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Admissibility of Extrinsic Evidence to Interpret a Written Contract
This article discusses the Singapore Court of Appeal case of Zurich Insurance
(Singapore) Pte Ltd v B-Gold Interior & Construction Pte Ltd and the
approach that Singapore Courts adopt in relation to the admissibility of extrinsic
evidence in the interpretation of written contracts.
In Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] SGCA 27, the Singapore Court of Appeal, in a written judgment by VK Rajah JA, clarified the approach that Singapore Courts must adopt in relation to the admissibility of extrinsic evidence that might affect the meaning of the words and expressions used in a written contract. The Court held that the Courts must adopt a contextual approach to contractual interpretation. Additionally, the Court ruled that ambiguity in a contract is not a prerequisite for the admissibility of extrinsic evidence in aid of contractual interpretation. In this regard, the Court also examined the relevant provisions of the Singapore Evidence Act (the 'Act') on the admissibility of extrinsic evidence to interpret a contract.
It bears stressing that contract interpretation is fundamentally an important area of legal and commercial practice. In view of this, the Court said that it would be in the interest of the public if parties, especially those engaged in commerce, are able to predict securely how the Courts will resolve a particular dispute on contract interpretation. This case aids in this regard.
According to the Court, the context of a contract
must be taken into account in understanding the meaning and intent of the
parties to the contract. Contracts are constituted by words, and, as Oliver
Wendell Holmes J said in Towne v Elisner 38 Ct 158 (1918), a 'word is not
a crystal, transparent and unchanged[.] [I]t is the skin of a living thought
and may vary greatly in color and content according to the circumstances and
the time in which it is used.' Indeed, contracts do not exist in a vacuum,
a point the Court reiterates several times in this decision.
Facts of the Case
B, an interior design and construction company, was engaged by a media production
company, M, to carry out maintenance, repair as well as addition and alteration
works at M's premises. B obtained a contractor all-risks policy ('Policy')
from Z, an insurance company. A fire caused by the negligence of one of B's
sub-contractors subsequently broke out at M's air-handling unit ('AHU') room
at the fourth floor of M's television building. As a result, one of the AHUs
and several production equipment and studios of M were damaged.
M sued both B and the sub-contractor for damages
caused by the fire. After M successfully obtained a judgment at the District
Court as far as its claim against B was concerned, B commenced third-party
proceedings against Z to recover compensation based on the Policy ('Third-Party
Action'). The District Judge in the Third-Party Action dismissed B's claim
against Z. On appeal to the High Court, the High Court Judge set aside the
District Judge's decision. Z appealed to the Court of Appeal.
The Insurance Policy
Section I of the Policy, titled 'Material Damage', provided that Z would indemnify
the insured, B, if the enumerated items in the Policy's Schedule should suffer
any unforeseen and sudden physical loss or damage from any cause in a manner
necessitating repair or replacement. The Schedule essentially covered permanent
and temporary work and the materials to be incorporated therein.
Section II of the Policy, titled 'Third Party Liability', provided that Z would indemnify B up to a specified amount against such sums in damages which B shall become legally liable to pay due to accidental loss or damage to property belonging to third parties. It was specifically stated that the loss or damage to the property must have occurred in direct connection with the construction or erection of the insured items. Section II had its set of special exclusions. It was stipulated that Z would not indemnify B in respect of liability consequent upon loss or damage to property belonging to or held in care, custody or control of the Contractor(s), the Principal(s) or any other firm connected with the project which is insured under Section I, or an employee or workman of one of the aforesaid ('Special Exclusion 4(b)').
The issue in this case was whether the damage
caused to M's property by the fire was covered by the Policy.
Ruling of the Court of Appeal
The Court of Appeal allowed Z's appeal on the ground that the damage caused
to M's property by the fire was not covered by the Policy.
Paradigm shift
The Court highlighted that there has been a shift from the traditional approach
to contractual interpretation to the contextual approach to construing a contract.
Under the traditional approach, ambiguity, absurdity or the existence of an
alternative meaning is a prerequisite for the Court to resort to or consider
extrinsic evidence to interpret a contract. This is because the Court will
not ordinarily consider evidence outside the four corners of the document
being construed if the terms thereof are clear.
The traditional approach has increasingly been sidelined in favour of the contextual approach to construing a contract. The term 'context' refers to the circumstances surrounding the formation of the contract, including the purpose for which it was entered into. This is a departure from the traditional approach whereby the terms of the contract were divorced from the factual matrix of the case and were interpreted purely on 'internal linguistic considerations'. In this regard, the Court stated that the seeds of the paradigm shift to the contextual approach were arguably first sown by the House of Lords in Prenn v Simmonds [1971] 1 WLR 1381. Lord Wilberforce in this case stated in part the following:
The time has long passed when agreements … were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. … We must … inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. [Emphasis added]
This principle was reiterated by Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen Tangen [1976] 1 WLR 989 when he said: 'In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.'
