Donovan Drainage & Earthmoving Limited v Halls Earthworks Limited HC Auckland CIV-2010-404-000029
[2011] NZHC 551
•2 June 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-000029
BETWEEN DONOVAN DRAINAGE & EARTHMOVING LIMITED Appellant
ANDHALLS EARTHWORKS LIMITED Respondent
Judgment: 2 June 2011 at 11:30 AM
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 2 June 2011 at 11:30 am
pursuant to R 11.5 of the High Court Rules.
Registrar / Deputy Registrar
Date.....................................
Solicitors: Urlich McNab Kilpatrick, P O Box 633, Whangarei
Fax: (09) 470-2580
Counsel: R J Bowden, P O Box 1862, Whangarei 0140
Fax: (09) 438-2746
DONOVAN DRAINAGE & EARTHMOVING LTD V HALLS EARTHWORKS LTD HC AK CIV-2010-404-
000029 2 June 2011
[1] In January 2006 Donovan Drainage & Earthmoving Limited (Donovan) engaged Halls Earthworks Ltd (in liquidation) (Halls) to undertake construction work on a subdivision for which Donovan was the head contractor. A dispute arose as to whether the contract was a measure and value contract (as Donovan maintained) or a lump-sum contract (as Halls argued). The dispute depended on the interpretation of a revised schedule prepared by Halls which formed the basis of the contract between the parties. In proceedings in the District Court Judge Sharp held
that the contract was a lump-sum contract.[1] On appeal I held that, despite errors in
the Judge’s decision, her conclusion was correct.[2] Donovan now seeks leave to appeal my decision.
[1] Donovan Drainage & Earthmoving Ltd v Halls Earthworks Ltd DC Auckland CIV-2008-004-000006, 1 December 2009.
[2] Donovan Drainage & Earthmoving Ltd v Halls Earthworks Ltd HC Auckland CIV-2010-404-000029, 10 November 2010.
[2] The principles that apply to an application for leave to bring a second appeal are well settled and set out in Waller v Hider.[3] The proposed appeal must raise some question of law or fact capable of bona fide serious argument in a case involving some interest, public or private, of sufficient importance to outweigh the cost, both to the court system and to the parties, and the delay involved in the further appeal. On a second appeal the Court of Appeal is not engaged in the general correction of error.
Its primary function is to clarify the law and to determine whether it has been properly construed and applied by the court below. It is the High Court, as the intermediate appellate court, that has primary responsibility for correcting error and ensuring that justice is done to the parties.
[3] Waller v Hider [1998] 1 NZLR 412 (CA).
[3] For Donovan, Mr Bowden identified two questions that, in his submission, would justify a second appeal. The first was whether the draft schedule that preceded the revised schedule was admissible for the purposes of interpreting the revised schedule. The second was whether Halls’ agreement to pay its expert witness a success fee should have resulted in the District Court’s decision being set aside.
[4] Mr Bowden also raised two other issues but acknowledged that they did not meet the criteria for a second appeal. These were the treatment of the evidence of
Mr Bax and the weight put on the evidence of Mr Halls. However, given
Mr Bowden’s acknowledgement, I do not consider either ground further.
The admissibility of the draft schedule
[5] Negotiations for the contract between the parties commenced when Donovan provided a draft schedule of work to Halls. The various line items to be priced were shown and Mr Mcleod of Halls inserted handwritten prices for each item. He also showed a figure at the foot of each page, which appeared to represent the sub-total of the line items, and a figure of $557,811.58 (GST exclusive) on the top of the first page, which appeared to represent the total of the sub-totals. However, if that was intended, it was not successful; not all the line items added to the apparent sub-totals at the foot of each page and the figures at the foot of each page did not add to the apparent total shown on the first page. The actual total of the line items was
$476,724.08.
[6] The draft schedule was not accepted. Donovan requested that Halls reduce some of the rates and Halls submitted a revised schedule which showed only handwritten totals at the top of each page and a revised GST exclusive total of
$550,070.50 on the front page.
