The Civil Justice Council has recently published its report on compulsory alternative dispute resolution (the ADR Report) concluding that mandatory alternative dispute resolution (ADR) is lawful and “could be desirable and effective”.

We have previously explained that the English court strongly encourages parties to any litigation to properly engage with ADR during a dispute. If a party elects not to do so, or simply pays lip service to ADR, that party will need to justify its position to the court. If the court determines that a party has unreasonably failed to engage with ADR, the party could potentially face serious costs consequences.

The ADR Report suggests that the court may be prepared to go even further in respect of how it approaches ADR. In January 2021, the Civil Justice Council was asked to consider the legality and desirability of a form of compulsory ADR. The ADR Report concludes that mandatory ADR is lawful and it is not incompatible with Article 6 of the European Human Rights Convention (the right to a fair trial).

In response to the ADR Report, Sir Geoffrey Vos (Master of the Rolls and the Head of Civil Justice) commented that (emphasis added):

  • the ADR Report shows that “it is possible, where a court process remains available, lawfully to mandate (alternative) dispute resolution”; and
  • ADR should no longer be viewed as ‘alternative’ but as an integral part of the dispute resolution process; that process should focus on ‘resolution’ rather than ‘dispute’. This report opens the door to a significant shift towards earlier resolution”.

Our view

The ADR Report reinforces how integral to the litigation process the court considers ADR to be. While the trend over recent years has been for the court to strongly encourage parties to engage with ADR, this is a clear signpost that the court is considering going further.

It remains to be seen if/how the court will adopt the ADR Report’s recommendations into the current Civil Procedure Rules. The ADR Report also made it clear that mandatory ADR may not be suitable for every case.

Even if the court does seek to make ADR mandatory, it will be a different matter altogether to police what would essentially be “without prejudice” privileged discussions, for example by monitoring whether parties turn up and negotiate in good faith.

However, in light of the ADR Report’s conclusion (as well as recent case law), the court continues to make it clear that it expects parties and their legal advisers to consider engaging with ADR during any litigation.

If a party is not prepared to engage with ADR, it is clear that it will need to have a good reason for not doing so, and it will be required to justify this to the court.

By Isobel Morton, Rachel Richardson, Shailen Patel

The recent case of Ralph v Ralph [2021] EWCA Civ 1106 raised the question of whether (and when) settlors seeking rectification of a voluntary settlement to which trustees are parties need to establish that the mistake was mutual.

The case itself did not involve a settlement, but instead concerned a father and son who purchased a property in joint names. The only reason the son became a joint owner was to enable his father to obtain a mortgage, and he did not contribute to the purchase price. The relevant Land Registry form showed that the buyers were to hold the property as tenants in common in equal shares. The father applied for the form to be rectified as he argued that his son was never intended to have a beneficial interest in the property.

The High Court concluded that the transfer form could be rectified. The Court of Appeal overturned this, holding that it was necessary to establish a continuing common intention of the parties in order to rectify the document. Rectification is a power to correct mistakes in recording what the parties have actually agreed and in this case there had been no discussion with the conveyancer on whether the property was to be held as joint tenants or tenants in common. An absence of agreement is different to an actual agreement.

However, the Court of Appeal held that different considerations apply to settlements and declarations of trust. There, depending on the nature of the clause that the parties seek to rectify, the settlor and trustees may not need to share a continuing common intention.

In support of this, Vos MR referred to the case of Re Butlin’s Settlement Trusts [1976] Ch 251 in which Brightman J rectified a voluntary settlement to include a clause that had been mistakenly omitted, despite the fact that at least two trustees were ignorant of the settlor’s intention to include the provision. The omitted clause provided an express power for a majority of the five trustees to exercise any of the powers given to them over the income and capital of the trust fund.

In that case, there was no need to establish the mistake was mutual. However, common intentions may still be relevant if there was an actual bargain between the settlor and the trustees, or between the settlor and another party such as a spouse in the case of a pre-nuptial settlement.

This leaves open the possibility that mistakes involving settlements may be easier to rectify as it may only be the intention of the settlor which is relevant.

A settlor may seek rectification by proving that the settlement does not express his true intention, or the true intention of himself and any party with whom he has bargained

By Isobel Morton, Rachel Richardson, Shailen Patel

In Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961, the Court of Appeal has upheld a judgement that there was a mistake in a rent review clause, even though the wording of the clause was clear. In doing so, it applied the principle established in Chartbrook Ltd v Persimmon Homes Limited [2009] UKHL 38 that "…the literal meaning of a provision can be corrected if it is clear that a mistake has been made, and what the provision was intended to say."

The Court of Appeal in Monsolar v Woden rejected an argument that, as a consequence of the Supreme Court decision in Arnold v Britton [2015] UKSC 36, the Chartbrook principle only applied where a provision was open to more than one possible interpretation. The underlying facts of Monsolar v Woden and Arnold v Britton were similar – both concerned clauses (rent review and service charge clauses, respectively) which, applied literally, would result in the tenant paying huge sums by the end of the lease.

In Arnold v Britton, the court decided that, given the wording of the clause was clear, the court could not intervene to save the tenant from what appeared to be a bad bargain:

"a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice."

In Monsolar v Woden, the court decided that the position was different and that it could intervene. This was on the basis that "[t]here is… a distinction between a case which concerns a provision which seems merely imprudent and one which appears irrational."

In other words, the courts could not intervene where the effects of the literal wording of the clause were "…commercially unattractive and even unreasonable…" or "…unduly favourable to one side, imprudent or unreasonable…", for example. However, the courts could intervene where the effects were, for example, "arbitrary and irrational" or "nonsensical … lead[ing] to the conclusion that they cannot have been intended". The Court of Appeal confirmed that Arnold v Britton had not affected the court’s power to intervene in these circumstances.

In the lease the Court of Appeal had to consider, the rent review mechanism was set out in a formula. This formula increased the rent payable by reference to RPI. However, taken literally, the effect of the formula (as drafted) was that the rent was required to be increased each year by the change in RPI since the start of the term, rather than increasing the rent by the change in RPI from year-to-year. On one party’s calculations, the result of this was that, by the end of the 25 year lease (based on a historical average for RPI increases), the starting rent of £15,000 per year would have increased to some £76 million, as compared with less than £30,000 if the “simple” RPI increase were applied.

The Court of Appeal decided that this result was so absurd that there must have been a mistake in the drafting. The court drew support for its conclusions from:

  • the starting presumption that rent review clauses are intended to reflect changes over time in the value of the property or of money;
  • other provisions of the lease which suggested that the intention was that the rent would simply increase in line with RPI;
  • the arbitrary effects of the clause, if read literally – for example, that the rent would increase even after a year in which the RPI had fallen (unless RPI had fallen so far as to be below the original level of the RPI); and
  • the fact that it was fairly easy to see how a mistake had been made.

The Court of Appeal also agreed that it was clear how the clause should be re-drafted, and so it was able to do so.

Comment

This judgment will provide comfort for parties fearing that, following Arnold v Britton, courts would never intervene to save them from a clearly-worded contractual provision that was incorrectly drafted. However, for the court to be comfortable doing so, the effects of the clause will need to be very obviously a mistake and not what the parties could possibly have intended. Further, the court must be able to identify what the parties must have intended instead.

However, there may well be clauses where it is not so clear-cut whether the disastrous results are irrational or merely imprudent. This will therefore continue to be an issue that parties and courts will have to grapple with.

The best way to avoid this problem is, of course, to ensure that the terms of the agreement properly reflect what has been agreed – including in relation to any formulas used. Where formulas are used, it is often helpful to include a worked example setting out how the parties understand the formula will apply.