Legal notes: Weasel words

Legal notes Allyson Colby considers the risks of drafting and advising on conditional contracts Practitioners advising on conditional contracts will be acutely aware of the possibility that the buyer may try to exploit the conditions to walk away from the agreement following a dip in the market or a change of circumstances. Rentokil Initial 1927 plc v Goodman Derrick LLP [2014] EWHC 2994 (Ch); [2014] PLSCS 254 concerned a contract that was conditional on the grant of planning permission for residential development. The buyer took a tough stance while negotiating a list of “unacceptable planning conditions”. However, the seller’s solicitors negotiated amendments to ensure that the test of whether a planning condition was acceptable was substantially objective. When the property market crashed, the buyer claimed that its hard-won planning permission contained unacceptable conditions. The parties began arbitration proceedings to resolve their dispute, but the case was compromised at the seller’s instigation shortly before it was heard. In subsequent proceedings against its solicitors, the seller claimed that the contract wording was defective and that it would not have entered into the agreement if its lawyers had explained its true meaning and effect. The property market had been buoyant and there were other potential purchasers who would have bought the land outright. The seller claimed the difference in value between the original contract price and the price eventually paid by the buyer. It estimated its loss at approximately £1.88m and also claimed £600,000 for the wasted costs of the arbitration.   Planning conditions The list of unacceptable planning conditions in the contract included any condition that “had the effect of … limiting the planning permission to a set period of time”. Another provision dealt with highway, drainage and other obligations that could not be satisfied without the agreement of a competent authority or third-party. A second limb of the same clause dealt with conditions that must be met before commencement or use and occupation of the development that could not be satisfied without the agreement of a competent authority or third-party “and which cannot in the reasonable opinion of a reasonable developer be obtained on terms or at a cost or within a timescale acceptable to a reasonable developer”. Due to a formatting error, this last test did not appear to apply to the first limb of the clause. The planning permission stipulated that development should begin within three years and included conditions requiring the developer to obtain approvals, among other things, for schemes for waste management, for access and landscaping, for foul and surface water drainage, to protect habitats and trees, and for the provision of green energy. Did any of these conditions qualify as “unacceptable planning conditions”?   Word games The court reminded the seller that the construction of a document is not a game with words, but an attempt to discover what a reasonable person would have understood the parties to mean. The requirement to commence work within three years was not a condition that limited the planning permission to a set period of time. The contractual provision was aimed at temporary permissions and it would not make commercial sense to interpret it differently. The judge also construed the agreement to mean what it would have meant, absent the formatting error; if the first limb of the clause in dispute were truly unqualified, this would render the second limb otiose. He dismissed arguments that other provisions describing unacceptable planning conditions should be interpreted literally on the grounds of commerciality and ruled that none of the planning conditions were unacceptable for the purposes of the agreement. The judge was satisfied that the contract reflected the heads of terms and the commercial deal struck between the parties. He believed that the buyer would have asserted that the conditions were unacceptable whatever the contract said – and would have lost at arbitration. He also concluded that the seller had chosen to compromise the dispute without regard to the merits of the case because it wanted to divest itself of the property and was concerned about the buyer’s financial position. The decision reminds us that the fact that one of the parties to a contract chooses to advance an incorrect and implausible construction of the agreement does not mean that the wording is defective. But had the seller’s solicitors failed to advise their client properly?   Duty of care Carradine Properties Ltd v DJ Freeman & Co [1999] Lloyd’s Rep 483 confirmed that the precise scope of a professional’s duty to advise depends, among other things, on the extent to which a client appears to need advice. An inexperienced client will need and will be entitled to expect his solicitor to take a much broader view of the scope of his retainer and duties than an experienced client. The judge concluded that the seller was a highly sophisticated commercial client. It had accepted a conditional offer because of the higher price offered for a contract on such terms and had retained external solicitors to draft a contract and advise on it. The firm was not instructed to advise on the commercial aspects of the transaction, nor on whether planning consent would be granted and, if so, on what terms; the seller’s planning consultants were responsible for this. The seller also employed an experienced in-house solicitor, who understood the risks of entering into a conditional contract and the importance attached to conditions that might prevent the contract from becoming unconditional. He had been closely involved with the negotiations and had made key commercial and legal decisions throughout. The seller claimed that its external legal advisers did not alert it to the risks that it was taking by entering into the transaction. The law firm had reported to its in-house solicitor in a letter stating that it contained a “very brief summary of only the key provisions of what is an extremely complicated sale contract”. Cases like this are fact sensitive. However, the court decided that the letter sufficed in the context of the advice already given. There must be a sensible limit on a solicitor’s duty to explain legal documents. The law firm had explained that the summary provided was “no substitute for perusal of the form of contract” and it had not been necessary for them to undertake a line-by-line analysis of the contract for the seller’s benefit.   Allyson Colby is a property law consultant