[7] As noted, the argument between the parties was whether the contract had been entered into on a lump-sum basis and the figure of $550,070.50 (GST exclusive) was the total contract price, or whether the contract had been entered into on a measure and value basis and the amount owing was $441,381.63 (GST exclusive), being the actual total of the various line entries. In the District Court and on appeal Donovan argued that it was evident from the draft schedule that the difference of $108,688.87 between the actual total of the line items and the GST exclusive total of $557,811.58 was the result of errors by Mr McLeod and that these were carried over to the revised schedule. Halls, however, argued that the difference between the total of the line items and the GST exclusive total in the revised schedule represented the preliminary and general margin.
[8] A good deal of the argument in both courts was focused on explaining the apparent errors in Mr McLeod’s arithmetic. The District Court Judge did not place weight on the draft schedule because she did not see it as relevant. I considered that, had the draft schedule been a contractual document, Mr Bowden’s argument could have merit but that, since the draft schedule was part of the pre-contractual negotiations, it was inadmissible; the contractual document was the revised schedule and it was that which the Court was required to interpret.
[9] Donovan wishes to argue that the draft schedule was part of the factual matrix and therefore admissible in the interpretation of the revised schedule. The ambit of the factual matrix is well known to include “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”, provided it was reasonably available to the parties at the time.[4] Mr Bowden relied on the decision of the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd, in which Tipping J, commenting specifically on the use to which prior negotiations might be put in interpreting a contract, said:[5]
[4] Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 (HL) at
114-115 adopted in New Zealand in Boat Park Ltd v Hutchinson & Findlay [1997] 2 NZLR 74 (CA).
[5] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5; [2010] 2 NZLR 444.
[27] Against that background I come to the subject of the admissibility of prior negotiations. Some of the difficulties in this area may derive from the concept of “prior negotiations” being employed in a more or less expansive way. Sometimes the concept seems to be used as if it encompassed all conduct in circumstances associated with negotiations towards the formation of a contract. It is necessary, however, to distinguish between the subjective content of negotiations; that is, how the parties were thinking, their individual intentions and the stance they were taking at different stages of the negotiating process on the one hand, and, on the other, evidence derived from the negotiations which shows objectively the meaning the parties intended their words to convey. Such evidence includes the circumstances in which the contract was entered into, and any objectively apparent consensus as to meaning operating between the parties.
[28] The vice in admitting subjective evidence of negotiations, is that doing so would be inconsistent with the objective basis on which interpretation issues are resolved. That already seen, evidence of a party’s subjective intention is not relevant to an objective resolution of interpretation issues. Although the common law takes the view that it is only the final written contract which records the ultimate consensus of the parties, the way that consensus is expressed may be based on an agreement as to meaning reaching during negotiations.
[29] There is no problem with objective evidence directed to the context, factual or linguistic, in which the negotiations were taking place. That kind of evidence can properly inform an objective approach to meaning. Whereas evidence of the subjective content of negotiations is inadmissible on account of its irrelevance, evidence of facts, circumstances and conduct attending the negotiations is admissible if it is capable of shedding objective light on meaning. It is often said in contract interpretation cases that evidence of surrounding circumstances is admissible. Circumstances which surround the making of the contract can operate both before and after its formation. In either case irrelevance should be the touchstone for the exclusion of evidence. I do not consider there are any sufficiently persuasive pragmatic grounds on which to exclude evidence that is relevant. Indeed to do so would require reconciliation with s 7 of the Evidence Act 2007.
[30] In Gibbons Holdings Ltd v Wholesale Distributors LtdI expressed the view that evidence of subsequent conduct should be admissible, if capable of providing objective guidance as to intended meaning. I suggested that, in order to be admissible, post-contract conduct should be shared or mutual. I saw that as a way of emphasising the need to exclude evidence which demonstrated only a party’s subjective intention or understanding as to meaning. I now consider that the approach I am taking in these present reasons is a simpler and clearer articulation of the appropriate principle, but one which still preserves the essential line between subjectivity and objectivity of approach.
