Mutual Knowledge admissible to construe contract
The parties had entered into a development contract in respect of a site in Wandsworth, under which balancing compensation was to be paid. They disagreed as to its calculation. Persimmon sought rectification to reflect the negotiations.
Held: The appeal succeeded. There were difficulties in construing the contract. The contract came to be read after a period of sharp falls in value which were not reflected comfortably in the words used, and the phrase ‘additional residential payment’ made no particular commercial sense. It was necessary for it to be clear first that the language had gone awry, and second what a reasonable bystander would have understood the parties to have meant. Those conditions being satisfied, the appeal was allowed.
Evidence of negotiations can be given to establish that ‘a fact which may be relevant as background was known to the parties’. It was also argued that the course pre-contractual negotiations should be allowed and taken into account in construing the contract. There was however no clear case shown for departing from this exclusionary rule or changing what is now settled practice.
The court should consider ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.’
Lord Hoffmann noted that prior negotiations might be relevant for purposes other than the drawing of inferences about what the contract means.
As to the cases of East and KPMG, he said: ‘What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.’
Lord Hoffmann said: ‘words used as labels are seldom arbitrary’
Lord Hoffmann (obiter) where the document of which rectification is sought is a written contract, the relevant test of intention is purely ‘objective’ – meaning by this what a reasonable observer with knowledge of the background facts and prior communications between the parties would have thought their common intention at the time of contracting to be.
Judges:
Lord Hope of Craighead, Lord Hoffmann, Lord Rodger of Earlsferry, Lord Walker of Gestingthorpe and Baroness Hale of Richmond
Citations:
[2009] UKHL 38, Times 02-Jul-2009, [2009] 27 EG 91, [2009] BLR 551, 125 Con LR 1, [2009] 3 WLR 267, [2010] 1 P and CR 9, [2009] Bus LR 1200, [2009] NPC 86, [2009] CILL 2729, [2009] 4 All ER 677, [2009] 1 AC 1101, [2009] WLR (D) 223
Links:
Bailii, WLRD, HL
Jurisdiction:
England and Wales
Citing:
At first instance – Chartbrook Ltd v Persimmon Homes Ltd and Another ChD 2-Mar-2007
The claimants had entered into an agreement with the defendant house-builder for the development of a site which the claimants had recently acquired. The structure of the agreement was that the developer would obtain planning permission and, under . .
Appeal from – Chartbrook Ltd v Persimmon Homes Ltd CA 12-Mar-2008
Owners of land (Chartbrook) made a contract with a developer (Persimmon) granting Persimmon a licence to develop the land for commercial and residential use. Planning permission was granted and the development was built. The sums payable to . .
Cited – A and J Inglis v Buttery and Co CA 1877
Surrounding circumstances are not admissible for any purpose of finding out which words the parties intended to use rather than did use in their contract. Lord Justice Clerk Moncreiff said that in all mercantile contracts ‘whether they be clear and . .
Cited – River Wear Commissioners v Adamson HL 1877
It was not necessary for there to be an ambiguity in a statutory provision for a court to be allowed to look at the surrounding circumstances.
As to the Golden Rule of interpretation: ‘It is to be borne in mind that the office of the judge is . .
Cited – Prenn v Simmonds HL 1971
Backgroun Used to Construe Commercial Contract
Commercial contracts are to be construed in the light of all the background information which could reasonably have been expected to have been available to the parties in order to ascertain what would objectively have been understood to be their . .
Cited – Birmingham City Council v Walker HL 16-May-2007
The tenant was the son of the former tenant. The tenancy had originally been in the ownership of his father and his mother. The father died in 1969, when the tenancy not yet a secure tenancy. On the mother’s death, the council argued that the first . .
Cited – A and J Inglis v Buttery and Co HL 1878
The presumption is that a contract document expresses all the terms in the contract with the effect that the court will only look to the document ‘in determining what the contract really was and what it really meant. Lord Blackburn preferred the . .
Cited – KPMG Llp v Network Rail Infrastructure Ltd CA 27-Apr-2007
The parties disputed the interpretation of a break clause in their lease. Carnwath LJ said that courts should not readily accept that parties have made mistakes in formal documents: ‘correction of mistakes by construction’ is not a separate branch . .
Cited – Alexiou and Another v Campbell PC 26-Feb-2007
(the Bahamas) . .
Cited – Kirin-Amgen Inc and others v Hoechst Marion Roussel Limited and others etc HL 21-Oct-2004
The claims arose in connection with the validity and alleged infringement of a European Patent on erythropoietin (‘EPO’).
Held: ‘Construction is objective in the sense that it is concerned with what a reasonable person to whom the utterance . .
