(back to preceding text)

50.  This offer of a straightforward sharing of the proceeds was modified in a letter dated 6 February 2001 by the addition of what were described as “guaranteed backstop dates and minimum payments":

“Upon receipt of the purchase monies, the revenue will be apportioned to Chartbrook on the basis of 29.8% of the net revenue achieved from the disposal of the private sale residential units and 45% of the net revenue from the disposal of the commercial units. In addition, we are prepared to provide you with guaranteed backstop dates and minimum payments that will be made regardless of the actual performance of the project both in terms of timescales and costs. I set out on the attached schedule our proposals concerning this element of the deal.

Based on the current scheme for 80 units, and 9020 sq ft of commercial floor space, the minimum land value we are prepared to pay to Chartbrook on the disposal of each residential unit is £67,000, together with a further minimum payment of £400,000 on the disposal of the commercial unit. If as a result of improvements in the market, Chartbrook are entitled to more than the minimum payments I suggest an equalisation calculation takes place following the disposal of the last unit…

Within the contract, I…suggest that a formula is included whereby the land value is calculated using the following inputs:

Private Sale Residential Accommodation…..94.96/sq ft…

Once the total land value has been calculated, a simple formula can then be applied to divide the land values by the number of units, in order for us to calculate the guaranteed payments that you will receive on the sale of each plot…”

51.  On 12 February there was a further modification to make separate provision for the sales of car parking spaces, but the overall offer for land value remained the same. The judge found (paragraph 110) that Chartbrook accepted this offer in principle and Persimmon’s solicitors were instructed to draft an agreement. Their draft was attached to an e-mail dated 1 March 2001 and contained essentially the same formulae for calculating the price as those in the final agreement. The definition of “Additional Residential Payment” was (save for the percentage figure) in precisely the same words as those of the final agreement.

52.  Between March and May Chartbrook acquired some additional adjoining land and Persimmon revised its cost estimates. The result was a change in the figures but not in the formulae. In a letter dated 24 May 2001 Persimmon offered a new total land value of £7,191,947. The letter contained a table setting out —

“the minimum guaranteed land values that you will receive for the respective elements of the scheme, together with the percentage of sales revenue that you will also be entitled to if the project performs better than is currently anticipated”

53.  The figures in the table were 23.4% for “percentage of sales revenue” and £53,333 for “minimum value per plot.” The judge found that this offer was also accepted in principle and the new figures were inserted into the final contract. The words of the definition of ARP in the final draft remained (subject to the change in the percentage figure) exactly the same as in the first draft.

54.  It is I think clear that a reasonable person who read the February and May letters in the light of the background known to the parties would have taken them to have been intending that Chartbrook should receive an ARP if, but only if, “the project performs better than is currently anticipated".

55.  Persimmon’s case on rectification at the trial was that the letter of 24 May 2001 was an outward expression of the common and continuing intention of the parties and (if Chartbrook was right about its true construction) the definition had been drafted in the mistaken belief that it gave effect to that common intention. On the other hand, the evidence of the two principals of Chartbrook, Mr Vantreen and Mr Reeve, was that they had made no mistake. The definition accorded exactly with what they had thought they were being offered in the letters of February and May 2001. Indeed, they said they would not have done the deal for any less. It was put to them in cross-examination that no rational person could have understood the letters in the sense which they claimed and Mr Vantreen was caused some little difficulty by the fact that, on his copy of the May 2001 letter, he had calculated the amount which (on Persimmon’s construction of the definition) the sale price of a 700 sq ft flat would have to exceed before any ARP became payable (£228,000). This calculation would have been irrelevant on his own construction of the definition and he was unable to explain why he had made it. Nevertheless the judge accepted the evidence of Mr Reeve and Mr Vantreen that they had honestly believed that the definition (as they claimed to have understood it) was what had been agreed and they were not been mistaken. The judge therefore held that the mistake was not common to both parties and dismissed the claim for rectification.

