Summary and implications
The fact that a contract may give one party a good bargain does not necessarily open up the possibility that the contract can be re-interpreted by the court.
The court can give a ruling (declaration) about the meaning of a contract in limited circumstances. The general rule is that the court will only re-interpret a contract if:
- There is an obvious mistake, which can be ascertained from the background facts or the surrounding circumstances; and
- It is clear what correction ought to be made to the contract in order to correct the mistake.
The facts in this case were unusual: neither party had inspected the property before the sale
The property was sold at auction. The seller was an executor and the buyer was an investor. Neither party had inspected the property before contracts were exchanged.
The auction particulars described the property as freehold, with a shop on the ground floor and a residential flat on the first floor. The property was sold subject to an existing lease of the shop and a leaseback for 125 years of the first floor flat.
The property included an additional flat
However there was an additional flat at the rear of the ground floor. The additional flat was not mentioned in the particulars or in the conditions which applied to the sale.
The auction price paid by the buyer did not reflect the value of the additional flat.
The seller discovered the additional flat
Between exchange and completion, the seller discovered the existence of the additional flat. The seller argued that the additional flat was excluded from the sale. He said that the sale contract was for the freehold of the shop together with a flying freehold of the first floor flat.
The buyer contended that the additional flat should be included in the sale.
The High Court had to decide how to interpret the contract
The judge in the High Court decided that, considering the price paid, the contract should be for the transfer of the freehold with the benefit of the shop and subject to a lease-back of both the first floor flat and the ground floor flat on the same terms. The judge said that an objective observer would have realised that the description of the property was incomplete and would not expect the sale to involve the “gift” of the additional flat.
The buyer appealed to the Court of Appeal.
The Court of Appeal disagreed with the High Court judge’s interpretation
This was not a case in which the words used by the parties led to an arbitrary and irrational result.2
In this case, the wording of the contract was clear and if the contract was given its ordinary meaning the results were perfectly clear and workable.
As this was a sale by auction, the terms had not been negotiated between the parties. It was entirely up to the seller to decide what to offer and on what terms and for the bidder to decide how much to bid.
There was no ground to create a new additional lease to give the benefit of the value of the ground floor flat to the seller.
In any transaction, both sellers and buyers must inspect the property before contracts are exchanged
Sellers should ensure that they accurately describe the property to be sold. If they are not familiar with the property, they should carry out an inspection, to ensure that the sale particulars accurately describe what they are intending to sell.
Buyers should also inspect the property prior to purchase, particularly where the property is sold at auction and the parties have not negotiated the contract.
In this case, the buyer gained a substantial windfall. However, this will not happen in every case and buyers should be very careful to ensure that they know what is being included in a sale.
Click here for our briefing note on the Chartbrook case which considered rectification by construction.
Correcting a contract: rectification or court declaration
If there is a mistake in a contract, there are two ways in which that mistake can be corrected: either by rectification (re-writing the contract) or by a court declaration as to the meaning of the contract.
Rectification is possible where there has been either:
- A common mistake where both parties mistakenly believe the document reflects their common intention; or
- A unilateral mistake where one party mistakenly believes that the document accurately records the agreement between the parties, while the other party knows about the mistake and takes unconscionable advantage of it.
A court declaration to re-interpret the contract is possible where:
- There is a clear mistake, which is ascertained by considering the document against the admissible background facts or the surrounding circumstances; and
- It is clear what correction ought to be made in order to correct the mistake.