All about the evidence: Recent Supreme Court decision confirms extrinsic evidence rules and implication of contractual terms

The Supreme Court’s recent decision in Bathurst Resources Ltd v L & M Coal Holdings Ltd provides important guidance on the approach to the use and admissibility of extrinsic evidence for contractual interpretation and the test for implication of contractual terms.


The Denniston and Stockton Plateaus lie within the Buller Coalfield, in the South Island.  Escarpment, a part of the Denniston Plateau, contains significant amounts of high-quality coking coal, used in the steel-making process.  L & M Coal Holdings Ltd (L & M) held exploration permits in these areas.  In 2010, Bathurst Resources Ltd (Bathurst) agreed to purchase coal exploration rights and mining applications from L & M. 

The agreement between Bathurst and L & M (the Agreement) included the sale of two exploration permits and associated rights.  Payment was to be made in a number of ways, including a deposit, performance payments, and royalties.  The first performance payment was to be paid within 30 days of the first 25,000 tonnes of coal being shipped from the permit area. 

After the Agreement was settled, the parties experienced a number of setbacks.  Escarpment took longer than anticipated to open.  Then the international price of coking coal collapsed.  In light of these difficulties, the parties agreed to amend the Agreement (the Third Deed).  The Third Deed provided that as long as Bathurst continued to make royalty payments, a failure to make a performance payment when due would not be an actionable breach or default under the Agreement. 

By September 2015, 25,000 tonnes of coal had been extracted.  L & M argued that this triggered the first performance payment obligation under the Agreement.  Bathurst did not pay, asserting that it was entitled to defer payment under the Third Deed, although it continued to make royalty payments.  In May 2016, Bathurst suspended mining at Escarpment.  It paid no further royalties.

L & M claimed that Bathurst was entitled to defer payment of the first performance payment under the Third Deed only while it continued to pay royalties.  L & M argued that extrinsic evidence should be admitted to demonstrate this.  Alternatively, it argued, such a term should be implied into the Agreement.  In contrast, Bathurst argued that the Agreement gave Bathurst flexibility as to the date of making the performance payments, as long as it complied with the royalty deed.  It also argued that the term which L & M argued should be implied was not one which was capable of clear expression.

There were two key issues at stake on appeal:

  • What extrinsic material can be admitted into evidence to assist with contractual interpretation?
  • What criteria should be used to determine a term to be implied into a contract?

The Court found in Bathurst’s favour on both these issues.

Admissibility of extrinsic evidence

Bathurst proposed a relatively narrow approach to admissibility of extrinsic evidence, arguing that evidence must be “mutual, overt and proximate” to be admissible.  L & M, however, considered that evidence which is neither mutual nor overt could be relevant if it favours the accuracy of one possible interpretation of the words of the contract over another.  Both parties agreed, and the Court confirmed, that admissibility is governed by the Evidence Act 2006. 

The Court held that there are two broad types of extrinsic evidence: evidence as to a party’s subjective intent or understanding of the contract, and evidence as to the parties’ common mutual understanding. 

Evidence as to a party’s subjective intent or understanding of the contract is not admissible if it was not communicated to the other party before the contract was formed.  It is not evidence that would have been available to a reasonable person having all of the information reasonably available to the parties at the time.  However, evidence which objectively proves the parties’ common mutual understanding as to the meaning of the contract is relevant and admissible.

Evidence as to the parties’ common mutual understanding can include prior negotiations, evidence as to the specialised meaning of a word used in the contract, or the parties’ subsequent conduct after the contract is signed.  The important consideration is whether this would prove anything relevant to a reasonable person.  Evidence is inadmissible if it only proves a party’s subjective intention / belief on the meaning of the words, or if it relates to their undeclared negotiating stance at the time.    

