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URL: http://www.bailii.org/ew/cases/EWCA/Civ/2007/399.html
Cite as: [2008] Bus LR D73, [2007] EWCA Civ 399

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Neutral Citation Number: [2007] EWCA Civ 399
Case No: A3/2006/1537

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE HART)

Royal Courts of Justice
Strand, London, WC2A 2LL
14 March 2007

B e f o r e :

LORD JUSTICE AULD
LORD JUSTICE MAY
and
LADY JUSTICE ARDEN

____________________

Between:
KHAN
Appellant/
Defendant
- and -


KHAN

Respondent/Claimant

____________________

(DAR Transcript of
WordWave International Limited
A Merrill Communications Company
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____________________

MR D FOSKETT QC (instructed by Messrs Stanniford Wallace) appeared on behalf of the Appellant.
MR J EVANS (instructed by Messrs Batt Broadbent) appeared on behalf of the Respondent.

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Lord Justice Auld:

  1. This is an appeal by permission of Lloyd LJ from a ruling of the late Hart J on 21 June 2006 on one of a number of preliminary issues in a dispute between two brothers, Ashraf Khan, the respondent claimant, and Afzal Khan, the appellant defendant, arising out of their partnership in the firm of Khan and Co. Hart J's ruling was in favour of Ashraf on the issue whether his claim to a share in the assets of Khan and Co arising on the dissolution of that partnership on 1 April 2002 had been compromised by an oral agreement made between them at a family meeting on 3 August 2002. The judge held that the agreement was confined to resolving the ownership of certain jointly held properties and as to their future involvement or non-involvement in partnerships between them, one of which was Khan and Co, but did not include a compromise of Ashraf's claim to a share in the assets of Khan and Co arising on its dissolution.
  2. The parties came from Pakistan to this country in 1968, when in their teens, and from about 1978 they have been involved in various joint and separate business ventures. Hart J described the documentary evidence as to the origins of Khan and Co as "surprisingly sparse". But he was satisfied on all the evidence before him that by 1991 Khan and Co was engaged in property letting and management. The brothers at some time formed another partnership, which they called Chic Boutique, a retail clothing business. Afzal appears to have taken the main responsibility for the running of Khan and Co and Ashraf of Chic Boutique.
  3. Over the years the brothers acquired a number of properties in connection with these and other ventures, some in Afzal's sole name, some in both their names, some in the names of Afzal and others and some in the name of both of them and others. These properties, in addition to their respective partnership interests in Khan and Co and Chic Boutique, became from about 1999 the subject of increasing friction and dispute between the brothers. Hart J in paragraphs 17, 18 and 19 of his judgment drew from the evidence before him the following pen picture of their business relationship over the two or three years before the agreement in question:
  4. "17. Apart from the notional division of the taxable profits shown in the tax returns there seems to have been no accounting as between the two brothers in relation to the profits of either of the Chic Boutique business or of the Khan and Co property management business. In general the finances of both businesses appear to have been controlled by Afzal who in practice seems to have allowed Ashraf to pay himself out of the modest earnings of Chic Boutique and to have undertaken through Khan and Co the payment of the mortgage, council tax and insurance in connection with Ashraf's residence …
    18. From 1999 onwards the relationship between the two brothers appears to have been more and more fractious. I have not found it easy to obtain a clear picture as to why this change came about. According to Ashraf the breakdown began with a disagreement between the two brothers over a plan to refinance the business. Afzal had retained brokers for this purpose and agreed that they be paid a fee for their services to which Ashraf took exception. I think it likely that it was only in the course of this refinancing exercise that Ashraf came to have a real idea as to the potential size of the business and the implications of his being a 50 percent partner in it. He began to ask questions, in particular as to who owned particular properties and why the ownership of some properties which he had thought were owned by the nominees of the partnership had apparently been transferred into Afzal's sole name. He began to distrust the answers which he was given by Afzal and the differences between their respective lifestyles which at one time had simply seemed to reflect their different roles in the businesses began to rankle. In crude terms Ashraf believed that profits generated by the partnership business were being diverted by Afzal into his own pocket"