56.  The case was argued at trial on the assumption that rectification required both parties to be mistaken about whether the written agreement reflected what they believed their prior consensus to have been. In the Court of Appeal, Persimmon challenged the finding of fact about what Mr Reeve and Mr Vantreen had believed, but not the underlying proposition of law. The Court of Appeal unanimously dismissed this part of the appeal on the ground that it could not disturb the findings of fact. There are accordingly concurrent findings of fact about the states of mind of Mr Reeve and Mr Vantreen. Your Lordships indicated at the hearing that in accordance with the usual practice, you would not re-examine them: see Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254, 274-275.

57.  In the printed case, however, Persimmon (encouraged by articles in the Law Quarterly Review by Marcus Smith (“Rectification of Contracts for Common Mistake, Joscelyne v Nissen and Subjective States of Mind” (2007) 123 LQR 116-132 and Professor McLauchlan (“The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (2008) 124 LQR 608-640)) asked for leave to challenge, for first time, the proposition of law. Mr Nugee submitted that the judge and the Court of Appeal had been wrong in their assumption about what a party had to be mistaken about. Rectification required a mistake about whether the written instrument correctly reflected the prior consensus, not whether it accorded with what the party in question believed that consensus to have been. In accordance with the general approach of English law, the terms of the prior consensus were what a reasonable observer would have understood them to be and not what one or even both of the parties believed them to be. In the present case, submitted Mr Nugee, the prior consensus was contained in the May letter, which made it clear that the terms were to be as contended for by Persimmon. If the definition in the final agreement did not have that meaning, it was not in accordance with the prior consensus and if Mr Reeve and Mr Vantreen believed that it was, then they, like the representatives of Persimmon, were mistaken.

58.  Mr Robert Miles QC, for Chartbrook, objected to Persimmon being given leave to advance this argument. He said that if the point had been taken at the trial, the evidence might have taken a different shape. I rather doubt this, but as I understand that the Committee shares my view that Persimmon is entitled to succeed without rectification, the question is academic. Nevertheless, as it has been very well and fully argued, I propose to express an opinion about it.

59.  Until the decision of the Court of Appeal in Joscelyne v Nissen [1970] 2 QB 86 there was a view, based upon dicta in nineteenth and early twentieth century cases, that rectification was available only if there had been a concluded antecedent contract with which the instrument did not conform. In Lovell and Christmas Ltd v Wall (1911) 104 LT 85, 88 Sir Herbert Cozens-Hardy MR said that rectification “may be regarded as a branch of the doctrine of specific performance". It presupposed a prior contract and required proof that, by a common mistake, the final completed agreement as executed failed to give proper effect to the prior contract. In Joscelyne‘s case the Court of Appeal declared itself puzzled by the reference to specific performance, but I think it is clear enough that the Master of the Rolls had in mind a contractual obligation to execute a lease, conveyance, settlement or similar instrument, giving rise to a specifically enforceable obligation to do so. A failure to execute a document giving effect to the terms of the agreement would be a breach of that obligation and the court, in rectifying the instrument, would be specifically performing the agreement. Since the decision in Joscelyne’s case extended the availability of rectification to cases in which there had been no enforceable prior agreement, specific performance is plainly an inadequate explanation of the doctrine. But for present purposes the significance of cases like Lovell and Christmas Ltd v Wall (1911) 104 LT 85 is that the terms of the contract to which the subsequent instrument must conform must be objectively determined in the same way as any other contract. Thus the common mistake must necessarily be as to whether the instrument conformed to those terms and not to what one or other of the parties believed those terms to have been.

60.  Now that it has been established that rectification is also available when there was no binding antecedent agreement but the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified, it would be anomalous if the “common continuing intention” were to be an objective fact if it amounted to an enforceable contract but a subjective belief if it did not. On the contrary, the authorities suggest that in both cases the question is what an objective observer would have thought the intentions of the parties to be. Perhaps the clearest statement is by Denning LJ in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ld [1953] 2 QB 450, 461:

“Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties - into their intentions - any more than you do in the formation of any other contract. You look at their outward acts, that is, at what they said or wrote to one another in coming to their agreement, and then compare it with the document which they have signed. If you can predicate with certainty what their contract was, and that it is, by a common mistake, wrongly expressed in the document, then you rectify the document; but nothing less will suffice.”

