Language problems
Date: 02 October 2009
Authors: Nick Knapman
Issue: Vol 159, Issue 7387
Categories: Features, Property
While the basic principles on which a contract should be interpreted are well known, any House of Lords’ decision which provides clear guidance on the application and refinement of these principles in particular circumstances is very welcome.
The decision in Chartbrook Limited v Persimmon Homes Limited and Others [2009] All ER (D) 12 (Jul) is one such decision. In the leading judgment, Lord Hoffmann commented at length on three issues in particular: (i) correction of mistakes by construction;
(ii) the extent of the exclusionary rule pursuant to which pre-contractual negotiations are inadmissible for the purposes of contract interpretation; and
(iii) rectification.
This article focuses on the construction issue while Lord Hoffmann’s comments on the arguments of “very considerable general importance” relating to the exclusionary rule and rectification will be covered in part two.
The facts
Chartbrook (landowner) and Persimmon Homes (developer) entered into a development agreement on 16 October 2001 to construct a mixed use scheme in Wandsworth.
Under the terms of the agreement, Persimmon was required to obtain planning permission, after which it would construct the scheme. On completion, Chartbrook would dispose of the units under the direction of Persimmon which would receive the proceeds for its own account and pay Chartbrook an agreed price for the land.
The price to be paid by Persimmon for the land comprised two elements, the: the total land value; and the “additional residential payment” (ARP).
It was the meaning of this latter concept which caused the litigation.
The ARP was defined in the agreement as “23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value (MGRUV) less the Costs and Incentives (C&I)”. Chartbrook's view was that the meaning of the definition was very straightforward.
You take the price achieved for each flat, deduct the MGRUV and the C&I and calculate 23.4% of the result. The total of the figures for the individual flats made up the ARP. Chartbrook therefore claimed that Persimmon should make an additional payment of approximately £4.5m.
Persimmon argued that the definition required the deduction of C&I from the price achieved to arrive at the net price received by Persimmon. You then calculate 23.4% of that price and the ARP was the excess of that figure over MGRUV. If Persimmon was right, its additional payment should be approximately £900,000.
Clearly a very substantial sum of money was at stake depending on which interpretation was correct.
First Instance / Court of Appeal
Briggs J upheld the Chartbrook argument approach to the interpretation of the definition on the basis of the ordinary rules of syntax: the words used made sense on their own.
In terms of Persimmon’s back-up claim for rectification, the judge accepted the evidence of the two principals of Chartbrook that they honestly believed the definition was what had been agreed and they had not been mistaken and held that the mistake was not common to both parties, dismissing the claim.
On appeal, a majority of the Court of Appeal agreed with the judge’s decision, with Collins LJ dissenting. Persimmon therefore appealed to the House of Lords.
Construction approach
Lord Hoffmann confirmed that the basic principles for contract interpretation are the five which he set out in the Investors Compensation Scheme Limited v West Bromwich Building Society (1998) 1WL 896 so that: “the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.”
The House emphasised (in Investors) that “we do not easily accept that people have made linguistic mistakes, particularly in formal documents” but said that in some cases the context and background drove a court to the conclusion that “something must have gone wrong with the language”.
Lord Hoffmann’s view was that something had gone wrong with the language in the Chartbrook contract because “to interpret the definition of ARP in accordance with the ordinary rules of syntax makes no commercial sense”.
He drew support for his view from the labels of MGRUV and ARP given to the relevant definitions and thought these were indicative of an intention that MGRUV was to be the minimum Chartbrook would receive. His comments should be noted by those who draft contracts: “The words used as labels are seldom arbitrary. They are usually chosen as a distillation of the meaning or purpose or of a concept intended to be more precisely stated in the definition.”
The answer
But how could Lord Hoffmann correct the mistake when he accepted the words made syntactical sense? The answer: the concept of “correction of mistakes by construction”.
Lord Hoffmann stressed that this concept is not a separate branch of the law but simply another aspect of the single task of interpreting an agreement in its context in order to get as close as possible to the meaning which the parties intended.
East v Pantiles (Plant Hire) Limited (1981) 263 EG 61 confirms two conditions must be satisfied in order for mistakes to be corrected by construction:
(i) there must be a clear mistake on the face of the instrument and
(ii) it must be clear what correction ought to be made in order to cure the mistake.
Lord Hoffmann concluded that both of the conditions had been satisfied in the case. As to what correction had to be made in order to cure the mistaken wording, Lord Hoffmann said: “everyone agrees that the only sum from which C&I can rationally be deducted is the headline price achieved on sale, so as to arrive at the net amount received by Persimmon.
That is accordingly what the parties must have meant. You deduct the C&I from the nominal price achieved and the ARP is the excess, if any, of 23.4% of that net sum over the MGRUV”.
The future
The other law lords agreed with Lord Hoffmann’s analysis and Persimmon’s appeal on the construction issue was therefore successful. Whether the law lords’ decision will assist in resolving arguments based on the disputed meaning of contracts is open to debate, however.
The decision confirms that the court can correct an obvious mistake in an agreement without a party having to make a claim in rectification—very good news if you do not have the evidence to support such a claim.
If, however, the wording in dispute makes syntactical sense, should the court necessarily be deciding whether it makes commercial sense on the basis of construction alone and, further, should the court decide what correction should be made in order to cure the mistake?
If you want to avoid the uncertainties of these questions, the answer would appear straightforward—make doubly sure the wording of your contract is clearly expressed.
Nick Knapman is a partner in the property litigation group at national commercial law firm Beachcroft LLP. E-mail: nknapman@beachcroft.com
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