Pre-contract negotiations do not help deciding terms of agreement

In Great Hill Equity Partners (“G”) II LLP v Novator One & Others (“N”) the High Court held that the general rule that negotiations are only an aid to construction of the true meaning of the parties remains true and are generally not admissible.

 

What this means is that such evidence may be admissible only rarely and even then will not necessarily be conclusive.

 

In this case the meaning of agreement under dispute was a share option agreement but the principle applies to any contract in fact.

 

Issues frequently arise either because a contract is never signed or because there is disagreement over what was actually agreed.

 

In such cases the courts will try to find the true meaning based on what a “reasonable person” might think with reference to all the background information available at the time the contract was formed-including drafts and negotiations. The courts will favour a commercially sensible agreement wherever possible.

 

Normally pre-contract negotiations do not help deciding terms of agreement since by their very nature they indicate that agreement had not been reached but were continuing.

 

Like many legal principles there are exceptions to the “norm” and where a contractual term is not defined and which bore no natural or obvious meaning then a court could turn to any evidence including pre-contractual negotiations as a “private dictionary exception”.

 

The High Court here looked at legal precedent including a superior court’s decision which had suggested the principle not to allow negotiating evidence could and should be relaxed. However even allowing for this call for relaxation of the rigidity of the overriding principle it nevertheless remained good law that ordinarily negotiations and draft heads of terms say would only rarely be admissible.

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