61.  Likewise in the Olympic Pride (Etablissements Georges et Paul Levy v Adderley Navigation Co Panama SA [1980] 2 Lloyd’s Rep 67, 72, Mustill J said:

“The prior transaction may consist either of a concluded agreement or of a continuing common intention. In the latter event, the intention must have been objectively manifested. It is the words and acts of the parties demonstrating their intention, not the inward thoughts of the parties, which matter.”

62.  An example of the application of this objective ascertainment of the terms of the prior transaction is George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive (1950) 84 Lloyd’s Rep 97 in which a landlord negotiating a new lease proposed to the tenant that “the terms and conditions contained in the present lease to be embodied in the new lease where applicable.” The tenant accepted this offer, but the new lease as executed made the tenant liable for repairs which under the old lease had been the responsibility of the landlord. In answer to a claim for rectification, the landlord said that the new lease was in accordance with what he had understood to be the effect of his offer. The Court of Appeal said that this was irrelevant. What mattered was the objective meaning of what the landlord had written. Sir Raymond Evershed MR said, at p 107:

“If the defendants…did misconstrue [the letter] that is unfortunate for them, but at least they cannot be heard to say that their letter was intended to mean anything other than that which the words convey to the reader as a piece of ordinary English.”

63.  As against these authorities, there are two cases upon which Mr Miles relied. The first is Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561, in which the Court of Appeal by a majority (Glidewell and Hobhouse LJJ, Hoffmann LJ dissenting) refused to rectify an agreement which was alleged not to be in accordance with what had previously been agreed in summary heads of agreement. Hobhouse LJ, who gave the majority judgment, affirmed the decision of Saville J, who said that the defendants had failed to establish that there was a prior common agreement or intention in terms that the court could ascertain or (which is probably another way of saying the same thing) that the definitive agreement failed to reflect that prior agreement. In other words, the language of the heads of agreement was too uncertain to satisfy the requirement stated by Denning LJ in Rose’s case that one should be able to “predicate with certainty what their contract was". Hobhouse LJ noted that Saville J “did not base himself upon any consideration of the evidence as to the actual state of mind of the parties” and in my opinion the case lends no support to the view that a party must be mistaken as to whether the document reflects what he subjectively believes the agreement to have been.

64.  The other case is the decision of Laddie J in Cambridge Antibody Technology Ltd v Abbott Biotechnology Ltd [2005] FSR 590, in which he rejected a submission that evidence of the subjective state of mind of one of the parties contained in statements which had not been communicated to the other party (“crossed the line”) was inadmissible. In my opinion, Laddie J was quite right not to exclude such evidence, but that is not inconsistent with an objective approach to what the terms of the prior consensus were. Unless itself a binding contract, the prior consensus is, by definition, not contained in a document which the parties have agreed is to be the sole memorial of their agreement. It may be oral or in writing and, even if the latter, subject to later variation. In such a case, if I may quote what I said in Carmichael v National Power plc [1999] 1 WLR 2042, 2050 - 2051:

“The evidence of a party as to what terms he understood to have been agreed is some evidence tending to show that those terms, in an objective sense, were agreed. Of course the tribunal may reject such evidence and conclude that the party misunderstood the effect of what was being said and done.”

65.  In a case in which the prior consensus was based wholly or in part on oral exchanges or conduct, such evidence may be significant. A party may have had a clear understanding of what was agreed without necessarily being able to remember the precise conversation or action which gave rise to that belief. Evidence of subsequent conduct may also have some evidential value. On the other hand, where the prior consensus is expressed entirely in writing, (as in George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive (1950) 84 Lloyd’s Rep 97) such evidence is likely to carry very little weight. But I do not think that it is inadmissible.

