Overage provisions in contracts have become increasingly sophisticated. Some use algebraic symbols to capture their meaning; others rely solely on words. In Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] PLSCS 197, the House of Lords was asked to decide the price that had become payable under an overage agreement that relied on ambiguous wording.
The dispute turned on the meaning of the phrase “Minimum Guaranteed Residential Unit Value” [MGRUV]. Put simply, the landowner claimed that it was entitled to receive a guaranteed payment for the sale of the flats comprising the development and 23.4% of any surplus. The developer claimed that the landowner was entitled to receive an additional payment only if 23.4% of the sales price amounted to more than the MGRUV. The House of Lords agreed that the landowner’s interpretation would result in a large and commercially unrealistic overage payment and therefore upheld the developer’s claim.
Their lordships were unconcerned that if the developer’s interpretation were correct, the court would have to rewrite the parties’ agreement by inserting additional words in to the overage formula, as well as applying deductions at a different point in that formula. They ruled that when the language used in a document is ambiguous, there is no limit to the amount of red ink, verbal rearrangement, or correction that can be used in the process of interpretation. The fact that the courts may have to express the parties’ meaning in words different from those used by the parties is not a reason to deny the contract the correct meaning, and the courts do not have to formulate alternative wording that approximates as closely as possible to that used by the parties.
Interestingly, Lord Hoffmann held that it was impossible to ignore the labels that the parties had attached to the definitions in their contract. In his opinion, the labels used by parties are seldom arbitrary; they are often selected to convey a concept or the purpose of a definition. A guaranteed minimum payment suggested the possibility of a larger payment that, depending on some contingency, may or may not fall due. However, if the landowner’s interpretation were correct, there would be virtually no element of contingency.
The decision is also notable for its reaffirmation of the rule that evidence of pre-contract negotiations is inadmissible as an aid to contractual interpretation: see Prenn v Simmonds [1971] 1 WLR 1381. The rule means that parties are generally unable to introduce evidence of what was said or done while negotiating a document to explain its meaning.
The rule does not exclude the use of such evidence for other purposes; for example, to support a claim for rectification or estoppel. These remedies are unaffected by the rule, because they start from the premise that, as interpreted, the wording in the contract is incorrect. Indeed, had the Court of Appeal’s interpretation of the document been upheld, the House ruled that the developer would have been entitled to rectification.
Allyson Colby is a property law consultant