[31] There is no logical reason why the same approach should not be taken to both post-contract and pre-contract evidence. The key point is that extrinsic evidence is admissible if it tends to establish a fact or circumstance capable of demonstrating objectively what meaning both or all parties intended their words to bear …
[10] Mr Bowden submitted that the draft schedule was not a declaration of subjective intent and, on its face, showed what the parties intended. He submitted that, whilst it might be said to be a previous negotiation, equally, there was a continuum from the draft schedule through to a subsequent letter, sent by Donovan
21 December 2006, seeking the reduction in price of certain line items and on to the revised contract. In terms of the significance of this case Mr Bowden submitted that the draft schedule had the potential to serve as a seminal example of where the line should be drawn as to the consideration of pre-contractual negotiations.
[11] I do not accept Mr Bowden’s submissions. It is clear that both the draft schedule and the 21 December 2006 letter formed part of the negotiations that led up to the final contract. Donovan had no input into the figures entered by Mr McLeod on the draft schedule. Regardless of how one might interpret the draft schedule, it could never be regarded as other than a document produced by Halls itself and therefore could not reflect anything other than Halls’ subjective position at that stage
of the negotiations. Likewise, the letter of 21 December 2006 could never be other
than a reflection of Donovan’s own position at that stage of the negotiations.
[12] This is not a situation, as was the case in Vector, where the dispute turned on the meaning of a phrase used in a contract and which could be resolved by reference to the parties’ previous agreement as to what the phrase would mean in the context of that contract. This case simply involves an ongoing process of offer and counter- offer, culminating in an offer made by one party which was accepted by the other. It is not a case that requires reference to previous negotiations to interpret the contractual document and, indeed, it would be risky to do so.
Success fee
[13] In the District Court Halls called as an expert witness its former contractor Mr Sweeney. He gave extensive evidence about the likelihood of Halls’ rates including a margin. The trial judge had described Mr Sweeney as a “compelling expert witness for the defence” but on the other hand went on to say that she placed little weight on his evidence because it had limited relevance.
[14] After the trial it was discovered that Mr Sweeney had negotiated a success fee and Mr Bowden submitted that the judgment should have been set aside on this basis alone. I held that the outcome would have been the same even without Mr Sweeney’s evidence. I did, however, exclude Mr Sweeney’s fee from the disbursements that Halls was entitled to claim.
[15] Mr Bowden submitted that since Halls is now in liquidation the unsecured creditors will have to meet whatever fee the liquidators pay Mr Sweeney and it will be difficult for the liquidators to resist Mr Sweeney’s invoice for his fee, since they authorised that transaction. Donovan is one of the unsecured creditors and, as a result, will find itself contributing to Mr Sweeney’s fee.
[16] Mr Bowden proposed two options. The first is an award of costs to the plaintiff payable by the liquidators personally and not from the creditors’ pool as an effective sanction and exercise of the Court’s desire to exercise scrutiny over expert
witnesses and their counsel. The second is that the District Court judgment be set aside entirely.
[17] The possibility of the judgment being set aside was considered at the appeal hearing and rejected because, as I have already said, the outcome of the hearing would have been the same even without Mr Sweeney’s evidence. There is no basis on which to revisit that decision on a second appeal. The alternative option now advanced was not suggested at the appeal hearing. It cannot, realistically, be viewed as having sufficient importance to justify granting leave for a second appeal.
[18] Donovan’s application for leave to appeal is dismissed.
Cross application by Halls for leave to appeal
[19] In my decision I reduced the Judge’s award of increased costs to scale costs and, as already discussed, excluded Mr Sweeney’s fee as a claimable disbursement. Halls seeks leave to appeal my decision on these issues.
[20] Although Mr Grove submitted that the decision raised an issue of public importance in relation to an appellate court’s ability to interfere with discretionary orders, this area of the law is clear and no question of law arises from this case. The decision to reverse the Judge’s costs award turned very much on the information provided to me at the appeal hearing. No question of fact arises that is of such importance to justify a second appeal. Halls’ application for leave to appeal is
therefore dismissed.
P Courtney J
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