66.  In this case there was no suggestion that the prior consensus was based on anything other than the May letter. It is agreed that the terms of that letter were accepted by Chartbrook and no one gave evidence of any subsequent discussions which might have suggested an intention to depart from them. It follows that (on the assumption that the judge was right in his construction of the ARP definition) both parties were mistaken in thinking that it reflected their prior consensus and Persimmon was entitled to rectification.

67.  Since, however, I think that the judge and the majority of the Court of Appeal were wrong on the question of construction, I would allow the appeal on that ground.

LORD RODGER OF EARLSFERRY

My Lords,

68.  I have had the privilege of considering the speeches of my noble and learned friends, Lord Hoffmann and Lord Walker of Gestingthorpe, in draft. For the reasons which they give, I consider that the construction favoured by Persimmon is appropriate. In particular, it seems to me that once you grasp the general structure of schedule 6 of the agreement, as described by Lord Walker in para 79 of his speech, the appropriate interpretation becomes clear.

69.  Like Lord Hoffmann, I would decline counsel’s elegant but, in the event, unnecessary invitation to revisit the rule in Prenn v Simmonds [1971] 1 WLR 1381. No-one could possibly say that the rule is based on some error of law or misconception. On the contrary, the main pros and cons of having regard to prior negotiations when interpreting a formal contract have been known and discussed for centuries. The present law represents a choice which was already second nature to the Earl of Eldon LC as long ago as Millers v Miller (1822) 1 Sh App 309. When interpreting a clause in a marriage contract which had been preceded by “a vast deal of correspondence", the Lord Chancellor assured the House that he did not recollect a case to which he had given more earnest attention, but still gave the correspondence short shrift, at p 317:

“My Lords, all the previous correspondence I lay entirely out of the case, because I cannot conceive that any thing can be more dangerous than the construing deeds by the effect of letters and correspondence previous to the execution of them.”

Subsequently, at p 319, he described the possibility of looking at the effect of the correspondence as “a very singular thing". Some sixty years later, with rather more deliberation, the House affirmed that approach in Inglis v John Buttery (1873) 3 App Cas 552 and, a century after that, reaffirmed it in Prenn v Simmonds [1971] 1 WLR 1381. The rule could scarcely be more firmly embedded in our law.

70.  Of course, in Miliangos v George Frank (Textiles) Ltd [1976] AC 443 the House departed from a rule, of which Lord Denning had said some fifteen years previously, “if there is one thing clear in our law, it is that the claim must be made in sterling and the judgment given in sterling": In re United Railways of Havana and Regla Warehouses Ltd [1961] AC 1007, 1068-1069. But not only was that rule essentially procedural: in addition, the House could point to a change of circumstances which seemed to cry out for intervention. Here, by contrast, the rule about prior negotiations forms part of the law of evidence and there are no particular pressing circumstances which call for a change. The House is simply being asked to make a fresh policy decision and, in effect, to legislate to provide for a different rule. The wisdom of the proposed change is, however, debatable. So, if there is to be a change, it should be on the basis of a fully informed debate in a forum where the competing policies can be properly investigated and evaluated. Although counsel presented the rival arguments with conspicuous skill, your Lordships’ House in its judicial capacity is not that forum.

71.  Like Lord Walker, I see no reason to differ from what Lord Hoffmann has said on rectification.

LORD WALKER OF GESTINGTHORPE

My Lords,

72.  I shall first address, on a traditional approach, the issue of construction raised in this appeal. That approach requires the court to consider the disputed definition of “Additional Residential Payment” in the context of the agreement as a whole, and the parties’ shared understanding of the general situation and the aim of the transaction they were entering into.

