction of the agreement... would be considerably increased.’ 

Lord Hoffman made these comments in the context of arbitration and litigation. It must logically follow that if it is inappropriate for such negotiations to be admitted before an arbitrator or a judge, then adjudication is certainly not the forum within which to consider this issue. In the short amount of time within which an adjudicator has to decide a matter, it is a matter of public policy that pre-contract negotiations should not be admitted into adjudication proceedings. 

It would be particularly unfair to admit evidence of pre-contractual negotiations in construction cases where third parties were not privy to such negotiations but took an assignment or novation ?of a contract or advance money on its security.

It might even be argued that trying to deal ?with a full analysis of pre-contract negotiations in ?as truncated a process as adjudication would be a breach of natural justice. However, the question of whether complexity of evidence, combined with ?the statutory time limits for adjudication, can result in breaches of natural justice is a much wider issue than there is time to look at in  this article.

Exceptions to the rule 

First, pre-contractual negotiations can be considered if a party claims for rectification, ?the main purpose of which is to correct mistakes made in recording agreements. 

Second, where a term does not have an obvious and natural meaning, then evidence of what the parties said in negotiations may be admissible under the ‘private dictionary’ principle to show ?the parties negotiated on an agreed basis as to ?the meaning of the term. Lord Hoffman stated in Chartbrook that the private dictionary principle ?is ‘akin to the principle by which a linguistic usage ?in a trade or among a religious sect may be proved’; however, he rejected the decision in the leading case (Karen Oltmann [1976] 2 Lloyd’s Rep 708) ?on this point. Given the emphasis on the importance of the common use between the parties being an unconventional one, the number of cases in ?which a private dictionary can genuinely be ?said to exist will be limited.

Third, an exception can be made to the exclusionary rule in cases of estoppel by convention. Estoppel by convention may be distinguished from other forms of estoppel due to the requirement of ‘mutuality’. It is essential that both parties adopt the assumption as a basis for their transaction. This is worth considering further.

In The Vistafjord [1988] 2 Lloyd’s Rep 343, ?Lord Justice Bingham established a three-stage ?test for estoppel by convention. It applies where:

1. The parties have established a conventional basis;

2. On that basis they have regulated their subsequent dealings; and 

3. It will be unjust or unconscionable if one of ?the parties resiles from that convention. 

This test referred to estoppel by convention based on post-contract convention, which is the most usual application of the doctrine. In PW & Co v Milton Gate Investments Ltd [2003] EWHC 1994 (Ch), Lord Neuberger indicated that an estoppel by convention could not be based on an understanding or common assumption reached during pre-contractual negotiations. 

He relied on the reasoning of the Court of Appeal in Keen v Holland [1984] 1 WLR 251, where the court dismissed the estoppel by convention claim as the common assumption was reached prior to the entry into the written contract. In the Court of Appeal’s view, it would be incorrect to extend estoppel ?to cover situations where an understanding or common assumption was reached prior to entry into the written contract. 

Lord Neuberger recognised that the Court of Appeal judgment in The Vistafjord supported the view that estoppel by convention is a ‘wide and flexible doctrine’, and did not exclude the possibility of an estoppel arising before the contract was entered into. However, he asserted that the case was not concerned with an estoppel that was based on a convention which had arisen from pre-contractual negotiations. Therefore, in light of Keen, ‘it would be wrong to extend too readily the circumstances in which estoppel by convention can apply’. 

Adjudicator’s jurisdiction 

Exceptions to the exclusionary rule are therefore few and far between. Does an adjudicator have jurisdiction to deal with claims for exceptions ?to the rule? 

Section 108(1) of the Housing Grants, Construction and Regeneration Act 1996 states: ?‘A party to a construction contract has the right ?to refer a dispute arising under the contract for adjudication under a procedure complying with this section.’ 

With each claimed exemption, the adjudicator ?is being asked to ‘fix’ a contract which is some way purportedly lacking. Surely such exceptions do not and cannot arise under the contract, but rather arise in connection with, or in some other way separate to, the contract. 

In Hillcrest Homes Ltd v Beresford and Curbishley Ltd [2014] EWHC 280 (TCC), the court noted in the Joint Contracts Tribunal standard form contract ?the difference between the language used in the adjudication clause (‘arises under this contract’) and the wider language used in the arbitration clause (‘any dispute or difference... of any kind whatsoever arising out of or in connection with this contract’). The adjudication clause simply followed the language of section 108 of the Act. 

It was found in Fillite (Runcorn) Ltd v Aqua-Lift [1989] CLR 66: ‘The disputes as to negligent misstatement, misrepresentation under the Misrepresentation Act 1967 and collateral warranty or contract, while they may in a loose sense be said to arise with reference to the contract, cannot be said to arise as a direct result of it. They all relate to matters which either preceded the contract or were at best contemporaneous with it.’

Similarly, claims for private dictionary, estoppel, and rectification relate to matters which precede the contract, so it is hard to see how they can fall under the contract in accordance with section 108(1). 

Persimmon Homes Ltd v Woodford Land Ltd [2011] EWHC 3109 (Ch) also supports the view that an adjudicator does not have jurisdiction to decide claimed exemptions to the rule, as they do ?not fall under the contract. The court held ?that determination of rectification and related ?estoppel claims would require detailed evidence, disclosure of documents, and cross-examination of witnesses, and that these are remedies that only the court can grant.

Chris Holwell is a partner in the construction team at Freeths @freeths www.freeths.co.uk