JUDGMENT

Lord Nicholls of Birkenhead J:

[1] This appeal and cross-appeal from a decision of the Court of Appeal of New Zealand raise questions on the proper interpretation of a written agreement between the parties and questions of fact. No point of law of general importance is involved. The judgments in the courts below set out the basic facts very fully; the judgment of Williams J in the High Court covered 125 pages of the record of the proceedings, and the judgment of the Court of Appeal 35 pages. It would be of no assistance to the parties, or anybody else, for their Lordships to recapitulate the background facts yet again.

[2] Their Lordships will therefore turn straight to the issues raised by the respondent Morrison Industries Limited ("Morrison") in its cross-appeal, after referring to the principal terms of the parties' agreement. The agreement was dated 29th September 1986. By this agreement the appellant Masport Limited ("Masport") agreed to buy from Morrison all its stock, including raw materials, work in progress, spares and finished goods located in New Zealand or Australia. The purchase price was to be "the aggregate book value of the assets as at 31 December 1986 using as the basis therefor the book values as per Morrison's accounts", subject to a reduction for obsolete or unusable stock (para 6). Provision was made for arbitration on the amount of this reduction if the parties could not agree. The first $2 million of the price was to be paid on the date of settlement, which was fixed for three months ahead, on 31st December 1986. The balance was payable in two instalments over the next 18 months. One-third of the balance was to be paid on 30th September 1987, and the remainder on 30th June 1988. Immediately upon the value of the stock being determined, Masport was to issue to Morrison bills of exchange payable on 30th September 1987 and 30th June 1988 for the amounts then payable less, in the case of the earlier bill, the amount of $0.5 million. Stock was to be taken on the date of settlement by Morrison under the direction and control of Arthur Young and Co, who were Morrison's auditors, "as though for audit purposes". Masport was entitled to have observers present at the stocktaking, and to confer with Arthur Young "as to the financial determination resulting". For the purpose of fixing the time when Masport should issue the bills of exchange, the value of stock so determined, without any deduction for obsolete or unusable stock, was "deemed to be the determination of the value of stock" (para 8).

[3] Several documents were attached to the agreement when it was signed. Each page of these documents was initialled by the persons who signed the agreement. Among these documents, although not referred to in the text of the agreement, was one which had formed part of Morrison's accounts for the financial year ending 31st March 1986. It was headed "Statement of accounting policies". Under the heading "Accounting convention" appeared this statement: -

"The general principles of historical cost accounting have been applied in the preparation of these financial statements except for ..."

[4] Under a further heading, "Valuation of Assets - Inventories", the document stated:-

"Trading stock, raw materials and work in progress are valued at the lower of cost or net realisable value. The standard cost method has been used to determine cost

The Book Values As Per Morrison's Accounts

[5] Morrison's financial year ended on 31st March, so in the ordinary course the usual statutory accounts would not be prepared as at 31st December 1986. For this reason there could be no question of Arthur Young determining the value of the stock for the purposes of the agreement by simply going to the books and extracting the values of the stock as recorded therein for the purpose of the year-end accounts. Hence the agreement envisaged that, as at the settlement day of 31st December 1986, the "books" of Morrison would have to be specially written up w