73.  The owner (Chartbrook) had assembled a site off Wandsworth High Street, London SW18 (Numbers 1,3,5,7 and 9 Hardwicks Way), with valuable potential for development. Under the agreement dated 16 October 2001 the developer (Persimmon Homes, a subsidiary of a well-known quoted company which guaranteed the developer’s obligations) had the responsibility of applying for planning permission for a mixed commercial and residential development in a form approved by the owner. The agreement was conditional on the developer obtaining planning permission in a satisfactory form within 15 months (subject to extension in certain circumstances). If planning permission in a satisfactory form was obtained the owner would continue as registered owner of the site, but would execute a charge of the property as security for its obligations to the developer. The developer would occupy the site as a licensee and carry out the development at its own expense, including responsibility for insurance. The developer’s obligations in carrying out the residential development (by the construction of flats) were not prescribed in detail. Its obligations in carrying out the commercial development were limited to what were described as “core and shell works".

74.  As the flats were developed they were to be marketed by the developer, at its own expense, and sold (together with parking spaces) on 125-year leases at escalating ground rents. The commercial development, when the core and shell works were completed, was to be sold to a nominee of the owner on a 125-year lease at a peppercorn rent. There was to be a premium calculated at the rate of £110 per square foot of the net internal area of the commercial premises (plus VAT). The developer was also to negotiate the eventual sale of the freehold subject to all these leases. The owner was under an obligation to grant all the necessary leases and to make the eventual transfer of the freehold.

75.  As I have mentioned, the agreement did not provide in detail for the specification or cost of the construction by the developer of the residential part of the development - that is, the flats. The owner had to approve the planning application, and the developer had to meet NHBC standards, but that was all. In particular, the developer did not commit itself to any particular level of expenditure, with two minor exceptions: the developer undertook to spend a sum of at least £250,000 on planning gain through an agreement under section 106 of the Town and Country Planning Act 1990, and to pay at least £25,000 in compensation to adjoining owners for the loss of rights to light. There was also an unquantified contingency sum for dealing with possible pollution in the sub-structure. These three items were to be deducted in computing the Total Residential Land Value (“TRLV”) for the purposes of schedule 6 (the Price) but there was nothing at all in the agreement providing for the developers’ overall profit as such to be computed and brought into the bargain.

76.  All this is background, but to my mind relevant background, to the problem at the heart of this appeal, that is the correct construction of the definition of the Additional Residential Payment (“ARP”) set out in para.1 of schedule 6. The ARP (also pointlessly relabelled as the Balancing Payment) is one of two components which had to be aggregated to make up the Price—that is, the total consideration payable by the developer to the owner. The other component was the Total Land Value (“TLV”), that is the aggregate of (i) the TRLV already mentioned; (ii) the Total Commercial Land Value (“TCLV”) and (iii) the Total Residential Car Parking Land Value (“TRCPLV”). Under para 3 of schedule 6 the TLV was payable by instalments over 52 months, starting nine months after the grant of planning permission, and the ARP was payable on completion of the last residential sale or six months after the completion of the development, whichever was the earlier.

77.  Each of the three components of the TLV was defined by a formula. The TRLV was to be computed by reference to the net internal area of the residential units for which planning permission was obtained at the rate of £76.34 per square foot (“less the section 106 money and less the rights of light money and less the sub-structure assumptions additional cost”). The TCLV was to be computed by reference to the net internal area of the commercial premises for which planning permission was obtained, at the rate of £38.80 per square foot. The TRCPLV was to be £3,024 multiplied by the number of residential parking places for which planning permission was obtained.

78.  Both parties were experienced in the property world—the owner as a land dealer, the developer as a developer—and they shared the knowledge that the site (including units 1 and 3 Hardwicks Way which the owner acquired during the negotiations), with the benefit of planning permission on favourable terms, would have a market value in the general region of £5m. They hoped that planning permission for residential development would be granted for up to 100 flats with an aggregate internal area of 50,000 to 60,000 square feet. The background facts known to the parties included the recent takeover by the developer’s group of Beazer Homes Ltd, as a result of which the developer decided that it could not afford an outright purchase of the Wandsworth site. Instead the purchase was to be funded out of the proceeds of the disposal of the development, and the owner would expect to be compensated for the deferment of its consideration.