Rectification for common mistake
Persimmon Homes v Hillier (Court of Appeal) [2019]
The case acts as a reminder that, although pre-contractual correspondence is not admissible as an aid to interpreting a contract, it can be important evidence if the court is considering a claim for rectification. Where rectification is sought on the basis of common mistake, the claimant must establish that the parties’ negotiations clearly demonstrated an apparent common continuing intention, which was not properly reflected in the written agreement as a result of a mutual mistake.
Facts:
The claimant property developer purchased two companies (‘Holdings’ and ‘Developments’) owned by the defendants. Holdings and Developments owned land for potential future development in West Sussex as well as options to purchase other land forming part of a single site. However, they did not own certain areas of land that were seemingly acknowledged to be crucial to the overall development of the site (called the ‘Felbridge Freeholds’). This land was owned by a third company also owned by the defendants (‘Investments’).
In the share purchase agreement the defendants warranted that Holdings and Developments held good title subject as specified in the relevant disclosure letter. The disclosure letter provided by the defendants as part of the transaction included a statement that the Felbridge Freeholds were not legally and beneficially owned by Holdings and Developments. It also referred to all matters contained or referred to in the data room, which included documents showing that the Felbridge Freeholds were not held by Holdings and Developments.
Only after the claimant had purchased the companies did it actually realise that it had not acquired all of the land. The claimant brought a claim for rectification of the share purchase agreement and disclosure letter. They requested that the warranties set out in the share purchase agreement should cover all of the relevant property including the land which was in fact owned by Investments. If successful this would mean that the sellers would be liable in damages for breach of warranty. The claimant succeeded at first instance with its claim for rectification. The judge held that the parties had an apparent common continuing intention as demonstrated by correspondence and other documentation ‘crossing the line’ (i.e. passing between them) that at the time of the share purchase agreement the whole of the site should be included in the transaction. What the actual, subjective intention of the sellers was was not relevant.
The sellers appealed on the grounds that the first instance judge had failed to apply the relevant principles correctly on the facts, in particular in finding that there was a common intention to transfer the Felbridge Freeholds.
Decision:
The Court of Appeal dismissed the appeal. There was no challenge to the applicable legal principles. The relevant test is that the parties held an apparent common continuing intention, up to the point of entering into the agreement, which mistakenly was not reflected in its terms. The common continuing intention is not a mere subjective belief but what an objective outside observer would have understood the common intention to be.
The Court of Appeal held that the first instance judge was fully entitled on the evidence to conclude that the share purchase agreement and disclosure letter did not accurately reflect the terms agreed between the parties.
In particular, the parties’ common continuing intention was evidenced by the following aspects of the pre-contractual negotiations:
- An information memorandum provided by the defendants identified the “strategic landholdings” that could be included in the sale and referred to them being “part owned, part held under option”.
- The claimant’s first indicative offer was expressed to include the purchase of “all strategic land interests”.
- A data package provided to the claimant suggested that the claimant would acquire control of all of the land interests in the site.
- In answers to enquiries the defendants had represented that Holdings and Developments controlled the entire site and that ownership and control of the entire site would pass to the claimant.
- Further pre-contractual correspondence between the parties also indicated that they had both proceeded on the basis that the whole of the development site would be included in the sale.
Points to Note:
- What the case demonstrates is that pre-contractual correspondence can be critical and it is important that it is treated seriously;
- Rectification is a remedy which contracting parties and their advisors should be aware of if there is a need for ‘mistakes’ in a signed contract to be corrected. These can be ‘common mistakes’ (as here) or a ‘unilateral mistake’ (where one party mistakenly believes that the document accurately records the agreement reached between the parties, while the other knows there is a mistake in the document and takes advantage of it);
- The case illustrates that it is vitally important that the contract documents accurately reflect the transaction that has been agreed;
- Consideration of arguments related to rectification necessarily involve consideration of pre-contractual correspondence. Raising such arguments may be useful in ensuring that the court admits evidence of the pre-contract exchanges if that could assist arguments relating to the interpretation of the contract. Strictly such evidence is inadmissible in relation to issues of contract interpretation.