The Court of Appeal has upheld a decision that a share purchase agreement and disclosure letter should be rectified, with the effect that the defendant sellers of two property development companies gave an unqualified warranty that the companies owned certain freehold properties. In fact, those properties were owned by another of the defendants’ companies which was not included in the transaction. As a consequence, the defendants were held to be in breach of warranty and liable to the claimant in damages: Persimmon Homes Limited v Hillier and Creed  EWCA Civ 800.
The decision is of interest as a relatively rare Court of Appeal decision allowing a claim for rectification. It acts as a reminder that, although pre-contractual negotiations are not admissible as an aid to interpreting a contract, they will be important evidence if the court is considering a claim for rectification.
A claim for rectification is not, however, straightforward. Where rectification is sought on the basis of common mistake, the claimant must establish that the parties’ negotiations evinced a common continuing intention, which was not properly reflected in the written agreement as a result of a mutual mistake.
Heather Rankin, an associate in our disputes team, considers the decision further below.
The claimant property developer purchased the shares in two companies (the “Companies”) owned by the defendants. The Companies held interests in land for potential future development at Felbridge, West Sussex, including options to purchase part of the site, but they did not hold further freehold interests that were crucial to its development (the “Freehold Interests”). The Freehold Interests were held by a third company owned by the defendants, in which the claimant did not acquire an interest as part of the transaction.
In the share purchase agreement the defendants warranted that the Companies held good title to a number of properties, but described the Felbridge site imprecisely (as “land lying to the south of Crawley Down Road, Felbridge”) and referred to the option agreements. A disclosure letter provided by the defendants as part of the transaction documentation included a statement that the Felbridge properties were not legally and beneficially owned by the Companies but referred to the existence of the options. It also referred to all matters contained or referred to in the data room, which included documents showing that the Freehold Interests were not held by the Companies.
Only after the claimant had purchased the Companies did it realise that it had not acquired the Freehold Interests. The claimant brought a claim against the defendants for damages for breach of warranty, on the basis that the warranties should be construed to refer to the whole of the Felbridge site, or in the alternative for rectification of the share purchase agreement and disclosure letter.
The claimant succeeded at first instance, on the rectification though not the construction argument. The judge held that the parties had a common continuing intention at the time of the share purchase agreement and disclosure letter that the whole of the Felbridge site should be included in the transaction, but because of a mutual mistake it was not included.
The defendants appealed on the grounds that:
- the first instance judge had failed to apply the relevant principles correctly on the facts, in particular in finding that there was a common intention to transfer the Freehold Interests; and
- the disclosure letter, being a unilateral document issued by the defendants, was not capable of rectification.
The Court of Appeal dismissed the appeal (David Richard LJ giving the lead judgment with which McCombe and Newey LJJ agreed).
The court noted that there was no challenge to the judge’s summary of the applicable legal principles, by reference to the Court of Appeal decisions in Swainland Builders Ltd v Freehold Properties Ltd  2 EGLR 71 and Daventry DC v Daventry and District Housing Ltd  1 WLR 1333. The relevant test is that the parties held a common continuing intention, up to the time of entering into the agreement, which mistakenly was not reflected in its terms. The common continuing intention is not a mere subjective belief but what an objective outside observer would have understood the intention to be.
The Court of Appeal held that the first instance judge was fully entitled on the evidence to conclude that the share purchase agreement and disclosure letter did not accurately reflect the terms agreed between the parties.
In particular, the parties’ common continuing intention was evidenced by the following aspects of the pre-contractual negotiations:
- An information memorandum provided by the defendants identified the “strategic landholdings” that could be included in the sale. The Felbridge site was described in the information memorandum as being “part owned, part held under option”.
- The claimant’s first indicative offer was expressed to include the purchase of “all strategic land interests”.
- A data package provided to the claimant treated all the various titles as included in one site and clearly suggested that the claimant would acquire control of all the interests in the site.
- In answers to enquiries the defendants had represented that the Companies controlled the entire site required and that ownership and control of the entire Felbridge site would pass to the claimant if it acquired the strategic land interests.
- Further pre-contractual correspondence between the parties also indicated that they had both assumed that the whole of the Felbridge site would be included in the sale and a particular telephone conversation (of which there was limited evidence) could not be shown to have changed the previously agreed position that the Felbridge site would be included in the deal.
- The written heads of terms did not change the position. Even if they were contrary to the inclusion of the entire Felbridge site, which was far from clear, there was no reason to treat the document as definitive; if the heads of terms were affected by the same mistake as the agreement, neither could stand.
The Court of Appeal also rejected the defendants’ argument that, as a matter of law, the disclosure letter was not capable of rectification. It had been part of the suite of contractual documents agreed between the parties. If it did not give effect to the terms of the transaction, there was no reason why it should not be capable of rectification.