Cited – Bank of Credit and Commerce International SA v Ali, Khan and others (No 1); BCCI v Ali HL 1-Mar-2001
Cere Needed Releasing Future Claims
A compromise agreement which appeared to claim to settle all outstanding claims between the employee and employer, did not prevent the employee later claiming for stigma losses where, at the time of the agreement, the circumstances which might lead . .
Cited – East v Pantiles Plant Hire Ltd CA 1981
The court considered the circumstances under which rectification could properly be ordered in respect of a deed. Brightman LJ said: ‘It is clear on the authorities that a mistake in a written instrument can, in certain limited circumstances, be . .
Cited – Jumbo King Ltd v Faithful Properties Ltd 2-Dec-1999
(Court of Final Appeal of Hong Kong) . .
Cited – Investors Compensation Scheme Ltd v West Bromwich Building Society HL 19-Jun-1997
Account taken of circumstances wihout ambiguity
The respondent gave advice on home income plans. The individual claimants had assigned their initial claims to the scheme, but later sought also to have their mortgages in favour of the respondent set aside.
Held: Investors having once . .
Cited – Mannai Investment Co Ltd v Eagle Star Assurance HL 21-May-1997
Minor Irregularity in Break Notice Not Fatal
Leases contained clauses allowing the tenant to break the lease by serving not less than six months notice to expire on the third anniversary of the commencement date of the term of the lease. The tenant gave notice to determine the leases on 12th . .
Cited – Countess of Rutland’s Case 1604
Popham CJ said: ‘it would be inconvenient, that matters in writing made by advice and on consideration, and which finally import the certain truth of the agreement of the parties should be controlled by averment of the parties to be proved by the . .
Cited – Homburg Houtimport BV v Agrosin Private Ltd (the ‘Starsin’) HL 13-Mar-2003
Cargo owners sought damages for their cargo which had been damaged aboard the ship. The contract had been endorsed with additional terms. That variation may have changed the contract from a charterer’s to a shipowner’s bill.
Held: The specific . .
Cited – Bratton Seymour Service Co Ltd v Oxborough CA 1992
The company was set up to acquire and manage a property divided into flats which also included ‘amenity areas’ (tennis courts, swimming pool, gardens). It was argued that there should be implied into the articles of association an obligation on the . .
Cited – Pepper (Inspector of Taxes) v Hart HL 26-Nov-1992
Reference to Parliamentary Papers behind Statute
The inspector sought to tax the benefits in kind received by teachers at a private school in having their children educated at the school for free. Having agreed this was a taxable emolument, it was argued as to whether the taxable benefit was the . .
Cited – Practice Statement (Judicial Precedent) HL 1966
The House gave guidance how it would treat an invitation to depart from a previous decision of the House. Such a course was possible, but the direction was not an ‘open sesame’ for a differently constituted committee to prefer their views to those . .
Cited – Partenreedesei Karen Oltmann v Scarsdale Shipping Co Ltd (The Karen Oltmann) 1976
The parties disputed the application of the word ‘after’ in a break-clause in a charter party which provided that ‘Charterers to have the option to redeliver the vessel after 12 months’ trading subject giving 3 months’ notice’. By their negotiations . .
Cited – Shore v Wilson 1842
Parke B said: ‘In the first place, there is no doubt that not only where the language of the instrument is such as the Court does not understand, it is competent to receive evidence of the proper meaning of that language, as when it is written in a . .
Cited – Regina v National Insurance Commissioner, Ex parte Hudson HL 1972
The House considered whether it would have power to make a ruling with prospective effect only. Lord Diplock said the matter deserved further consideration; Lord Simon said that the possibility of prospective overruling should be seriously . .
Cited – Antaios Compania Naviera SA v Salen Rederierna AB (‘the Antaios’) HL 1984
A ship charterer discovered that the bills of lading were incorrect, but delayed withdrawal from the charter for 13 days. They now sought leave to appeal the arbitration award against them.
Held: Though he deprecated extending the use of the . .
Cited – Stevens and others v Bell and others CA 20-May-2002
Interpretation of the trustees’ powers with respect to surplus under the Airways Pension Scheme
Orse British Airways Pension Trustees Ltd v British Airways Plc . .
Cited by:
Cited – Sigma Finance Corporation, Re; (in administrative receivership) SC 29-Oct-2009
The court considered how the losses of the insolvent company were to be distributed as between secured creditors and preferential creditors, given the terms of the applicable trust deed.
Held: The court considered the interpretations of the . .
