In the following case, the claimant advanced “manifestly lawyer-generated” arguments for rectification of a contract for the sale of land on the basis of mutual and unilateral mistake. The judge’s findings and his obiter observations will be of considerable interest to all involved in negotiating contracts.

Connolly Limited v Bellway Homes Limited [2007] EWHC 895

The parties entered into a contract for the sale of land for development. The vendor appointed an agent to assist it with its plans for the site. Following discussions between the vendor’s agent and the purchaser, it was agreed that:

  • the price to be paid for the site on completion (following receipt of planning permission) would be ‘indexed’ in the sale contract so that, pending completion of the sale, the vendor would benefit from any increase in the value of the land; but
  • an allowance would be made, against the increase in the value of the land, for any increase in building costs.

A formula was agreed to calculate any additional amount which the purchaser would have to pay if the sales price per square foot at completion (as valued) exceeded ‘B’, where ‘B’ was defined as follows:

“ B = £212 (representing the estimated average sales price per net square foot of the Residential Development at the date of this Agreement)”

The negotiations preceding agreement on ‘B’

The purchaser’s representative (referred to as ‘the purchaser’) proposed a figure to the vendor’s agent of £210 for ‘B’, and he put this figure forward as his view of the average achievable house price, based on the advice he had received and the enquiries he had made. The vendor’s agent (being unfamiliar with rental values in the location of the relevant site) did not carry out any analysis of what the appropriate figure for ‘B’ should be, but relied upon the figure of £210 as being a genuine and accurate estimate of the average sales price per square foot at the time the agreement was entered into.

The vendor’s agent sent heads of terms which included the figure of £212 for ‘B’ “as currently agreed”. The purchaser was surprised by this, and assumed a typographical error - first, because the vendor had proposed a slight increase in the amount the purchaser had proposed (when it was in the purchaser’s interests for ‘B’ to be reduced, rather than increased); and secondly because he had expected the vendor’s agent to come back to him, seeking to negotiate a reduction in the figure of £210. The purchaser did not query the figure of £212 and this was the amount included in the contract

On completion, when the time came for any further payment to the purchaser to be calculated, the vendor did not become entitled to any further payment under the formula.

This was not the outcome it had expected.

The vendor’s claims

  • The vendor brought proceedings claiming:

    rectification of ‘B’ on the grounds that there was either a mutual or a unilateral mistake in relation to the figure of £212 for ‘B’ in the indexation formula; and
  • damages for the tort of deceit.

The vendor’s claims in relation to mutual mistake failed since it became apparent, during evidence, that there had not been a mutual mistake. ‘B’ might not have reflected the vendor’s intentions, but it had reflected the purchaser’s intentions.

The judge found that an objective figure for ‘B’, based on the views of the parties’ experts, was £183 per square foot. The question then arose as to whether the vendor could succeed in its claim for rectification due to unilateral mistake.

Unilateral mistake: the first key ingredient

The judge noted that the first legal requirement (established in the authorities) in a claim for rectification as a result of a unilateral mistake, was that one party erroneously believed that the document it had entered into (and wanted to be rectified) contained a particular term or provision.

The judge found that the vendor failed at the first hurdle. The vendor’s agent had made a mistake - but it was not an error that the document contained (or did not contain) a particular term or provision. The vendor’s agent was mistaken as to the accuracy (in commercial terms) of the agreed figure for ‘B’. In short, the vendor’s agent made an error of judgment in entering into the contract; and this was not the sort of error which would entitle the court to rectify an agreement.

Unilateral mistake: who made the mistake?

In view of the judge’s finding that the vendor’s claim for rectification failed, the judge did not need to address any further arguments raised in relation to unilateral mistake. However, it is worth noting the following argument raised by the purchaser.

The purchaser cited obiter observations by the Court of Appeal in George Wimpey UK Ltd v VIC Construction Ltd [2005] EWCA 77 - that rectification would only be available where there was evidence that the person who entered into the contract (as opposed to the person who negotiated it) was mistaken in relation to a particular term. The purchaser therefore argued that, even if the vendor’s agent had been mistaken, rectification was not available because the vendor had not provided any evidence that the individual who had executed the contract on behalf of the vendor had been mistaken.

The judge declined to comment on the validity (or otherwise) of this argument.

Unilateral mistake: editors’ comments

Where the board of a company approves the decision for a company to enter into a contract which has been negotiated by the company’s employees, it may be impossible to establish that the board had the requisite knowledge, and therefore that the board was mistaken as to the terms of the contract. If therefore the Court of Appeal’s obiter comments in Wimpey are correct, the consequences are quite startling: rectification may rarely be available as a remedy for unilateral mistake. It would therefore have been interesting if the judge had commented on the Court of Appeal’s obiter comments in Wimpey.

Deceit

Since the vendor’s claim for rectification on the grounds of mistake had failed, its only other potential remedy was damages for deceit. 

The judge observed that the purchaser had proposed £210 per square foot for ‘B’ during the course of arms’ length negotiations about the terms of a proposed contract.

The judge quoted Clerk & Lindsell on Torts, 19th edition (2006) at para. 18 - 10 (liability in deceit for promises and statements of intention):

“ ... The law permits the seller some latitude in exaggerating the value of his goods and so the purchaser is not bound to disclose the highest price he chooses to give ...” 

The judge accepted that, for deceit to apply, it would be necessary for the vendor to establish that the figure proposed by the purchaser for ‘B’ (of £210 per square foot) was “so far wide of the mark” that dishonesty or deceit could unequivocally be inferred by the court.

The judge concluded:

  • the figure of £210 per square foot was so far wide of the mark that the court could infer dishonesty;
  • when the purchaser proposed the figure, he had known that it was not a genuine estimate; and he had intended the vendor’s agent to believe that it was a genuine estimate, based on the investigations the purchaser had carried out;
  • the vendor’s agent had in fact believed that the figure of £210 was a genuine estimate, and had relied upon it; and
  • as a result, the vendor had suffered damage.

The judge awarded damages against the purchaser, calculated on the basis that, but for the deceit, the parties would have agreed £183 per square foot (the amount the judge calculated as the objectively estimated average sales price at the time the agreement was entered into).

Deceit: editors’ comments

Is a party acting dishonestly if he knows that the other negotiating party has made a mistake, and chooses not to point this out to the other side? This issue was discussed in the Wimpey case, where the Court of Appeal expressed diverging views. An “avowedly self-interested approach” to negotiations may not be dishonest.

However, in this case, the purchaser clearly went beyond adopting an “avowedly self-interested approach” to negotiations. He made a representation which he knew to be untrue and which he intended the other party to rely upon. This case confirmed (as trite law) that negligence of the victim - here, the vendor’s agent (in failing to check the accuracy of ‘B’) - was no defence to a claim for deceit.