Land – Development agreement – Contractual term – Parties attributing different meanings to term in agreement – Whether parties’ pre-contract negotiations admissible when construing term – Whether appellant entitled to rectification of agreement – Appeal dismissed
The respondent brought an action for moneys that were allegedly due under an agreement whereby the appellant was to develop the respondent’s land. The adjoining owner, who held a 50% share in, and was a director of, the respondent, was joined as a Part 20 defendant. However, it was common ground that the dispute lay entirely between the respondent and the appellant.
The agreement involved the development and sale of residential units. The payment to the respondent was to consist of two parts. First, the total land value was to be a defined price per square foot for the residential and commercial areas and a defined price per parking space. The amount was variable by reference to the area for which planning permission was obtained for each part of the development. Second, a balancing payment, the additional residential payment (ARP), was variable by reference to the ultimate sale price for each residential unit.
The ARP was defined as 23.4% of the price achieved for each residential unit in excess of the minimum guaranteed residential unit value (MGRUV), less costs and incentives. The respondent contended that it was entitled to a 23.4% share of the net proceeds of sale of each residential unit that exceeded the minimum guaranteed amount. Accordingly, the ARP was around £4.6m, of which £3.9m remained unpaid. The appellant argued that the respondent was entitled to receive an additional payment only if 23.4% of the net sale price amounted to more than the MGRUV. Consequently, the ARP was slightly less than £900,000.
The judge held that the respondent’s interpretation was correct and that, as the definition clearly stated, the ARP meant 23.4% of an amount calculated by deducting both the MGRUV and the costs and incentives from the price achieved for each residential unit: see [2007] EWHC 409 (Ch); [2007] 1 All ER (Comm) 1083.
The appellant appealed, arguing that the respondent’s construction gave it a windfall of around £4m more for its land than the appellant had offered, bore no relation to what had been agreed and made no commercial sense; the agreement should be rectified either on the ground of common mistake or unilateral mistake.
Held: The appeal was dismissed (Lawrence Collins LJ dissenting on the point of construction).
(1) There was no basis for rewriting the agreement as the appellant suggested. The definition of ARP in the agreement was clear, certain and unambiguous and the arithmetic was straightforward.
(2) This was not a case in which it would be legitimate, as part of the construction exercise, to have recourse to the pre-contract negotiations. The basic rule was that, for reasons of practical policy, the law excluded from the admissible background the previous negotiations of the parties. Although the boundaries of the exception were in some respects unclear, to the extent that any inroads might legitimately be made, none had been made good in this case. No scope arose for recourse to prior negotiations for evidence of a “private dictionary” to explain the parties’ contractual language, and invoking the course of the negotiations for the limited purpose of identifying an agreed basis for the transaction could not be justified: Prenn v Simmonds [1971] 1 WLR 1381 and Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896 considered.
(3) The appellant appeared to have a powerful case to have the agreement rectified, but this was not a case where the judge had overlooked any points in its favour. He had delivered a conspicuously careful and full judgment that dealt with all the important points put forward by each side.
The court would rectify a contract if clear and unambiguous evidence could be established that showed that a mistake had been made in the recording of the parties’ intention, what that intention was and that the alleged intention continued in the minds of both parties up to the execution of the agreement. However, only if the appeal court were satisfied that the trial judge had not taken proper advantage of having seen and heard the witnesses would it be justified in interfering: Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560; [2002] 2 EGLR 71; [2002] 23 EG 123 and Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002] EWCA Civ 1642; [2003] 1 WLR 577 considered.
Christopher Nugee QC and Julian Greenhill (instructed by Mayer Brown International LLP) appeared for the appellant; Robert Miles QC and Timothy Morshead (instructed by Herbert Smith LLP) appeared for the respondent.
Eileen O’Grady, barrister
