England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
THE HON MR JUSTICE HART
HC 04 C02929

		Royal Courts of Justice Strand, London, WC2A 2LL
		19th December 2005

Lord Justice Jacob (giving the first judgment at the invitation of Lord Justice May):

1. This is an appeal from a determination of a preliminary issue by Hart J on 1^st July 2005 ([2005] EWHC 1369 (Ch)). He described what he had to decide succinctly as follows:

"1. This is the trial of a preliminary issue in relation to a landlord and tenant matter pursuant to an order of Master Moncaster dated 2^nd December 2004. The claimants are the landlords of premises at Colette House, Piccadilly, London. By a lease dated 12^th April 2001 the premises known as the Second Floor, Colette House were let to the defendant for a term of 5 years commencing on 24^th June 2001 at an annual rent of £66,024 (excluding VAT).

2. The lease contained a clause ("clause 10") in the following terms:

"Either party shall be entitled by giving not less than six months' notice in writing to the other to terminate this lease at the end of the third year of the Term ("Termination Date") and provided that up to the Termination Date in the case of a notice given by the Landlord the Tenant shall have paid the rents hereby reserved and shall have duly observed and performed the covenants on the part of the Tenant and the conditions herein contained this lease shall absolutely cease and determine on the Termination Date but without prejudice to any right or remedy of either party in respect of any antecedent breach by the other of the provisions of this lease"

3. By a notice given by a letter dated 10^th December 2003 the defendant purported to bring the lease to an end pursuant to that clause. In the action the claimants have disputed the effectiveness of that notice on the grounds that the defendant was in breach of its obligations under the lease as at the termination date. The defendant's primary case is that it is irrelevant whether or not it was in breach of the terms of the lease as at the termination date because its right to break was unconditional. Its alternative case is that any breach had been cured by the termination date as the result of a tender of a sum of money in respect of dilapidations. This preliminary issue is not concerned with that secondary question.

4. The question with which I am concerned is whether the defendant's right to terminate the lease was conditional on it having duly observed and performed its covenants at the termination date. It is common ground that such conditionality exists, if it exists at all, solely because of the express wording contained in clause 10. The difficulty for the claimants is that the express wording in clause 10 applies only "in the case of a notice given by the landlord". The claimants contend that on their true construction these words should be read as if they said "in the case of a notice given by the tenant" or, which amounts to the same thing, "in the case of a notice given to the landlord". Alternatively, the claimants contend that clause 10 should be rectified so to provide."

2. Hart J determined the question of construction in favour of the landlord claimants. The word "Landlord" in the proviso should be read as "Tenant". Alternatively he held, if that were wrong, that clause 10 should be rectified so as to substitute the word "Tenant" for the word "Landlord" in the proviso.

Construction

3. It is common ground that the inter-parties negotiations are irrelevant to this issue (see ICS v West Bromwich BS [1998] 1 WLR 896 at 913A per Lord Hoffmann). So at this stage I do not propose to go into what happened in the negotiations, though this is of course relevant when one comes to the question of rectification.
4. The task is to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract (ibid. at 912G).
5. Until shortly before this appeal was opened, the parties were in dispute as to whether clause 10, read as it stands, was a commercial nonsense. The Judge held that it was, saying:

"11. It is quite plain that clause 10 as it stands is an absurdity. There can be no rhyme or reason in making the exercise by the landlord of its right to terminate conditional on the performance by the tenant of its obligations under the lease. No commercial purpose in such a provision can be imagined. Moreover the inclusion of such a provision would put it in the power of the tenant, by its own breach of covenant, to defeat the right conferred on the landlord. Although there is nothing grammatically or syntactically wrong with the formulation, it is in my judgment obvious that something has gone wrong with the clause. A landlord needs a condition of this kind in relation to its right to break in the same way that a fish needs a bicycle."

6. Mr Timothy Fancourt QC, who now represents the tenant, concedes that the Judge was right to so hold. So it is now also common ground that the clause cannot have been intended to convey a nonsensical meaning.
7. Moving on from that conclusion, the Judge reasoned thus:

"15. An alternative way of putting the case, suggested by the court, was that it was not obvious what the error was since it might have been the case that Miss Gowman [who had acted for the landlord in the negotiations] had deliberately introduced some qualification in relation to a notice given by the landlord but had then accidentally included an entirely inapposite condition which was relevant only to a notice given by the tenant. The weakness of that approach however is that it is difficult (and I have found it impossible) to hypothesise any corresponding condition which either party could sensibly have wished to introduce in relation to a notice given by the landlord."

16. In my judgment, looking at the clause it is obvious not only that a mistake has been made in its formulation but also obvious what that mistake is. I would accordingly construe the words "in the case of a notice given by the landlord" as "in the case of a notice given by the tenant".