    19. For his part Afzal plainly regarded Ashraf's unaccustomed inquisitiveness and acquisitiveness as both extremely irritating and impertinent … By the time the two brothers fell out Afzal had persuaded himself that Ashraf had never pulled his weight in the property management business. Indeed that they had never really been partners at all. On Afzal's view of the matter Ashraf had been admitted to the business only in the sense that he had been allowed to call himself a partner. His entitlement to share in the profits of the business was simply an entitlement to be paid such share if any of the profits as Afzal chose to pay him and he had no interest in the capital of the partnership."
  5. Hart J found on the evidence before him that it was common ground that in the months leading to the dissolution of the partnership on 1 April 2002 the two brothers intended to go their separate ways once they had resolved the division of their property and partnership interests. The family meeting on 3 August 2002 was prompted by the family, who were unhappy about the disputes between them, in the hope that it would help them to resolve them.
  6. In February 2005 Ashraf issued these proceedings for declarations as to the existence of the partnership business between him and Afzal in the name of Khan and Co as to its dissolution and for accounts and enquiries to establish the partnership property and their respective entitlements in it on dissolution. Pursuant to an order of Deputy Master Rhys, Hart J heard and determined four preliminary issues, of which this was the first. It was in the following terms:
  7. "Whether … Ashraf's claim to a share of the assets of the partnership Khan and Co arising on the dissolution of the partnership had been compromised by the agreement … [of 3 August 2002]."
  8. The brothers were at one at trial that they had agreed at the family meeting that:
  9. 1) Ashraf would have no further interest in the business of Khan and Co and that Afzal could continue to trade under that name.
    2) Afzal would have no further interest in Chic Boutique and that Ashraf could continue to run it.
    3 Ashraf would have the entire legal and beneficial interest subject to mortgages in three properties then registered in their joint names.
    4) Afzal would have the entire legal and beneficial interests in certain other properties then registered in their joint names.
    5) Ashraf acknowledged that he had no claim on another property that he had mistakenly believed was then registered in their joint names.
  10. So far so good. However, the brothers were not at one about a further matter. Ashraf's case was that in reaching those agreements or agreement it was understood between them that he had other claims against Afzal, claims that Afzal would resist in court if necessary. Afzal maintained on the other hand that they had agreed those terms of agreement to be in full and final settlement of all Ashraf's claims against Afzal, including any arising out of the dissolution of Khan and Co.
  11. Hart J reviewed the evidence on the issue in paragraphs 26 to 34 of his judgment. First, there was evidence from those who attended the meeting on 3 August 2002, namely Ashraf and Afzal, their brother Aslam and their sisters Shakila and Sajila, who in their various ways referred to a number of documents that were generated, documents prepared by Afzal and signed at the meeting. They were:
  12. 1) joint letters from Ashraf and Afzal to the bank, respectively instructing the bank to remove Ashraf's name from the Khan and Co bank account held by it and to remove Afzal's name from the Chic Boutique bank account held by it.
    2) A letter from both of them addressed "To whom it may concern" recording that Ashraf had full interest in three retail properties and that Afzal had "full interest" in two other properties.
    4) A letter from Ashraf to the bank disclaiming any interest in a further property, 86 Hainault Road, Leightonstone E11 1EH, which had been registered in their joint names, and in which he informed the bank he had only acted as trustee for Afzal (following some exchanges shortly after with Afzal through Aslam, he followed with a further letter to the bank to be read with it, stating that he had agreed to purchase a 50 percent share in that property at the market value less the amount of various charges on it).
