Sale of land – Council housing – Rectification of transfer – Transfer of housing stock and housing department staff of claimant council to defendant registered social landlord – Negotiations over which party to pay deficit in staff pension scheme – Claimants intending defendant to pay – Amendment to transfer contract providing for claimants to pay – Whether rectification available on grounds of common or unilateral mistake – Whether defendant assuming duty of care not to seek to benefit from the claimants’ misunderstanding – Claim dismissed
The defendant company was a registered social landlord incorporated in order to purchase the claimant council’s housing stock. The claimants’ housing department staff were also to transfer to the defendant but were to retain their membership in the local government pension scheme administered by the relevant county council, with the defendant 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 course of the negotiations, the parties signed various documents that were not intended to be legally binding. They included: (i) a memorandum of understanding recognising that the parties should work within partnership principles; (ii) a joint letter to their consultants instructing them to work together to find a solution that achieved the best possible deal for each side without causing detriment to the other; and (iii) a valuation document containing statements in similar terms.
In September 2007, the claimants prepared a proposal, drafted in terms that they understood to mean that the defendant would pay the pension deficit. A later version of that proposal was signed by both parties, although it was again not intended to be legally binding. The parties’ solicitors, who were responsible for the drafting of the transfer contract, were only peripherally involved with the negotiations over its commercial terms; the claimants’ solicitor was unaware that its client had intended for the defendant to pay the deficit. In November, a few days before the contract was executed, the defendant’s solicitor obtained, by e-mail, the consent of the claimants’ solicitor to an amendment that clearly required the claimants to make a payment of £2.4m representing the pension deficit to the county council within five days of completion. The contract was completed in the amended form.
The claimants brought a claim for rectification on the grounds of common or unilateral mistake. In the alternative, the claimants sought damages from the defendant for breach of an alleged duty of care arising from the memorandum of understanding and other documents.
Held: The claim was dismissed.
(1) In order to obtain rectification for common mistake, it was necessary to show that the parties had held a common intention as to some matter, continuing until the execution of the instrument, but that, by mistake, the instrument did not reflect that intention: Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560; [2002] 2 EGLR 71; [2002] 23 EG 123 applied. When considering the common intention, the court was concerned with how that intention appeared objectively from the way the parties expressed themselves: Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 applied.
The parties had reached a common intention that the defendant should pay the pension deficit. Even if the defendant’s representatives had not subjectively so intended, the outward expression of the parties’ intention centred on the September proposal, the claimants’ understanding of which was the more natural interpretation and had not been contradicted by the defendant. However, it was not possible to find that the common intention had continued until the execution of the transfer contract. Objectively viewed, the exchange of e-mails in November 2007 made it clear that the parties had agreed for the claimants to pay the pension deficit. Although the parties’ commercial negotiators were not directly involved in that debate, the parties were bound by the actions of their properly authorised solicitors and could not claim that they had not properly instructed them. By approving the amendment proffered by the defendant in November 2007, the claimants’ solicitor had changed the claimants’ objectively viewed intentions. Accordingly, the claim for rectification on the ground of common mistake failed.
(2) The requirements for unilateral mistake included awareness by one party of the other’s mistaken belief as to the inclusion, or omission, of a term of the instrument and a failure by that party to draw the mistake to the other’s attention: George Wimpey UK Ltd v VI Construction Ltd [2005] EWCA Civ 77; [2005] BLR 135 applied. The claimants were unable to meet those requirements. Since the claimants had, through their solicitor, agreed to a clause that provided precisely the opposite from what they believed, and the defendant had brought the change to their attention by proposing the new clause, it could not be said thereafter that the defendant knew that the claimants were mistaken. The claimants’ commercial negotiators could not be regarded as separate from their solicitor in that regard. When commercial parties used commercial solicitors, the relationship between each solicitor and its client was a matter for the client, not for the counterparty to the transaction. The defendant was entitled to assume, unless it had information to the contrary, that the claimants’ solicitor was properly instructed and had properly informed its client. The difference between the commercial negotiators and the claimants’ solicitor did not entitle the claimants to ignore what its solicitor had agreed on its behalf and what the solicitor had been alerted to by the proposal of the altered clause. Consequently, the requirements for rectification for unilateral mistake were not met.
(3) The circumstances did not give rise to the duty of care alleged by the claimants. No such duty of care would ordinarily exist between parties negotiating a commercial agreement, even one between public or charitable bodies. On the true interpretation of the memorandum of understanding and other documents, the defendant was not offering any service to the claimants, or assuming any responsibility to them, but simply accepting the principle of fair play and agreeing to negotiate in good faith. Such an understanding did not give rise to any duty of care; otherwise, it would make the negotiation of commercial transactions unworkable, uncertain and risky. Parties negotiating such transactions needed to know where they stood and that they would only owe duties of care if their relationship went beyond that of arm’s length counterparties. That point was not reached in the instant case: Henderson v Merrett Syndicates Ltd (No 1) [1995] 2 AC 145 considered.
Ian Croxford QC and Jonathan Evans (instructed by Sharpe Pritchard) appeared for the claimants; Nigel Jones QC and Alison Meacher (instructed by Wright Hassall LLP) appeared for the defendant.
Sally Dobson, barrister
