“A verbal contract isn’t worth the paper it is written on”- Sam Goldwyn
Sam Goldwyn recognised the importance of a written contract. A recent Supreme Court case (Vector Gas Limited v. Bay of Plenty Energy Limited) highlights the importance of careful and accurate drafting of contracts.
The Court had to decide the intention of the parties, as reflected in the wording of a contract for the supply of gas. The contract recorded that the price was “$6.50 per G.J.”, and the court had to decide whether this price was inclusive or exclusive of transmission costs (a difference of over $3m).
Traditionally, courts could only look at the plain and ordinary meaning of the words in a contract when interpreting it. In this case, the court decided that, while the ordinary or plain meaning of the words used will be the principal consideration when interpreting a contract, it could also look at other evidence in deciding what the true meaning of the contract was. That other evidence includes:
(a) Pre-contract negotiations to establish the circumstances in which the contract was entered into; and
(b)The commercial context in which a contract is made. In particular, the court emphasised the need to interpret a contract in accordance with commercial or business commonsense.
Here, the court found that the contract itself, viewed in isolation, suggested the price was inclusive of transmission costs, but when the background to the contract was considered, this interpretation was “commercially absurd” – no party in the supplier’s position would have agreed to discount the price by the equivalent of the transmission costs.
This case underlines the necessity for commercial contracts to be drafted very carefully and with attention to detail, and to make sure that they fully and accurately record the parties’ intentions.