  13. Ashraf's oral, though not written, evidence was that he had made it clear at the meeting that he had further claims to which he said Afzal's response was that, if he persisted with them, he would have to take them to court. As the judge observed, he had not so asserted in any of his witness statements. Afzal's evidence on that aspect was that he had said no such thing; if he had said anything like it he must have said it before the meeting not at it. Shakila and Sajila, who did not speak English, had both made witness statements in identical terms, which, in translation, recorded that once the documents had been signed at the meeting:
  14. "We were all satisfied that they have settled their entire business affairs and Ashraf was to go his own way from then on."
  15. Aslam's evidence was that the only matters "brought to the table" were the six properties in the joint names referred to in the agreement. His account in his witness statement was, on this critical issue, in somewhat neutral terms, namely that once the various documents had been signed at the meeting:
  16. "We were all satisfied that they had settled their differences at that time."
  17. However, as Hart J observed in his judgment, he gave an account in oral evidence closer to that given by his sisters in their witness statements, namely that the matters discussed and agreed at the meeting amounted to a resolution of all issues between his brothers, something that had been the whole purpose for the family meeting. As the judge recorded in paragraph 32 of his judgment, Aslam also said that the real issue at the meeting had been whether Afzal would cede to Ashraf the three properties that he did and that that and the other matters dealt with in the written documents were "the only issues brought to the table". He also expressed the perception that Afzal would never have entered into these agreements if there had been any question of Ashraf reserving further claims against him.
  18. Hart J, in paragraph 24 of his judgment, began his analysis of the evidence on the critical issue with an acceptance of Aslam's account and a rejection in part of Ashraf's account. This is what he said:
  19. "In my judgment Aslam was giving me an honest and accurate account of what transpired between the two brothers at the meeting. Accordingly I do not accept Ashraf's assertion that it was expressly made clear at the meeting that there were issues potentially unresolved by the agreements then reached and which might be the subject of litigation in the future. I also think that Aslam's perception that Afzal would never have conceded the 'three shops' had he believed that Ashraf might in the future pursue other claims, as an accurate one."
  20. However, Hart J, despite that view of Aslam's and Ashraf's evidence, went on in paragraph 35 of his judgment to say that it did not follow from it that there was consensus at the meeting that Ashraf had undertaken not to pursue other claims. This is how he put it:
  21. "It does not however … follow that either Ashraf or Afzal believe that Ashraf had bound himself not to make such claims. If the background against which the meeting took place was one where Afzal was asserting that the only issues on which out of court agreement was possible was the partition of the jointly owned property, I think it more likely that Ashraf attended the meeting hoping to reach agreement on those issues but without intending to abandon claims he might have in relation to other properties the purchase of which had been financed wholly or in part by the partnership and/or where the names in which the property was registered did not reflect the beneficial ownership."
  22. The judge went on to instance a property, 66 Warwick Road, Walthamstow, not one of the properties the subject of any express agreement at the 3 August 2002 meeting. Yet it was a property that had been purchased in the names of Ashraf and of a Mr Johal. Its mortgage payments had been made by Khan and Co; the rents earned by it had been paid to Khan and Co; Afzal acknowledged that Ashraf was entitled to a 25 percent share in any capital profit made on sale; and Ashraf had not accounted to him in respect of rents following dissolution. The judge took that, as he said in paragraph 35, as:
  23. "A good illustration although by no means typical of the difficulty in regarding the simple division agreed to on 3 August 2002 as resolving all the issues between the brothers".

