The recent decision of the Supreme Court of New South Wales in Movie Network Channels Pty Ltd v Optus Vision Pty Ltd  NSWSC 157 provides a helpful commentary on the admissibility of negotiations in respect to the construction of contracts. The decision affirms the principle that primacy is given to the words of the contract. If the meanings of the words are ambiguous it is only then that extrinsic material can be admitted (e.g. negotiations).
By a Channel Supply Agreement (CSA), The Movie Network Channels (TMNC) supplied TV Movie Channels to Optus Vision. A dispute arose between the parties concerning the meaning of the words 'Optus Vision retail price for the Movie Channels' contained in clause of the CSA that calculated the licensing fee payable by Optus Vision.
TMNC contended that an escalation clause was triggered in 2002 causing Optus Vision's licensing fee to rise and claimed close to half a billion dollars in unpaid licensing fees and interest. In response, Optus Vision argued that TMNC misconstrued the escalation clause and that the clause had never been triggered.
Basis of TMNC's Argument
TMNC sought an exception of the parole evidence rule to admit evidence of negotiations prior to the execution of the CSA in order to construe the escalation clause in its favour.
The parole evidence rule provides that when parties execute a written contract, the contract consists only of the terms in that contract and evidence of extrinsic terms cannot be applied to vary or contradict the language and meaning of the contract.
TMNC sought to have pre-contractual negotiations admitted as evidence and argued that the words of the CSA were ambiguous. It further argued that the parties' actual intention was that the words of the CSA were to be construed to mean the escalation clause had been triggered when Optus Vision's retail price for movies equalled Austar's basic price plus movie retail price.
TMNC relied on the decision of Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337in which Mason J suggested an exception to the parole evidence rule. Mason J observed that pre-contractual evidence is admissible on a question of construction if the contract is ambiguous and if the pre-contractual conduct casts light on the genesis of the contract, its objective aim, or the meaning of any descriptive term.
The Court agreed with TMNC that there may be cases where exceptions to the parole evidence rule may be invoked, but found that this was not one of those cases and declined to admit TMNC's evidence of the pre-contractual negotiations.
The Court rejected the evidence because it was near impossible to find any express agreement in the pre-contractual negotiations as to the particular way in which the retail price of the Movie Channels was to be determined.
The Court analysed Codelfa and cited Mason J's observations that when two or more meanings can be given to a contract the Court does not look at the actual intentions of the parties before the contract is signed, rather the Court looks at the objective framework of the facts.
In examining the objective framework of the facts, the Court took into account what a reasonable person subscribing to the Movie Channels would consider to be the retail price of the Movie Channels. The Court found that the approach taken by Optus Vision concurred with what a reasonable person would consider to be the retail price. TMNC's construction of the escalation clause was rejected and its claim dismissed.
For further infomation please contact Dean Hely on (08) 9288 6774 or Christine Arthur on (08) 9288 6706.