No, you cannot have my internal negotiation documents

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A case about a failed discovery application

Background

Australian courts adopt an objective theory of contract.

That is, the terms of a contract are construed objectively, by determining what a reasonable businessperson in the position of the parties would have understood the terms to mean. Courts are not concerned with the parties’ actual intentions.

The best guide, therefore, to what the parties intended is what has been written and signed.

Generally, therefore, courts are loath to admit into evidence documents relating to the negotiation of a contract to assist in its interpretation. That is particularly so with respect to a party's internal negotiation documents.

Discovery

A question arises as to whether such documents may still be required to be produced on discovery. That is because the discovery obligation is a broad one.

Documents must be discovered if they are relevant. A relevant document is one that 'relates to the issues in dispute'. A matter 'relates to the issues in dispute':

If it it is reasonable to suppose that the documents contain information which may either directly or indirectly enable the party seeking discovery to either advance their case or damage their adversary's case, which includes documents which may fairly lead to a train of enquiry which may have either of these two consequences.

This is known as the Peruvian Guano, or ‘train of enquiry’, test.[1]

One may ask, therefore, whether precontractual documents still ‘relate’ to a contract interpretation dispute, even though they would not be admissible into evidence.

The Court says no

The issue came before the Supreme Court of Western Australia in McDougall Holdings Trust v Rural Bank[2], in a decision delivered earlier this week, on 12 October 2021.

In that case, the plaintiff sought discovery of various of the bank’s ‘internal documents’, in a dispute that essentially concerned the proper interpretation of a number of loan facility agreements. The documents were created before the agreements were entered into.

Upon a review of the various categories of documents sought, the Court could not see how they could be relevant or how they could lead to a fruitful line of enquiry. The plaintiff’s application failed.

Good law

The outcome of this case accords with principle.

As Kirby P observed in State Railway Authority of NSW v Health Outdoor Pty Ltd, courts should be cautious about engaging in ‘a minute examination of the wilderness of precontractual conversations’. To do otherwise may seriously undermine the adherence to bargains which are such an important feature of economic life.[3]

Be aware, however, that it is the pleadings that determine what is in dispute, and it is possible for the pleader to put in issue precontractual conduct. Had, for example, the pleader in this case alleged improper lending practices, the situation may have been different. Other cases where precontractual conduct may be relevant include claims of misleading or deceptive conduct (depending on the relevant conduct) and claims of rectification.

 [1] As propounded in Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 and adopted in Australia. Note, however, discovery in the Federal Court is generally limited to ‘directly relevant’ documents.

[2] Alistair McDougall Nominees Pty Ltd as Trustee for The McDougall Holdings Trust -v- Rural Bank (A Division of Bendigo and Adelaide Bank Limited (ACN 068 049 178) [2021] WASC 348.

[3] (1986) 7 NSWLR 170, at 177. These observations were made in the context of precontractual conduct in a case concerning estoppel by convention. The same reasoning applies here.

Dean Grondal - Principal - Grondal Bruining

 Phone: +61 8 6500 4300 

 Email: dean.grondal@grondalbruining.com.au

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