    Hart J's conclusion, which is to be found in paragraphs 36 and 37 of his judgment, was, as I have indicated, in favour of Ashraf; namely, that the agreement was not one of compromise on all issues, but covered only the jointly-held properties identified in the document generated and signed at the meeting:

    "36. It seems to me that both brothers would have come to the meeting with the knowledge that there were potentially other issues between them than simply the partition of the jointly held properties and that the omission of Afzal to include in the paperwork produced at the meeting any formula purporting to make the agreement one in full and final settlement was not accidental. At any rate, nothing having been expressly said about the agreement being in full and final settlement I do not think that the circumstances made it necessary or obvious that such a term should be implied.

    37. Accordingly I answer the first issue in the negative …"
  24. Mr David Foskett QC, on behalf of Afzal, has challenged Hart J's rejection of his case that, by the agreement reached at the meeting on 3 August 2002, he and Ashraf compromised his claim as to the ownership and assets of Khan and Co.
  25. Mr Foskett's first submission was that Hart J wrongly had regard to what he found to be Ashraf's undisclosed intentions. He maintained that the judge, having expressly rejected as he did in paragraph 34 of his judgment, Ashraf's evidence that he had made clear at the meeting that he had other claims, wrongly relied on his conclusion in paragraph 35 that he had gone to the meeting hoping to reach agreement on the partition of the identified jointly-owned properties, but not to abandon his claim in respect of other properties financed wholly or in part by Khan and Co. Such a consideration, Mr Foskett submitted, offended the basic rule that, when considering whether negotiation between two parties to a dispute or a series of disputes has resulted in a binding compromise, a court should look for an objective common intention. He referred to the convenient text in support of that to be found in Chitty, 29th Edition, Volume 1, paragraphs 2, 001 to 002. To such an exercise, any undisclosed thoughts of one of the parties is, he said, irrelevant citing the well-known passage from the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at pages 912 to 913.
  26. The response of Mr Jonathan Evans for Ashraf to this complaint was that there was no inconsistency in Hart J's approach. He did not find that the only matter agreed was that the six properties in joint names would be divided, but that those six were the only properties the subject of the agreement.
  27. Mr Foskett's second submission was that Hart J wrongly relied, when concluding the matter against Afzal in paragraph 36 of his judgment, that he, in his preparation of the paperwork at the meeting did not include a provision that the agreement was to be in "full and final settlement". Mr Foskett referred to Aslam's evidence as to his belief that the meeting had resolved all issues between Ashraf and Afzal, and made the point that, in any event, the absence of the use of any such expression at the meeting was not conclusive, citing Cleopatra Seafoods Ltd v Khera and Others [2002] EWCA Civ 1260 and Bristow v Grout [1987] CAT 1134. He added that such significance, if any that might be given to its absence here, is minimal in the context of a resolution of a family dispute in the absence of lawyers.
  28. Mr Evans's response was to underline the fact that Aslam's evidence was not that it was expressly stated at the meeting Ashraf's claims to the three properties were in full and final settlement, only that he, Aslam, understood that to be the effect of the agreement. Mr Evans added that it did not follow from Hart J's acceptance of Afzal's belief that that was the end of all the issues between them and his rejection of Ashraf's evidence that they had expressly stated he had further claims, that he was acknowledging that the agreement was in full and final settlement.
  29. Mr Foskett's third submission was that, in any event, the agreement, and the Muslim family setting in which it was reached, and in the documentation it had generated, showed that it went beyond the vision of jointly-owned properties. There was, in particular, their documented abandonment of any interest in one of the two partnerships, Ashraf in that of Khan and Co and Afzal in Chic Boutique. Such mutual abandonment of partnership involvement was a strong indicator, he suggested, of a mutual parting of the ways and abandonment of any existing interest respectively in those two partnerships.
  30. Mr Evans' response on this issue was that the suggestion is a misunderstanding of what was agreed as to the two partnerships, namely that, following dissolution of them, each would go his own way having nothing to do with the running of the other. It said nothing, Mr Evans emphasised, about what was to happen on the dissolution of Khan and Co as to what had been a running sore between the two brothers, Ashraf's concern for a share of the profits and assets of that partnership.
