A recent case1 has provided useful guidance on the admissibility of pre-contractual negotiations in determining ambiguous or disputed contractual terms and the current trends in rectification.

BACKGROUND

The claimant, Chartbrook, entered into an agreement with the defendant, Persimmon, for the development of Chartbrook’s land. Under the agreement, Persimmon was to obtain planning permission for proposed works, carry out a development and then sell the properties. Chartbrook was then to grant leases to the buyers, from which Persimmon would receive the proceeds and pay Chartbrook a sum calculated in the contract in return.

The definition of the price contained a grammatical ambiguity. Chartbrook interpreted the definition literally, arguing that it was due to receive some £4.6 million. By contrast, Persimmon understood the price it was due to pay to Chartbrook to be around £900,000.

Chartbrook succeeded at trial and Persimmon’s appeal to the Court of Appeal was dismissed. On appeal to the House of Lords, Persimmon’s interpretation was unanimously allowed. It is the House of Lord’s comments on pre-contract negotiations and rectification which are particularly worthy of note.

PRE-CONTRACT NEGOTIATIONS

During negotiations, Persimmon had set out its proposals in relation to the price to Chartbrook in a number of letters. These were accepted and formed the basis of the agreement.

Persimmon argued that these negotiations should be admissible in assisting the court to decide objectively what a reasonable person, with all the knowledge of the parties, would have understood the parties to have meant by the definition of the price to be paid to Chartbrook.

This was rejected by the House of Lords, who reaffirmed the rule (“the exclusionary rule”) that pre-contractual negotiations are not admissible in the interpretation of terms, because allowing pre-contractual material could:

  1. create uncertainty and cost, as parties would have to spend time and money wading through material;
  2. encourage self-serving statements during negotiations; and
  3. allow for a situation whereby a third party to a contract, who had not been privy to the negotiations, might find the contract meant something different to what he had thought.  

RECTIFICATION

Persimmon also argued that, in the alternative, the contract should be rectified. The House of Lords decided that both parties were mistaken in thinking the written contract reflected their prior objective consensus and therefore allowed rectification.

This element of decision amounts to a significant clarification on the law of rectification for common mistake.

Previously, case law on rectification had set out two contrasting strands of thought: an equitable remedy that looked at the true (i.e. subjective) intentions of the parties, and a remedy designed to ensure contracts reflect the contractual (i.e. objective) intentions of the parties. The latter view has now been firmly endorsed.

The fact that the directors of Chartbrook subjectively thought the pre-contractual proposals meant something different to what the proposals meant (looked at objectively) was irrelevant. The crucial point was whether both parties were mistaken in thinking that the contract reflected their objective intention and consequently it was rectified.