Tips on capturing agreements - you have to write it down!

By Stuart Connor.

Key Points:
Commercial negotiations sometimes require a fudge to get the deal done, but you won't get a second bite of the cherry if the fudge doesn't reflect the deal you wanted.

Lawyers often wield the mysterious "parole evidence rule" when trying to get clients to accurately document their deals and not rely on oral negotiations or fudges. But here's the wrap - it's true!

In a judgment sparse on Latin, but abundant in common sense, Justice Muir of the Queensland Supreme Court recently rejected attempts by a contractor to dredge up its recollection of negotiations of an arrangement for the resolution of a dispute and the release of security bonds to support an interpretation of the written agreement favourable to the contractor (Northbuild Constructions Pty Ltd v Capital Finance Australia Ltd [2006] QSC 81).

The judge summarised the evidence put forward by the contractor and principal to a building contract about meetings where the negotiations took place and a familiar picture emerged of negotiations where each party thinks the other agrees with it, but doesn't press for clarification of its understanding.

An agreement was then documented and signed that the contractor would provide additional security to that provided under the building contract and the principal would "be entitled to retain security which would otherwise be released on Practical Completion until sufficient disputes have been resolved".

The contractor later tried to argue that the principal could only retain the additional security past Practical Completion, not the original security under the building contract. The judge held this was contrary to a literal construction of the agreement.

Nor did the evidence of the prior negotiations help.

In a strikingly insightful observation, the judge rejected the contractor's attempt to stray "from the legitimate use of negotiations as an aid to construction into an attempt to identify the contract which, in its opinion, should have resulted from the language used in the negotiations":

"What was said and left unsaid in the course of negotiations are objective facts within the knowledge of the parties. But the purpose of negotiations such as those under consideration is to produce a written instrument containing the parties' concluded agreement. Where such an instrument is produced, its terms constitute the parties' bargain. The negotiations have achieved their objective and, unless rectification is sought, the history of the negotiations is normally irrelevant. It is certainly not permissible, as an aid to construction of the instrument, to single out of a fluid process particular demands or assertions by one party and other party's responses or failures to respond. A party to negotiations, as a legitimate negotiating tactic, may wish to avoid direct or even indirect confrontation. Instead of bluntly rejecting a proposal it may subtly, at a later time, introduce a counter-proposal or suggest wording the adoption of which will produce a result contrary to the initial proposal."

The reality is that commercial negotiations sometimes require a fudge to get the deal done. The takeout point here is that a fudge is a fudge, and you won't get a second bite of the cherry if the fudge doesn't reflect the deal you wanted.

For further information, please contact Stuart Connor.