Development agreement – Contractual term – Construction – Commercial sense – Whether parties’ precontract negotiations admissible when construing term – Whether appellant entitled to rectification of agreement – Appeal allowed
In 2001, the appellant entered into an agreement with the respondent to develop the latter’s land. Pursuant to that agreement, the appellant obtained planning permission for a mixed residential and commercial development, which is subsequently constructed. It sold the properties on long leases, which the respondent granted at the appellant’s direction, and received the proceeds for its own account. Its payment to the respondent for the land was to be calculated in accordance with the terms of the agreement and comprised two elements: (i) the total land value, calculated by reference to the square footage of the area for which planning permission was obtained; and (ii) an additional residential payment (ARP), variable by reference to the ultimate sale price of each residential unit. The ARP was defined as “23.4% of the price achieved for each Residential Unit over the Minimum Guaranteed Residential Unit Value” (MGRUV), less costs and incentives.
A dispute arose over the ARP. The respondent contended that it was entitled to 23.4% of the amount by which the net price for each residential unit exceeded the MGRUV, producing an ARP of approximately £4.5m. However, the appellant argued that the respondent was entitled to receive an additional payment only if and to the extent that 23.4% of the net sale price amounted to more than the MGRUV, which meant that the ARP was less than £900,000.
In proceedings brought by the respondent, the judge ruled in its favour by reference to the clear meaning of the relevant contractual provision. He declined to have regard to the precontractual negotiations as an aid to construction and held that there were no grounds for rectifying the agreement: see [2007] EWHC 409 (Ch); [2007] 1 All ER (Comm) 1083; [2007] 11 EG 160 (CS). That decision was upheld on appeal: see [2008] EWCA Civ 183; [2008] 2 All ER (Comm) 387[2008] 11 EG 92 (CS). The appellant appealed to the House.
Held: The appeal was allowed.
(1) If it was clear that there was something wrong with the language of a contract, and what a reasonable person would have understood the parties to have meant, the court could correct the mistake as part of its task of construing the agreement against its background and context, without the need for rectification: Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896 and KPMG v Network Rail Infrastructure Ltd [2007] EWCA Civ 363; [2007] P&CR 11 applied. A strong case would have to be made before a court could be persuaded that the language was unclear. Although a contract may have appeared unduly favourable to one party, that was not a sufficient reason for supposing that it did not mean what it said.
In the instant case, a case had been made out. To interpret the contractual definition of ARP in accordance with ordinary rules of syntax made no commercial sense. The MGRUV was to be a guaranteed minimum in respect of an individual flat and connoted the possibility of a larger payment, which, depending on some contingency, might or might not fall due. In the respondent’s case, there was little element of contingency, since an ARP would be payable in every case where the sale price exceeded the MGRUV, which would arise save in the event of a catastrophic fall in the housing market. The precision with which the MRUV was defined suggested that such an unlikely event was not the contingency the parties had had in mind. Moreover, the MGRUV was intended to function as a minimum land value for the land that the respondent was selling, rather than a minimum sale price for the properties. To compare it with the realised sale price would not be comparing like with like. The interpretation of the contractual provisions adopted by the courts below therefore rendered the structure and language of the various provisions arbitrary and irrational. The ARP should be construed as the appellant had contended, as meaning the amount by which 24.3% of the achieved sale price exceeded the MGRUV: dissenting opinion of Lawrence Collins LJ in the Court of Appeal approved. It was not necessary to resort to rectification or to have regard to the precontractual negotiations.
(2) There could be no exception to the rule that precontractual negotiations were inadmissible in aid of construction. Since negotiations would ordinarily be irrelevant to the question the court had to decide, namely what the parties would reasonably be taken to have meant by the language that they had adopted to express their agreement. Even where they were relevant, their exclusion was justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes: Partenreederei MS Karen Oltmann v Scarsdale Shippng Co (The Karen Oltmann) [1976] 2 Lloyd’s Rep 708 disapproved. The two legitimate safety devices of rectification and estoppel by convention would, in most cases, prevent the exclusionary rule causing injustice. Both remedies had to be specifically pleaded and clearly established, and both lay outside the exclusionary rule because they started from the premise that, as a matter of construction, the agreement did not have the meaning for which the party seeking relief contended.
(3) In claims for rectification, the question was what an objective observer would have thought the intentions of the parties to be and whether the instrument to be rectified conformed to those intentions: Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450 and George Cohen Sons & Co Ltd v Docks & Inland Waterways Executive (1950) 84 Ll L Rep 97 applied; Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561 distinguished. This was the case whether rectification was based on an enforceable contract entered into prior to the instrument in which it was meant to be embodied or, where there was no antecedent enforceable agreement, based on a continuing common intention shared by the parties in respect of a particular matter in the instrument. The common mistake had to be as to whether the instrument conformed to the prior consensus, objectively determined, not as to what each of the parties believed that consensus to have been. Had the ARP meant what the courts below held it to mean, it would not have reflected the prior consensus of the parties and rectification would have been available.
Christopher Nugee QC and Julian Greenhill (instructed by Mayer Brown International LLP) appeared for the appellant; Robert Miles QC and Timothy Morshead (instructed by Carter-Ruck) appeared for the respondent.
Sally Dobson, barrister