In the landmark case of Investors Compensation
Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffman
made a decisive endorsement of the contextual approach. Here, he set out the
principles by which contractual documents are construed. These principles
have been regarded as the most lucid modern restatement of the contextual
approach. The more important impact of the Investors Compensation Scheme restatement
is the change in the way in which contractual interpretation is to be carried
out. The judgment in this case is to the effect that ambiguity is no longer
a prerequisite for the admissibility of extrinsic evidence in the exercise
of contract interpretation.
Extrinsic evidence under the
Singapore Evidence Act
The Court examined the relevant provisions of the Act on the admissibility
of extrinsic evidence to interpret written contracts. Proviso (f) to s 94
of the Act is particularly relevant to the instant appeal. Essentially, s
94 states that no evidence of oral agreement or statement shall be admitted
as between the parties to any agreement which has been reduced to the form
of a document for the purpose of contradicting, varying, adding to, or subtracting
from its terms. Despite this general statement, proviso (f) to this section
stipulates that 'any fact may be proved which shows in what manner the language
of a document is related to existing facts'.
The Court's endorsement of the contextual approach to contractual interpretation can be found in the recent cases of Singapore Telecommunications Ltd v Starhub Cable Vision Ltd [2006] 2 SLR 195 and Sandar Aung v Parkway Hospitals Singapore Pte Ltd [2007] 2 SLR 891. In these two cases, the Court interpreted the subject provisions in the respective cases in the light of extrinsic evidence to reveal the parties' objects in mind when entering into the contracts in question. In particular, Sandar Aung, consistent with the ruling of the House of Lords in Investors Compensation Scheme, acknowledged that extrinsic material is admissible even if no ambiguity is present in the plain language of the contract.
In the instant case, the Court affirmed its approval of the contextual approach to contractual interpretation in Sandar Aung. Moreover, the Court ruled that there was considerable force in Daniel Seng's thesis in his article, 'Another Clog on the Construction of Contracts? The Parol Evidence Rule and the Use of Extrinsic Evidence' [1997] SJLS 457, that proviso (f) to s 94 of the Act should be given a permissive interpretation which does not make ambiguity a prerequisite for the admissibility of extrinsic evidence in aid of contractual interpretation. It must be noted that Mr Seng's view has been adopted albeit implicitly in two Singapore High Court decisions, Standard Chartered Bank v Neocorp International Ltd [2005] 2 SLR 345 and China Insurance Co (Singapore) Pte Ltd v Liberty Insurance Pte Ltd [2005] 2 SLR 509.
The Court then listed the main features of the
approach to the admissibility of extrinsic evidence that Singapore must adopt
to affect written contracts, including the following:
1 A Court should take into account the essence and attributes of the document
being examined.
2 If the Court is satisfied that the parties intended to embody their entire agreement in a written contract, no extrinsic evidence is admissible to contradict, vary, add to, or subtract from its terms.
3 Extrinsic evidence is admissible under proviso (f) to s 94 of the Act to aid in the interpretation of the written words. Courts now adopt, via this proviso, the modern contextual approach to interpretation whereby ambiguity is no longer a prerequisite for the admissibility of extrinsic evidence.
4 The extrinsic evidence in question is admissible so long as it is relevant, reasonably available to all contracting parties, and relates to a clear context. However, the principle of objectively ascertaining the contractual intentions of the parties remains paramount.
5 A Court should always be careful to ensure
that extrinsic evidence is used to explain and illuminate the written words,
and not to contradict or vary them.
Interpretation of the Policy
On the facts, the Court of Appeal held that the damage caused to M's property
by the fire was not covered by the Policy pursuant to Special Exclusion 4(b).
It ruled that the words in Special Exclusion 4(b), 'which or part of which
is insured under Section I' should be read as qualifying the project as a
whole and not the property. According to the Court, 'reading these words as
a qualification to "property" instead would render unintelligible
the subsequent phrase "an employee or workman of one of the aforesaid"'.
In the instant case, since B's third party liability arose from damage to
property belonging to M, Special Exclusion 4(b) applied.
Additionally, the Court noted that the circumstances leading up to B taking out the Policy were not clear. For example, the exact communications which took place between the representatives and agents of B and the person who introduced B to Z were not precise. Moreover, the circumstances under which the insurance agent who had been attending to the insurance requirements of B decided to request for and/or under which Z decided to provide a contractor all-risks policy were uncertain. The Court said that since extrinsic material cannot be taken into account to construe Special Exclusion 4(b) in such a way as to render it inoperative, it found that this provision did exclude Z's liability to indemnify B under Section II. Thus, B was not entitled to indemnity under the Policy in relation to the damaged property.
Kala Anandarajah
Hazel Galimba Guiling
Rajah & Tann LLP
E-mail: kala.anandarajah@rajahtann.com
E-mail: hazel.guiling@rajahtann.com