  31. Fourthly, Mr Foskett, notwithstanding the need for caution before relying on the subjective understanding of those present, urged on the court that the other members of the family at the meeting, in addition to Afzal, ended it in the belief that a full and final agreement had been reached. He drew attention in that connection to the evidence of all concerned that the meeting seemed to have ended on reasonably amicable family terms, more amicable perhaps on Afzal's and Aslam's accounts than that of Ashraf, and to the request by Ashraf to Afzal for and the payment by Afzal to him of £3,000 in two cheques at the end of the meeting.
  32. Mr Evans' response was that it does not follow from Hart J's failure to make express mention of those matters in his judgment that he overlooked them, but that in any event such an amicable ending to what was in large part a family meeting was equally consistent with a settlement of the immediate matters of concern, enabling the two brothers to go their own business ways as with a settlement of all the outstanding issues. I agree. These aspects of the evidence do not, in my view, take the matter any further, one way or the other.
  33. As Mr Evans emphasised, the task for Hart J was one of fact, what the parties agreed; not one of law, in the sense of interpretation of what any common expression of it by them meant. In particular, it was one of fact as to what they orally agreed, evidenced in part by documents created by Afzal and signed by both of them. More particularly, it was one of fact to which they orally agreed at the meeting, not as to their respective states of mind beforehand going to their hopes or objectives as to what might be agreed. If, on the facts -- what was said and/or done at the meeting -- Afzal could not positively establish an agreement to compromise everything else between them in relation to Khan and Co, his defence of compromise had to fail. That is so, regardless of whatever reliance Hart J might have placed on either or both of the parties' undisclosed subjective approaches.
  34. In addition, the court should not consider overturning his overall finding of fact against compromise based on his evaluation of both written and tested oral evidence unless it is satisfied that it is plainly wrong, in the words of Ward LJ in Assicurazioni Generali SpA v Arab Insurance Group  [2002] EWCA Civ 1642 [2003] 1 WLR 577 and 584, such that it:
  35. "…exceeded the generous ambit within which reasonable disagreement about the conclusion to be drawn from the evidence is possible".
  36. Hart J's essential conclusion on all the evidence was that the parties came to the meeting with a history of various disputes that went beyond the matters on which they eventually hammered out what was capable of agreement between them at that time. The judge's rejection of Ashraf's evidence that he had made clear at the meeting that he had other claims did not undermine his conclusion that the agreement reached did not go beyond the six properties and withdrawal from the business affairs of the respective partnerships discussed and evidenced in the documentation. As Mr Evans pointed out, proper analysis of the judgment shows that Hart J did not rely on any undisclosed intentions of Ashraf as to what he and his brother agreed. His reasoning in paragraphs 35 and 36, by reference to his understanding of Aslam's evidence recorded in paragraph 32 of his judgment, was that Afzal, in the context of long standing and various disputes between them, had limited the meeting to what could be agreed without recourse to litigation.
  37. Put at its lowest, there was simply no positive evidence as to what was said and done at the meeting that they agreed that the subject matter of the agreement undoubtedly reached should serve as a final disposal of all issues between the two brothers. Indeed, properly analysed, as the judge pointed out, the balance of such indicators as there were, weighed against that outcome. The untied end in relation to 66 Warwick Road as to their respective entitlement on dissolution of Khan and Co to Ashraf's and Mr Johal's interest in that property owned by the partnership, is a good illustration of what they both must have known -- "more to come".
  38. Unchallenged evidence, which Hart J accepted, that the partnership in Khan and Co had come to an end and that Ashraf was to have no further part in its business did not militate against any claim that Ashraf might wish to make in respect of the partnership assets on dissolution. In that connection it is of interest to note that Afzal did not include in the joint letter addressed "To whom it may concern" identifying their respective "full" interest in the various properties, a similar assertion in relation to their respective interests in the partnership's assets, goodwill etcetera, as he might have been expected to do if that had been his understanding and concern at the time. Thus it was that the judge expressed himself as he did in these words in paragraph 35:
  39. "If the background against which the meeting took place was one where Afzal was asserting that the only issues in which out of court agreement was possible was the partition of the jointly owned property, I think it more likely than not Ashraf attended the meeting hoping to reach agreement on those emphasised issues but without intending to abandon claims he might have in relation to other properties the purchase of which had been financed wholly or in part by the partnership and/or with the names in which the property was registered did not reflect the beneficial ownership."