Cited – Westvilla Properties Ltd v Dow Properties Ltd ChD 15-Jan-2010
The owner sought specific performance of its contract to sell land to the defendant. The land was subject to a proposed lease which the defendant had concluded was uncertain and unattractive, and claimed to have rescinded the contract.
Held: . .
Cited – Oceanbulk Shipping and Trading Sa v TMT Asia Ltd CA 15-Feb-2010
The parties had settled their disagreement, but now disputed the interpretation of the settlement. The defendant sought to be allowed to give in evidence correspondence leading up to the settlement which had been conducted on a without prejudice . .
Cited – Horwood and Others v Land of Leather Ltd and Others ComC 18-Mar-2010
The claimants sought to claim for personal injuries against the defendant company, now in administration, and their insurers using the 1930 Act. The insurers said they were not liable to indemnify the company. The parties disputed the standing of an . .
Cited – Pink Floyd Music Ltd and Another v EMI Records Ltd ChD 11-Mar-2010
The claimant sought summary judgment for a claim under Licensing agreements under which the defendants had marketed and sold the claimant’s products. The remaining disputes concerned differences as to royalties from digital downloads sold through . .
Cited – Ashcroft v Barnsdale and Others ChD 30-Jul-2010
The parties sought to rectify a deed of family arrangement varying a will. The variation deed had had several mistakes which in fact increased the sum of Inheritance Tax owed. HMRC refused to accept the rectification deed unless approved by the . .
Cited – Wickens v Cheval Property Developments Ltd ChD 8-Sep-2010
The buyer of land sought a reduction in the purchase price complaining of the removal of several items (worth possibly andpound;300,000) by intruders after exchange. The seller said that the fixtures had been excluded under the contract.
Held: . .
Cited – Oceanbulk Shipping and Trading Sa v TMT Asia Ltd and Others SC 27-Oct-2010
The court was asked whether facts which (a) are communicated between the parties in the course of without prejudice negotiations and (b) would, but for the without prejudice rule, be admissible as part of the factual matrix or surrounding . .
Cited – Farstad Supply As v Enviroco Ltd SC 6-Apr-2011
The court was asked by the parties to a charterparty whether one of them is an ‘Affiliate’ of the charterer for the purposes of provisions in a charterparty by which both the owner and the charterer agreed to indemnify and hold each other harmless . .
Cited – Autoclenz Ltd v Belcher and Others SC 27-Jul-2011
Car Cleaning nil-hours Contractors were Workers
The company contracted with the claimants to work cleaning cars. The company appealed against a finding that contrary to the explicit provisions of the contracts, they were workers within the Regulations and entitled to holiday pay and associated . .
Cited – Rainy Sky Sa and Others v Kookmin Bank SC 2-Nov-2011
Commercial Sense Used to Interpret Contract
The Court was asked as to the role of commercial good sense in the construction of a term in a contract which was open to alternative interpretations.
Held: The appeal succeeded. In such a case the court should adopt the more, rather than the . .
Cited – Campbell v Daejan Properties Ltd CA 20-Nov-2012
The tenant appealed against an order requiring the amendment of what was found to be an obvious error in the lease as to the responsibility of the lessor to make repairs to certain walls and rooves, and the apportionment of liability for payment of . .
Cited – AJ Building and Plastering Ltd v Turner and Others QBD 11-Mar-2013
An insurance company had engaged a main contractor to handle repairs to houses insured under its policies. The contractor had engaged the claimant subcontractor to carry out the works at the defendants’ homes, but then went into insolvent . .
Cited – Pink Floyd Music Ltd and Another v EMI Records Ltd CA 14-Dec-2010
The defendant appealed against an order made on the claimant’s assertion that there were due to it substantial underpayments of royalties over many years. The issues were as to the construction of licensing agreements particularly in the context of . .
Cited – Daventry District Council v Daventry and District Housing Ltd CA 13-Oct-2011
The appellant challenged refusal of rectification of its agreement with the defendant. They asserted either mutual or unilateral mistake. The parties had agreed for the transfer of housing stock and management staff to the respondents. The claimant . .
Cited – Marley v Rawlings and Another SC 22-Jan-2014
A husband and wife had each executed the will which had been prepared for the other, owing to an oversight on the part of their solicitor; the question which arose was whether the will of the husband, who died after his wife, was valid. The parties . .
Cited – Sugarman and Others v CJS Investments Llp and Others CA 19-Sep-2014
The parties were apartment owners in a development, each owning shares in the management company. They disputed the interpreation of the Articles as to whether the owner of more than one apartment was still restricted to one vote at member meetings, . .