8. Mr Fancourt attacks that. He referred to what was said by Brightman LJ in East v Pantiles (Plant Hire) [1982] 2 EGLR 111 at p.112:

"It is clear on the authorities that a mistake in a written instrument can, in certain limited circumstances, be corrected as a matter of construction without obtaining a decree in an action for rectification. Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction. If they are not satisfied then either the claimant must pursue an action for rectification or he must leave it to a court of construction to reach what answer it can on the basis that the uncorrected wording represents the manner in which the parties decided to express their intention. In Snell's Principles of Equity 27^th ed p 611 the principle of rectification by construction is said to apply only to obvious clerical blunders or grammatical mistakes. I agree with that approach. Perhaps it might be summarised by saying that the principle applies where a reader with sufficient experience of the sort of document in issue would inevitably say to himself, "Of course X is a mistake for Y"."

9. Here, he submitted, although it is clear that a drafting error had been made, it was not possible to say with certainty what it was. As a consequence, absent any rectification, either the clause must be read as it stands, i.e. as a nonsense, or must be regarded as void for uncertainty.
10. To support his contention he advanced a hypothesis that the clause in its intended form may have been intended to cope with the fact that the lease is one to which the Landlord and Tenant Act 1954 applied. This would form part of the matrix of fact known to the reasonable reader. Under this Act a landlord cannot bring a tenant's right of occupation to an end by simply exercising a break clause in a lease. For the Act gives the tenant the right to apply for a new tenancy, unless one of a number of matters (most commonly that the landlord desires to demolish or reconstruct the building or that he intends to occupy the building for his own business purposes) are proved (see ss.24-30). If none of those matters are proved the court will grant a new tenancy at the prevailing commercial rent: in effect there will be a rent review. So it is not uncommon for a landlord's break clause to spell out as a condition for its exercise the matters which would prevent the court from granting a new tenancy – in that way a rent review is avoided.
11. Thus here, he hypothesised that the drafting error could have been to omit certain words and include others thus:

"Either party shall be entitled by giving not less than six months' notice in writing to the other to terminate the lease at the end of the third year of the Term ("Termination Date") and provided that up to the Termination date in the case of a notice given by the landlord the Tenant shall have paid the rents hereby reserved and shall have duly observed and performed the covenants on the part of the Tenant and the conditions herein contained the Landlord intends to demolish or reconstruct the demised premises or to occupy them in connection with its own business this lease shall absolutely cease and determine on the Termination Date but without prejudice to any right or remedy of either party in respect of any antecedent breach by the other of the provisions of this lease."

12. He submitted that, although no-one before the Judge could think of what the error was other than a mistaken "Landlord" for "Tenant", this was a reasonable alternative hypothesis. And so one could not say "of course 'Landlord' is a mistake for 'tenant'".
13. I would reject that argument. I do not think it is a reasonable hypothesis that the drafting error involved both including a string of words about the tenant's observance of covenant and the omission of words for which there is not a vestige of an indication in the language actually used. The hypothesis involves actually ignoring a string of words (those about performance) used by the parties. That is not an exercise of construction.
14. Putting it another way, one knows that the parties intended to agree something. What that something is must depend on the words used – one is trying to find out what they mean. The result of the words actually used is a nonsense, but it requires only the correction of one word to make sense – and the correction is of the sort of mistake we all make frequently (e.g. 'plaintiff' for 'defendant', or even 'plaintiff' for 'claimant').
15. I also remind myself that Lord Hoffmann in ICS expressly contemplated that:

"The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) that the parties must, for whatever reason, have used the wrong words or syntax."

This is just such a case. I recognise that it means holding the tenant accepted an onerous condition (for his right to break depends on full compliance with all the covenants) but that is not the same thing as reading the clause to mean something daft.

16. I would only add one further matter. Mr Fancourt submitted that it was a consequence of his argument that either the clause if not rectified must be read as it stands (a nonsense) or be void for uncertainty. I do not accept the former – for a nonsense cannot be what a reasonable man would conclude the parties meant. As Mr Christopher Pymont QC submitted for the landlords, once one concludes that the clause as it stands cannot have been intended, there is no going back. That leaves Mr Fancourt's alternative, that something is void. But what? Is it the proviso, so that the clause just becomes a mutual break clause? If not just the proviso, is it the whole of clause 10 which must go? And if either is so, what is the effect on the whole lease? Must that go too? - the omission of whatever words are to be blue-pencilled so changing the bargain that one cannot say there was ever a meeting of minds. These considerations to my mind show that the court should, so far as possible, strive to find a meaning rather than throw up its hands to say "nothing can be done."
17. Accordingly I would uphold the Judge on the question of construction.