    He said much the same again when expressing his conclusion on this issue in paragraph 36.

  40. As to the absence noted by Hart J in paragraph 36 of any "full and final settlement" formula in the supporting paperwork, I agree with Mr Foskett that its absence was not conclusive. Nevertheless, as Mr Evans contended, given that Afzal upon the family's insistence prepared all the documentation to record what had been agreed and by such "careful formalities", it was, in my view, a legitimate inference that if that had been agreed at the time Afzal might have been expected to include it, the most obvious place being as I have mentioned in the "To whom it may concern" letter. After all, on his own account, he prepared the documentation on the insistence of his family to avoid future disputes.
  41. For those reasons I am of the view that Hart J was entitled to conclude as he did that Ashraf had not compromised his claim to the declaration and an account and enquiries as to his interest in the assets of Khan and Co on its dissolution. His conclusion was tenable on the evidence that he accepted, and followed consistently his reasoning as to those parts of it that he did not accept. Put another way, on the evidence before him there was no clear evidence of an express consensus between the two brothers of the wider compromise that Mr Afzal put forward as one of his defences to Ashraf's claim. On the contrary, the meeting took place against the backcloth of a much wider range of keenly contested and unresolved issues than those specifically identified in the agreement. At the very least Hart J's carefully reasoned judgment cannot, in my view, be said to be so plainly wrong that the court should interfere with it.
  42. Accordingly, I would dismiss the appeal.
  43. Lord Justice May:

  44. I agree that this appeal should be dismissed for the reasons which Auld LJ has given. It seems to me that the bones of the matter are this. The issue with which this appeal is concerned is whether the agreement between Afzal and Ashraf Khan on 3 August 2002 compromised all claims which might arise between them on the dissolution of Khan and Co or only constituted an agreed distribution of various properties. There was disagreement on this between the two brothers who are the parties to these proceedings. It all turned on what was agreed at the family meeting on 3 August 2002.
  45. There was evidence from other members of the family as to what they understood had been the family's intention in setting up the meeting and there was evidence from Aslam in particular as to what he understood had in truth been agreed at the meeting, his understanding being that there had been a full compromise. Although evidence was admissible of the background context in which the agreement was made, the primary source of evidence of what had in fact been agreed had to be what was said at the meeting and what was written . Auld LJ has described the documents which were written and signed at the meeting. Those documents do not contain anything which constitutes or evidences a compromise of all claims or indeed goes beyond the distribution of properties or instructions to the bank as to the bank accounts.
  46. I understand Mr Foskett's point that some of these documents, for example the instructions to the bank, were not the kind of document in which you would expect to find an expression such as "full and final settlement" even if this was the kind of expression which this family was likely to use. But that does not, I think, apply to all the documents. The third of those quoted in paragraph 27 of Hart J's judgment nominally addressed "To whom it may concern" was in reality addressed to no one other than the two parties themselves or possibly also their families. It was the kind of document which might well have included, but perhaps did not absolutely demand, a statement to this effect, if that was indeed the agreement. However that may be, the documents do not contain anything comprehending full and final settlement. So if there had been a full compromise, it had to be found in what was said, and what was said had to constitute a sufficient consensus between Ashraf and Afzal to this effect.
  47. Although there was a body of evidence of what various witnesses understood had been agreed, there was scant evidence of what was actually said. Much of the evidence constituted commentary on the documents or, as I have said, what the witness understood had been agreed. There was thus no direct evidence that the necessary agreement was articulated. Ashraf had given evidence that he had articulated the contrary, but the judge rejected that part of his evidence. Nevertheless, Afzal in my view failed to establish by evidence the component which this part of his case required. Hart J's judgment cannot thus be impugned, nor, I think, can his further decision that the necessary component could not be implied.
  48. Lady Justice Arden:

