UK: Rectification Ordered Even Where Party Failed To Read Document Properly

Last Updated: 29 November 2011
Article by Mark Alsop

Daventry District Council –v- Daventry & District Housing Limited [2011] EWCA Civ 1153

This case involved a transfer (or outsourcing) of council housing by Daventry District Council to DDH, a new company set up as a charity to take it over. The purchase was being funded by RBS. The matter at issue concerned the pension fund deficit attributable to transferring employees and in particular who was to fund that deficit. There were negotiations between Mr Bruno for the Council and Mr Roebuck for DDH. These culminated in a document produced by Mr Bruno known as "Version 1" . The "better" interpretation of this document was that the Council was proposing a reduction of the purchase price equal to the pension fund deficit of £2.4 million, but that DDH would transfer the equivalent amount from a VAT relief fund which would otherwise have been shared, i.e. the net effect was that the parties would pay half the deficit each. Mr Roebuck knew that this was the interpretation of Version 1 intended by Mr Bruno, but he presented it to the DDH board and its solicitors and financial advisers as saying that the Council would be paying the deficit. The contract documentation was prepared on the basis of Mr Roebuck's interpretation and negotiated between the parties without changes to the relevant sub-clause. Later on, at RBS' request, a further sub-clause was inserted to confirm the position. This clause was specifically negotiated and agreed between the parties. At many of the negotiations, Mr Bruno was present but said nothing on the point. In due course the Council sought to rectify the agreement to make it clear that it was not responsible for funding the deficit.

The Court of Appeal ordered rectification. All three judges gave full judgments with Toulson LJ being firmly in favour of rectification, the Master of Rolls ordering rectification with some hesitation and Etherton LJ refusing rectification. The judges shared their judgments with each other as they were written. Etherton LJ in particular made some trenchant criticism of the positions taken by the other two.

The judges broadly speaking agreed on the law of rectification for common mistake but disagreed on the relative importance of (i) Mr Roebuck's misleading the DDH board as to the Council's understanding of the effect of version 1 and, on the other hand, (ii) the Council's repeated refusal to appreciate what was clearly set out in the document (arising from, as the Master of the Rolls put it: "an astonishing degree of casualness or ineptitude"). Both parties were under a mistake, albeit a different mistake.

The majority took the view that Mr Roebuck had misled the board of DDH as to the continuing intention of the Council that DDH should fund the deficit. Mr Roebuck was, as agreed between the parties, the agent for DDH so his knowledge should be attributed to DDH. Mr Roebuck knew well what terms the Council had meant to offer. He had caused DDH's lawyers to enter into the process of contract drafting on a false understanding. If he had been honest in his dealings with the lawyers, things would have proceeded differently. (Mr Roebuck's conduct was partly excused by the fact that the Council expressly agreed the new clause inserted by RBS. From then on, he could not have said to have misled the Council as the intentions of DDH.)

The words and actions of DDH as a whole including those of Mr Roebuck, would have led a reasonable observer to conclude (as the Council did) that DDH had agreed to pay the £2.4 million to the pension fund. The contrary words in the draft agreement and even the extra sub-clause proposed by RBS had to be interpreted in the context of the commercial terms of the agreement in principle (even though they were not binding). The question was whether DDH indicated an intention to resile from the prior accord (i.e. not fund the deficit) when including the clauses in the draft agreement. The hypothetical observer would not have concluded that DDH was signalling a departure from the prior accord; he would have concluded that DDH was making a mistake. The "carriage of the matter" was given over to solicitors on the basis that they would sort out drafting of contract which reflected the prior accord. As the High Court had put it, the reason for the clause put forward by RBS was purely to give RBS comfort and was not intended to effect a change in the deal. The commercial agreement outweighed even the clear wording of the relevant sub-clauses, especially since the first sub-clause was introduced at a stage of negotiations, and in a format, that appeared to be merely documenting the terms the parties had already agreed. The commercial reality also affected the interpretation of the parties' words and actions. It was commercially unreal to suggest that, in accepting the late amendment, the Council had agreed to give DDH a £2.4 million windfall for no commercial reason (it meant that the Council were effectively funding 1½ times the deficit).

Etherton LJ, on the other hand, took the view that the mistake arose from the Council's oversight of the document. When the original clause was inserted into the agreement and, especially when the later clause was inserted at the instigation of RBS, the objective observer would have thought that DDH was indicating its intention to resile from the terms of the earlier agreement and was intentionally putting forward a new position. The Council did not challenge the clause and indeed expressly assented to it. Had it raised an objection or even an enquiry, then the disagreement between the parties would have become clear.

On the matter of unilateral mistake, both the majority judges would have also had agreed to rectify on the grounds of unilateral mistake. Etherton LJ disagreed, because as the law presently stood nothing short of dishonesty was sufficient to found a claim for rectification for unilateral mistake – unconscionable conduct was of itself not sufficient. In any event he considered that the claim for unilateral mistake failed on causation, since the effective clause of the Council's misfortune was its own gross carelessness and not any unconscionable conduct on the part of Mr Roebuck.

This case is another instance where clear commercial words in a contract have been overturned to give effect to commercial agreement. Of course the case is fact specific, but it does contain interesting insights into the way that parties should conduct themselves in negotiations. One wonders if the decision will be appealed to the Supreme Court. One also suspects that the majority set out to punish sharp practice on the part of a negotiator (even if it did not (as found by the High Court judge) amount to dishonesty or unconscionable practice).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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