The test for implication of terms

Bathurst argued that the legal standard for implication of a term is one of strict necessity, which imposes a high threshold.  It also argued that the Court should confirm the five-stage test for implication of a term as set out in the English Privy Council case BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings.  That five-stage test is as follows:

  • It must be reasonable and equitable;
  • It must be necessary to give business efficacy to the contract;
  • It must be so obvious that it goes without saying;
  • The term must be capable of clear expression; and
  • It must not contradict any express term of the contract.

In contrast, L & M referred to previous cases to argue that the process of implying a term is a process by which the Court “discovers” a term which represents what the contract must have meant in a situation not directly addressed by the contract. 

The Court held that the starting point for the implication of terms remains the words of the contract.  A term can only be implied if it is strictly necessary to clarify the existing meaning of the contract.  The implied term will not add anything to the contract, but will only spell out what the contract must be intended to mean.  This is an objective inquiry.  Speculation on how the parties would have wanted the contract to handle an unforeseen eventuality is irrelevant. 

The majority held that the performance payment was triggered, but that the contract permitted the payment to be deferred.  They did not consider that the implication of a term was necessary to give business efficacy to the contract.  L & M had already received a deposit, the contract was between two commercially sophisticated parties, and there was always a possibility that the mine would not be developed and no further payments would be made.


This case provides comprehensive guidance on the use of extrinsic evidence in contractual interpretation and the implication of terms.  Extrinsic evidence is inadmissible if it merely proves a party’s subjective intention or belief as to the meaning of the words.  However, extrinsic evidence which objectively proves the parties’ common mutual understanding will be admissible. 

The previous test for implication of terms remains largely intact, although this judgment reiterates that the most important requirements (which must always be met) are that the term must be capable of clear expression and must not contradict any express term of the contract. While the other three factors remain important, they are analytical tools which overlap and are not cumulative.   

If you have any questions about your contractual obligations, please get in touch with our litigation team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

Privacy Commissioner to consult on Privacy Rules for Biometric Information
With the increasing use of facial recognition technology (FRT), retinal scans, and voice recognition by an array of different agencies, privacy concerns about its collection and use are set to be form...
24.11.2023 Posted in Business Advice
Fern forest NZ
Bioenergy in New Zealand: Fuels for the Future?
The energy transition from combustion fuels to low carbon alternatives is viewed as critical in the race to cut global CO2 emissions and reach climate targets.  We look at some of the opportunities p...
14.11.2023 Posted in Business Advice & Climate Change & Forestry
Will Wide BW
A well drafted will is a craft
The New Zealand do-it-yourself “DIY” attitude and way of life is not limited to home improvements, but sometimes also extends to wills.  Recently we had a DIY $5.99 fill in the blanks will acros...
07.11.2023 Posted in Private Wealth
rsz large pillars
Health and Safety: The Consequences of Dishonesty
Siddhartha Gautama said that lies are like huge, gaudy vessels, the rafters of which are rotten and worm-eaten, and that those who embark in them are fated to be shipwrecked.  Two remarkable health a...
03.11.2023 Posted in Employment & Health & Safety
Properly sequencing your Construction Adjudications: Henry Construction Projects Ltd v Alu-Fix (UK) Ltd
According to the UK’s Technology and Construction Court (TCC) (in Henry Construction Projects Ltd v Alu-Fix (UK) Ltd [2023] EWHC 2010) valid payment claims must be paid before the underlying merits ...
30.10.2023 Posted in Construction & Disputes
Key change to rules on distribution of surplus assets under the new Incorporated Societies Act 2022
On 5 October 2023, the new Incorporated Societies Act 2022 (2022 Act) came fully into force, replacing the Incorporated Societies Act 1908 (1908 Act). One of the key requirements under the 2022 Act is...
18.10.2023 Posted in Business Advice
Construction Framework Wide BW
Major milestone passed – NZS3910:2023 expected in time to fill Christmas stockings
As the most widely adopted standard form construction contract in NZ, NZS 3910 was more than ready for updated conditions given the changes in the industry since its last review in 2013.  After almos...
09.10.2023 Posted in Construction
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.