Sale of land – Council housing – Rectification of transfer – Transfer of housing stock and housing department staff of appellant council to respondent registered social landlord – Negotiations over which party to pay deficit in staff pension scheme – Appellants intending respondent to pay – Amendment to transfer contract providing for appellants to pay – Whether rectification available on grounds of common or unilateral mistake – Appeal allowed
The respondent company was a registered social landlord incorporated to purchase the appellant council’s housing stock. The appellants’ housing department staff were also to transfer to the respondent but were to retain their membership in the local government pension scheme administered by the county council, with the respondent to become a participating employer in that scheme. At the time of the sale negotiations, the pension fund was estimated to be £2.4m in deficit and an important element of the discussions on price related to the way in which, and by whom, that deficit was to be made up. During the negotiations, the parties signed documents that were not intended to be legally binding.
In September 2007, the appellants prepared a proposal (the first version), drafted in terms that they understood to mean that the respondent would pay the pension deficit. The parties signed a subsequent amended version of that proposal, although it was not intended to be legally binding. The parties’ solicitors, who were responsible for drafting the transfer contract, were only peripherally involved with the negotiations over its commercial terms; the appellants’ solicitor was unaware that its client had intended the respondent to pay the deficit. In November, a few days before the contract was executed, the respondent’s solicitor obtained, by e-mail, the consent of the appellants’ solicitor to an amendment that required the appellants to pay £2.4m, representing the pension deficit to the county council within five days of completion. The contract was completed in its amended form.
The appellants brought a claim for rectification on the ground of common or unilateral mistake. The High Court dismissed that claim, concluding that, by approving the amendment proffered by the respondent, the appellants’ solicitor had changed the appellants’ objectively viewed intentions. Accordingly, the claim for rectification on the ground of common mistake failed. Moreover, the requirements for rectification for unilateral mistake had not been met: [2010] EWHC 1935 (Ch); [2010] PLSCS 231. The appellants appealed.
Held: The appeal was allowed.
The appellants did not share the respondent’s mistaken belief that, under the transfer contract, the respondents would pay the pension deficit. However, the parties’ boards shared a mistaken belief that the transfer contract accorded with their prior commercial agreement embodied in the first version of the contract, although their reasons for sharing that mistaken belief were opposite. The appellants rightly believed that the commercial agreement embodied in the first version and the valuation was that the respondent would pay the pension deficit, but wrongly believed that the legal contract was that the respondent should pay the pension deficit. The respondent’s board wrongly believed that the appellants should pay the pension deficit, but rightly believed that the legal contract was that the appellants should pay the deficit. Their shared mistaken belief as to the conformity of the transfer contract with the first version and the valuation existed at the time of the execution of the legal contract. Accordingly, the question arose as to whether, in law, that shared mistaken belief entitled the appellants to have the transfer contract rectified so as to conform with the agreement embodied in the first version.
The court did not accept, as a general principle, that a mistake by both parties as to whether a written contract conformed with a prior binding agreement, objectively construed, gave rise to a claim for rectification, as held by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 3 EGLR 119. However, that decision should be followed in the instant case. Although the decision on the point was obiter, it was the unanimous opinion of the House of Lords. Accordingly, where rectification of a contract was sought on the basis of alleged common mistake, although there would be exceptions, the general rule was that the court should decide the question by reference to what a hypothetical reasonable objective observer, aware of all the relevant facts known to both parties, would conclude.
The appellants were entitled to rectification for mutual mistake as to whether the transfer contract conformed with the prior commercial agreement. That conclusion was not unjust since the respondent’s negotiator had been aware of the terms that the appellants had intended to offer and caused the contract to be drafted on a false understanding of what had been agreed. The mistake of both parties about the conformity of their prior non-binding agreement with the written contract was a relevant mistake under the Chartbrook principle and subsisted at the time of execution of the contract.
Ian Croxford QC and Jonathan Evans (instructed by Sharpe Pritchard) appeared for the appellants; Nigel Jones QC and Alison Meacher (instructed by Wright Hassall LLP, of Leamington Spa) appeared for the respondent.
Eileen O’Grady, barrister
