Where both parties to a contract share a mistaken belief as to whether the contract accords with their prior commercial agreement, but for opposing reasons, which party will be bound?

Daventry District Council v Daventry & District Housing Limited [2011] EWCA

This case concerned a contract to transfer the claimant's housing stock to the defendant. The calculation of the price to be paid by the defendant was based on a number of factors, including the cost of making good a deficit in the claimant's housing department pension fund of some £2.4 million. 

The parties agreed commercial terms for the transfer and an agreement in principle was reached whereby the defendant was to pay the pension deficit. The defendant's negotiator was aware of this but, as the agreement in principle was ambiguous, chose to interpret it as requiring the claimant to pay. Indeed, he let the defendant believe that the liability for the pension deficit would fall to the claimant. The contract ultimately provided for the claimant to pay the deficit. 

The claimant claimed for rectification on the basis of mutual mistake, or in the alternative, unilateral mistake on the grounds that the commercial agreement had from the outset been that the defendant would pay. The test for establishing mutual mistake is an objective one and the Court of Appeal found that the parties did share a mistaken belief that the transfer agreement accorded with the agreement they had reached in principle. The claimant was therefore entitled to rectification for the mutual mistake, despite the fact that the parties' reasons for sharing their mistaken belief were diametrically opposed:

  • The claimant believed (correctly) that the commercial agreement was for the defendant to pay, and (incorrectly) that the executed agreement reflected this.
  • Conversely, the defendant believed (incorrectly) that the commercial agreement was for the claimant to pay, and (correctly) that the executed agreement reflected this.  

The Court of Appeal, by a majority, found that the words and actions of the defendant would lead a reasonable observer to conclude that it had agreed to pay the deficit. The contrary wording in the agreement had to be interpreted in the context of the commercial terms of the original agreement and the commercial reality. Indeed, much emphasis was placed on the commercial negotiations and the reasoning behind the negotiations.

The case stands as a reminder that, where one party knows that the other has made a mistake, this mistake should be drawn to the mistaken party's attention; regardless of how careless the mistaken party has been. The importance of always reading the final draft of a contract for points that may have changed cannot be over stated.