Cited – Lloyds TSB Bank Plc v Crowborough Properties Ltd and Others CA 12-Feb-2013
The court was asked whether Lloyds TSB Bank Plc was entitled to rectify the terms of a compromise embodied in the schedule to a Tomlin order. . .
Cited – Arnold v Britton and Others SC 10-Jun-2015
Absurdity did not defeat a clear clause
A standard lease of plots on a caravan park, contained a provision which appeared to increase the rent by 10% in each year. The tenants argued that such a substantial increase could not have been intended.
Held: The tenants’ appeal failed . .
Cited – Radford and Another v Frade and Others QBD 8-Jul-2016
The court was asked as to the terms on which solicitors and Counsel were retained to act for the defendants. The appeals did not raise any issues concerning costs practice, and were by way of review of the Costs Judge’s rulings, and not by way of . .
Not applicable – Jump and Another v Lister and Another ChD 12-Aug-2016
Omnibus Survivorship Clauses
Wills for two people hade been drafted with survivorship clauses which provided for others according to the order in which they died, but in the event, having died together it had been impossible to say which died first. The parties disputed the . .
Cited – Cavendish Square Holding Bv v Talal El Makdessi; ParkingEye Ltd v Beavis SC 4-Nov-2015
The court reconsidered the law relating to penalty clauses in contracts. The first appeal, Cavendish Square Holding BV v Talal El Makdessi, raised the issue in relation to two clauses in a substantial commercial contract. The second appeal, . .
Cited – Wright and Another (Liquidators of SHB Realisations Ltd) v The Prudential Assurance Company Ltd ChD 6-Mar-2018
IVA is a special form of contract
Liquidators asked the court whether sums sought by the insolvent company’s landlords were payable and or provable. Under an IVA, the copany had been paying reduced rents, but the arrangement document provided that the full rents would be restored on . .
Cited – BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 Plc and Another SC 16-Jun-2016
The Court was asked whether Lloyds Banking Group was entitled to redeem 3.3 billion pounds of loan notes which would otherwise carry a relatively high rate of interest, namely over 10% per annum. The loan notes are contingent convertible securities . .
Not Followed – FSHC Group Holdings Ltd v Glas Trust Corporation Ltd CA 31-Jul-2019
Rectification – Chartbrook not followed
Opportunity for an appellate court to clarify the correct test to apply in deciding whether the written terms of a contract may be rectified because of a common mistake.
Held: The appeal failed. The judge was right to conclude that an . .
Cited – Lehman Brothers International (Europe) v Exotix Partners Llp ChD 9-Sep-2019
The parties had contracted to trade global depository notes issued by the Peruvian government. Each made mistakes as to their true value, thinking them scraps worth a few thousand dollars, whereas their true value was over $8m. On the defendant . .
Cited – Barnardo’s v Buckinghamshire and Others SC 7-Nov-2018
The Court considered the interpretation of a clause in a pension scheme trust deed which defines the phrase ‘Retail Prices Index’ and which allows the trustees of the pension scheme to adopt a ‘replacement’ of the officially published Retail Prices . .
Cited – The Financial Conduct Authority and Others v Arch Insurance (UK) Ltd and Others SC 15-Jan-2021
Many businesses, having been ordered to suspend business during the Covid-19 epidemic, sought to claim under business interruption insurance. The claims were rejected by the insurers and the insurers now appealed from a finding that they had been . .
Cited – R and S Pilling (T/A Phoenix Engineering) v UK Insurance Ltd SC 27-Mar-2019
The driver’s car failed its MOT., He took it to private premises to repair. In those repairs, inflammable materials ignited and the fire spread those premises and adjoining third party premises. The premise’ insurers paid the owners of both and . .
Cited – London Borough of Lambeth v Secretary of State for Housing, Communities and Local Government and Others SC 3-Jul-2019
The second respondent sought a certificate from the Council determining that the lawful use of its store extended to sales of unlimited categories of goods including food. A certificate to that effect was refused by the Council, but granted by a . .
Cited – London Borough of Lambeth v Secretary of State for Communities and Local Government and Others CA 20-Apr-2018
The parties disputed the validity of the time-limit condition (condition 1), which required the ‘development to which this permission relates’ to be begun within three years.
Held: The Court upheld the inspector’s decision that this condition . .
Cited – London Borough of Lambeth v Secretary of State for Housing, Communities and Local Government and Others SC 3-Jul-2019
The second respondent sought a certificate from the Council determining that the lawful use of its store extended to sales of unlimited categories of goods including food. A certificate to that effect was refused by the Council, but granted by a . .
Lists of cited by and citing cases may be incomplete.
Land, Contract, Evidence, Equity
Leading Case
Updated: 16 April 2022; Ref: scu.368925
