The court will intervene to correct a drafting mistake only if the contractual provisions are "nonsensical or absurd". The Court of Appeal recently considered this issue in a dispute between a landlord and a tenant in MonSolar IQ Ltd v Woden Park Ltd.(1)
The landlord, Woden Park Limited, leased 15 acres of land near Cardiff to the tenant, MonSolar IQ Ltd, for use as a solar farm. The 25-year lease provided for a starting rent of £15,000 and included a formula for calculating future rents that referenced the General Index of Retail Prices (or Retail Price Index (RPI)).
The formula did not increase the rent annually in line with RPI, but instead (assuming that RPI generally increased) increased the rent at a much higher rate. Assuming an annual increase in RPI of approximately 3%, the literal interpretation of the formula would have caused the year 25 rent under the lease to be £76 million, as opposed to £30,000 if the rent was increased in line with RPI.
The dispute concerned the effect of that calculation. The tenant claimed that there was a clear drafting mistake. The landlord argued that it was neither clear that the formula contained a drafting error nor, if there were an error, what that error was exactly.
The case reached the Court of Appeal, which found in favour of the tenant. It held that the rent review formula should be corrected under the "Chartbrook principle", whereby clear drafting mistakes can be resolved. In this instance, the calculation should have been construed so that the rent increased in line with RPI.
The Court of Appeal endorsed both the reasoning and conclusion of the first-instance judge. To displace the literal meaning of a contractual provision under the Chartbrook principle, it must be clear:
- that a mistake has been made; and
- what the parties intended the provision to say.
The first-instance court found that the formula contained a mistake; it was objectively intended to increase or decrease the rent on the review date "in accordance with any proportionate change in the RPI during that year". As such, it was possible to determine the truly intended construction of the formula, with an order being made on such terms.
In upholding the first-instance decision, the Court of Appeal rejected the landlord's submission that the Chartbrook principle was qualified by the judicial restraint found in the later decision of Arnold v Britton,(2) which emphasised that commercial common sense and context should not be invoked to undervalue the importance of the language of the provision in question.
The Court of Appeal noted that the context for these remarks in Arnold v Britton was that while parties cannot control the circumstances surrounding their contract, they can control the language of their contract, which a reasonable reader would expect to reflect what the parties intended. However, this does not apply in cases involving an alleged mistake, where the question is whether the language of the contract reflects what the parties intended.
The Court of Appeal re-articulated that the courts cannot rewrite the parties' bargain in the name of commercial sense (as both Arnold v Britton and Chartbrook(3) suggest). However, there is a distinction between "commercially unattractive and even unreasonable" cases in which judicial restraint is required and cases involving "nonsensical or absurd" provisions that the courts can correct by applying the Chartbrook principle.
Although the decision in this case upholds a construction of a contract contrary to its literal meaning, the judgment ultimately reinforces that the language used in contractual provisions is the starting point for interpretation. The judgment suggests that the court cannot depart from the words used in the contract unless the provisions are nonsensical or absurd. Therefore, contracting parties should continue to ensure that the language of their agreements accurately reflects the intended terms.
For further information on this topic please contact Sean Cannon at RPC by telephone (+44 20 3060 6000) or email ([email protected]). The RPC website can be accessed at www.rpc.co.uk.