  49. I agree with both judgments. There are three points that I would l like to add. First, there can be no difference in principle between the rules which apply to the interpretation of contractual documents and those which apply to oral contracts. Those rules were laid down by Lord Hoffmann (with whose speech the remainder of the House agreed) in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 898, 912-3. The passage is well known and I need not therefore set it out in full but the first three points which Lord Hoffmann made are relevant in this case:
  50. "My Lords, I will say at once that I prefer the approach of the learned judge. But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows:
    (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
    (2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact,' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
    (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them."
  51. Accordingly, evidence as to the circumstances surrounding the making of a contract is, subject to the exceptions noted in para (3) of the above extract from Lord Hoffmann's speech in the ICS case, always admissible on questions of interpretation. This is so even in a case where the contract, if interpreted on a textual basis and in isolation from its surrounding circumstances, would not be said to be uncertain or ambiguous. However, that basic rule is subject to a number of exceptions. In particular evidence as to a party's subjective intent, and evidence as to pre-contractual negotiations, is not admissible on questions of interpretation of a contract.
  52. Mr David Foskett QC, for the appellant, placed at the forefront of his argument the submission that it was the objective of various members of the family that the dispute between Mr Ashraf Khan and Mr Afzal Khan arising out of their business affairs should be resolved. Mr Foskett submitted that the objective of the parties was part of the factual matrix which the court could take into account. However, it is clear from the ICS case that declarations of subjective intent cannot be taken into account and the same applies to statements made in the course of pre-contractual negotiations. I would accept that the boundaries of what constitutes pre-contractual negotiations for this purpose are not always clear. In a recent case, The Square Mile Partnership v Fitzmaurice McCall Ltd [2006] EWCA Civ 1690, I held that:
  53. "Lord Hoffmann recognises that the boundaries of this exception of pre-contractual negotiations from the factual matrix are not clear. It may be very difficult to distinguish whether something that was stated in the course of pre-contractual negotiations is or is not admissible. For instance it may be evidence of the fact which forms part of the matrix which is admissible on interpretation, or alternatively it may amount to an agreement as to the way a provision under the agreement is to be interpreted."

