Background
Facts
Decision
Comment
Where the language of a contract plainly does not reflect the parties' actual agreement, the courts may sometimes seek to give effect to what the contract should have meant (for further details please see "Correcting contracts: what to do when the contract does not reflect the deal"). A recent case has cast further light on the process that the parties and the court should follow in seeking to remedy errors in the language of the contract.(1) It also provides a cautionary tale of how an unfavourable expert determination can be binding on the parties, even where the court takes a different view.
There are essentially two ways in which a court may correct a written agreement to remedy an error and give effect to what it should have meant. First, it may deem that the words mean what they ought to mean (ie, correction by construction). Second, it may rewrite the words so that their meaning is as the parties intended (ie, rectification). Broadly, the former is a way of repairing minor mistakes in drafting, whereas the latter is used where a more fundamental error has occurred in committing the agreement to paper. As this case establishes, an order for rectification will generally be made only when construction proves to be an ineffective remedial tool.
The case concerned an option agreement for the sale of a development site between the vendor, Woodford Land Limited, and Persimmon Homes Limited, the purchaser.
Woodford claimed that the parties had entered into the agreement in the belief, and with the common intention, that the cost of the provision of affordable housing (which was required by the local authority) would be borne by Persimmon.
Woodford applied for an order that the agreement be rectified to give effect to this common intention. Significantly, it did not plead a case based on the construction of the agreement (ie, that the agreement, as drafted and properly construed, already had the effect for which Woodford contended).
The judge declared himself puzzled by Woodford's failure to argue that, as a matter of construction, the agreement meant what - on Woodford's case - it was always intended to mean. He noted that in such cases:
"it is almost traditional for the claimant to mount a prior argument based on construction, with the claim for rectification advanced in the alternative. Not only are there commonly perceived tactical advantages in proceeding in this way (it enables evidence of the negotiations, inadmissible on the question of construction, to be placed before the court), but, more importantly, the question of rectification only arises if the contract does not have the meaning contended for by the claimant. If, on its true construction, the contract means what the claimant says it ought to mean, then there is nothing for the court to rectify. Moreover, the true construction of a document is a question of law. It is not something that the parties can agree between themselves, in a manner binding on the court."
The construction argument was not advanced in the litigation because it had already been resolved by expert determination, albeit on the basis of a concession by Woodford. The determination had been made pursuant to a dispute resolution clause in the agreement, which provided that an adjudicator should act as "an expert and not an arbitrator", and that his decision was "final and binding, save for any manifest error". However, as a contractual resolution, rather than a judicial decision, that determination did not bind the court. Therefore, the court decided to consider the question of construction. The judge saw this as an "essential preliminary" to the rectification claim - if, on its true construction, the contract meant what the claimant stated that it ought to mean, there would be nothing for the court to rectify.
After careful analysis the court disagreed with the expert determination. It held that on a true construction, the agreement provided for Persimmon to bear the cost of providing affordable housing. Therefore, the agreement did not need to be rectified and the claim for rectification was dismissed.
However, the result was a hollow victory for Woodford. Despite a decision apparently in its favour, it was left without a remedy. The court would not order rectification because it considered this unnecessary, as the written agreement already had the effect contended for; however, Woodford was contractually bound by the expert's contrary determination.
This case seems to suggest that in many cases a construction claim must be pleaded as a first step in rectification proceedings. For parties that seek to give effect to what they claim is the actual agreement, there appear to be few disadvantages to this approach. As the judge observed, it is "almost traditional" for both construction and rectification to be pleaded in the alternative.
On a practical level, the threshold for correcting a contract by construction is less onerous. Moreover, combining it with a claim for rectification provides an opportunity to put evidence of pre-contractual negotiations before the court, even though this evidence is not technically admissible on the construction argument. It is also undoubtedly the right approach as a matter of principle. The court cannot order the rewriting of an agreement before it has considered the proper construction of the written agreement as drafted.
The case also highlights that attempts to segregate the remedies - and to hive off the question of construction by means of an alternative dispute resolution clause - carries the concomitant risk that a party may inadvertently be forgoing its ability to benefit from a subsequent application for rectification. If the parties agree to abide by a non-judicial determination on the construction of an agreement, a more favourable judicial interpretation in the course of a court application for rectification will not override that contractual determination.
For further information on this topic please contact Matthew Dando at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
Endnotes
(1) Woodford Land Limited v Persimmon Homes Limited [2011] EWHC 984 (Ch).