The Privy Council has held that a party may rely on a statement in an agreement to defend a claim based on the agreement, even when both parties knew the statement to be untrue at the time of signing the agreement.

Prime Sight Limited v Lavarello [2013] UKPC 22 concerned an application to liquidate a company (Prime Sight), owned by a husband and wife.  The dispute arose after the bankruptcy of the husband, and the claim was brought by his trustee in bankruptcy.

The claim related to a deed of assignment of the lease of an apartment, owned by the husband.  Under the deed, the lease was assigned to Prime Sight and the deed recorded that Prime Sight had paid a purchase price of £499,950.  However, at the time of signing the deed, the parties knew that the amount had not been paid (nor did it appear that they intended it ever to be payable).  When the non-payment became clear to the trustee, it demanded the purchase price from Prime Sight.

In the Privy Council, Prime Sight opposed the trustee's liquidation application on the basis that there was a "substantial dispute" as to whether the debt was owing.  It relied on the fact that at the time the deed was signed, the parties had agreed that the husband would not make any claim against the company for the purchase price.  The assignee responded by arguing that the husband was 'estopped' from opposing the claim on this basis because the deed clearly represented that the debt had been paid.

The Privy Council found that the threshold of a "substantial dispute" had been met and upheld Prime Sight's opposition.  It noted that in order for an estoppel by deed to arise, it is not essential to show that the party relying on a representation actually believed it to be true. The parties may know the full facts but choose to assume different ones for the purposes of a transaction.  Parties are ordinarily free to contract on whatever terms they choose and the court's role is to enforce those terms, subject to certain exceptions (none of which were applicable in the present case).  In this case, the deed was a valid one and property had passed under it. In these circumstances, it was not possible simply to disregard the part of it which stated that a payment had been made.

This result may appear surprising given that there was no dispute that the deed misrepresented the true state of affairs.  However, it reflects that the Courts will not lightly allow parties to escape the effects of freely negotiated, unambiguous contracts.