  54. The Master of the Rolls and Jonathan Parker LJ agreed with my judgment.
  55. In this case Mr Foskett relies upon two matters. First, he relies upon the offer which was made by Mr Afzal Khan in May 2001 to divide the business of Khan and Co on a 50/50 basis. Secondly, he relies on the fact that in the period April to August 2002 Mr Afzal Khan stated that he was looking to take out of the settlement some six shops. He ultimately ended up with only three shops. Mr Foskett came close to submitting that these matters were relevant to interpretation. On his submission, they showed a reduction in Mr Afzal Khan's claims. In Mr Foskett's words, Mr Afzal Khan was:
  56. "setting out a stall and that has got smaller and smaller as we have gone along".
  57. In my judgment, these communications were part of the sequence of events leading up to the agreement, and thus formed part of the pre-contractual negotiations that led to the agreement which was made in 2002. The parties were going through a process of bargaining. Accordingly evidence of these communications is not admissible on a question of the interpretation of the agreement.
  58. In relation to the parties' aim of the agreement, Mr Foskett took the court to the evidence of the two sisters of Mr Afzal Khan and to the evidence of the third brother, Mr Aslam Khan, who had attended the meeting at which the agreement was made. The judge expressly accepted his evidence. Significantly, Mr Ashraf Khan gave evidence that he expressly said at the meeting that the agreement was not to be final. The judge did not accept this evidence but he accepted that Mr Ashraf Khan had attended the meeting hoping to reach an agreement on particular issues and without intending to abandon claims that he might have had in relation at least to other properties which had been purchased wholly or partly by the partnership Khan & Co and which were made in joint names and where the holding of the properties in joint names did not reflect beneficial ownership: see the passage from paragraph 35 of the judge's judgment already quoted by Auld LJ at paragraph 11 of his judgment.
  59. This means that there was no agreement between the parties as to the objective of the agreement. There was no aim that they shared as to the objective to be achieved. So their individual intentions as to the purposes of the agreement are not admissible on the question of the interpretation of the agreement (see per Lord Hoffmann in the ICS case above). Nonetheless, the fact that the parties owned other properties in common was an objective fact that formed part of the matrix of fact. That was a fact known to both parties. Accordingly, the judge was entitled to treat this fact as admissible on a question as to the interpretation of the oral agreement to which the parties had come, as indeed the judge did in paragraph 36 of his judgment (set out by Auld LJ in paragraph 13 of his judgment).
  60. The second point that I wish to make arises out of a submission by Mr Foskett about the failure of the parties to the agreement to include in their agreement the formula that the terms agreed were in full and final settlement. He submits that the judge attached some significance to this point in paragraph 36 of his judgment. I agree that the absence of this formula cannot be ignored, but the weight to be given to its absence must depend upon the particular circumstances of the case. In this case the judge attached some significance to it as appears from paragraph 36 of his judgment, but it is clear from paragraph 36 of his judgment that he did not attach great significance to it.
  61. The third point that I wish to make relates to another submission of Mr Foskett. He places some reliance on the fact that the meeting between the brothers, at which they made their agreement, took place as part of a family gathering within the Muslim culture, or at least within the culture of that part of the Muslim community to which the parties in this action belong. I should add at this point that, although this fact does not appear from the judgment of the judge, we were told that the parties had made their agreement in Punjabi, and so (and this is a separate point from that made by Mr Foskett in the submission in question) this is not a case where the court can attach particular significance to the actual words (in English) which we were told represented their agreement. The meeting, be it noted, was convened not by any of the brothers but by their sisters, although they played no part in the making of the agreement. The explanation for this appears to have been that the two sisters were unhappy that their brothers were in dispute and wanted all matters between them to be resolved. Mr Foskett relies on the fact that the making of the agreement was marked immediately after it was made by a shaking of hands and embrace between the brothers, and other members of the family. He also relies on the fact that, within the culture of the community to which the parties belonged, matters would be resolved without litigation. Mr Foskett did not suggest that this evidence was determinative. However he points out (correctly) that the judge did not in fact refer to these matters in his judgment. Even though these events took place after the agreement was made, and so are not in a strict sense part of the "background" to the making of the agreement ("background" being the word used by Lord Hoffmann in para (2) of the extract of his speech from the ICS case set out above), they were very much part and parcel of the making of the agreement and in my judgment evidence as to these matters is admissible under the principles in the ICS case.
  62. As I have said, when interpreting an agreement, whether written or oral, the court must look at the matrix of fact as described by Lord Hoffmann. This matrix of fact would no doubt include evidence as to the conduct that the parties regularly adopted. Where the parties are members of a particular community, then in my judgment the court must bear in mind that they may observe different traditions and practices from those of the majority of the population. That must be expected and respected in the jurisdiction that has received the European Convention on Human Rights. One of the fundamental values of the Convention is that of pluralism: see Kokkinakis v Greece [1994] 17 EHRR 397. Pluralism is inherent in the values in the Convention. Pluralism involves the recognition that different groups in society may have different traditions, practices and attitudes and from that value tolerance must inevitably flow. Tolerance involves respect for the different traditions, practices and attitudes of different groups. In turn, the court must pay appropriate regard to these differences.
  63. The different practices to which I have referred may in an appropriate case form part of the matrix of fact that is admissible on a question as to the interpretation of an agreement. However, in point of fact in this case, the evidence did not establish that the form of celebration to which I have referred would only occur if the parties had reached a final agreement on every matter that could possibly be in dispute between them at that time. The parties might similarly have conducted themselves if an agreement had been reached which was only partial, for example if it was sufficient to resolve the most pressing matters in dispute between the parties. This agreement was clearly capable of doing that. The agreement on both parties' cases enabled the parties to know how they stood as regards the future management of each of the three businesses in which they were both involved, and that must have been important for the purpose of resolving the immediate problems of both a family and business nature. Accordingly, the evidence was not sufficient in this case to lead the court to the conclusion that the agreement must have been in full and final settlement of all the claims that they had against each other. The shortcomings in the evidence on this point may well account for the fact that the judge made no reference to it. In a word, this particular evidence as to the factual matrix was, on examination, equivocal.
  64. However, the important points remain, firstly, that, if the evidence had been clear enough, it could have been significant, and, secondly, that it was evidence which, given the principles to which I have referred, the court must pay regard. Indeed, this may be one of the first cases in which the court has had to consider a submission about the admissibility, on a question as to the interpretation of a contract, of evidence as to the cultural tradition of the parties to a contract.
  65. Finally, we were told that this is the last judgment that the late Hart J handed down before he was diagnosed with the terminal illness from which he has since passed away, and I join with counsel in paying tribute to the depth of his analysis in this complex case.
  66. Lord Justice Auld:

  67. Accordingly, the appeal is dismissed.

  68. Order:
    Appeal dismissed.


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URL: http://www.bailii.org/ew/cases/EWCA/Civ/2007/399.html