Rectification

18. This is not a case of mutual mistake, where the rectification is granted so as to put right an erroneous writing down of what the parties had in fact agreed. It is said to be a case of rectification on the grounds of unilateral mistake.
19. The relevant facts are not in dispute. I simplify them to their essence:

i) The parties already had an existing lease, the 1996 lease from which to work. They were in dispute about a notice purportedly given by the tenant to terminate that lease. The new lease was to be the result of negotiations settling that dispute;

ii) The parties initially agreed in principle a 5 year term "with mutual break after 3 years." No condition on either the tenant or landlords' right to break was agreed or discussed;

iii) Miss Gowman, the solicitor acting for the landlords, nonetheless set about drafting a clause which imposed a condition (of due performance) on the tenant's right to break. She knew that such a clause was unlikely to be signed by a well-advised tenant. This is because it is not easy to perform all covenants perfectly (a cracked window might be a small breach, but nonetheless a breach, of a repairing covenant, for example);

iv) She made further amendments to the clause after consultation with her client, and then sent the draft new lease consisting of the language of the 1996 lease with all the amendments indicated in red. Clause 10 in its final form was one of the amendments, she having erroneously written "landlord" for tenant. She did not separately draw attention to the fact she was seeking to impose a condition on the tenant's right to break;

v) Her opposite number for the tenant was Mr Levan. He studied the draft and saw the clause in question. He thought she was trying something on. He also realised that read literally what had in fact been drafted was a nonsense and if read literally the clause could do his clients no harm. He realised that Miss Gowman had erroneously used the word "Landlord" when she meant "Tenant";

vi) So he decided not to point her error out, nor to challenge the whole question of conditionality of the break clause. He decided to accept the clause as it stood, not only knowing that Miss Gowman had made a mistake but also what she had really meant.

20. The basic principles as to rectification for unilateral mistake were, it was accepted, set out in the authoritative summary of Buckley LJ in Thos. Bates v Wyndhams (Lingerie) [1981] 1 WLR 505 at 516A-B:

"I think it must be shown: first, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist rectification to give effect to A's intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake."

21. Mr Fancourt accepts that all of the four ingredients identified by Buckley LJ were proved. He goes on to say however first, Buckley LJ did not say they were sufficient to entitle A to rectification – on the contrary he said the court "may" regard it as inequitable to allow B to say there was no mutual mistake. And second, that, unlike any previous case, the result of a rectification would be to put the parties in a contractual position which they had never agreed – which is a powerful reason for not granting rectification. It would impose on the tenant a significant fetter on his ability to break – the very thing that Miss Gowman was "trying on" and which Mr Levan would not have accepted.
22. Mr Fancourt also took us to George Wimpey v VI Construction [2005] EWCA 77 and particularly to what was said by Sedley LJ at paragraphs 58-62:

"58. There is, as it seems to me, a paradox in the notion of what an honourable and reasonable person would do in the context of an arm's-length commercial negotiation. This is a context in which honour (or honesty) and rationality (or reasonableness) are frequently not on speaking terms. I doubt whether Mr Fetherstonhaugh 's submission that the two epithets qualify each other does more than compound the paradox.

59. Take the present case. An honourable person negotiating for VIC would probably have asked Wimpey if they realised that E had been left out, but I very much doubt whether a reasonable negotiator would have done so. His first duty would have been to his own principal, whose interests undoubtedly lay in leaving E out and not alerting Wimpey to the omission.

60. The phrase 'honest and reasonable' is not a term of art. It is a judicial attempt to sketch a line beyond which conduct may be regarded as unconscionable or inequitable. Its duality, however, is a recognition that honesty alone is too pure a standard for business dealings because it omits legitimate self-interest; while reasonableness alone is capable of legitimising Machiavellian tactics.

61. Mistake is a concept which sits awkwardly in this space. Absent a prior accord which has simply not been carried into effect, absent also a dishonest inducement to contract, one is looking for a mistake on the claimant's own part which the defendant was honour-bound, despite his own legitimate business interests, to point out to him. I am unable to accept that this was such a case on any tenable view of the evidence.

62. There are at least two kinds of mistake. One is a literal misunderstanding of some fact material to the proposed contract. The other is an error of judgment in entering into the contract. I find it difficult to think that the second kind has any relevance to the law of unilateral mistake. Nobody is bound, even in honour, to help his opposite number to negotiate to the best advantage."

Mr Fancourt submitted that Mr Levan was doing no more than acting in his client's legitimate business interests – no more taking advantage of a mistake by the other side than a buyer who knows he is buying a valuable antique from a seller who thinks the thing is near worthless.

23. I am not impressed by any of this: the Judge thought, as too do I, that there was no reason to refuse rectification. What Mr Levan decided to do was deliberately to take advantage of the other side's drafting error. As the Judge observed that was imprudent as exposing his client to the construction argument which in the event succeeded – precisely for the reason that the mistake was apparent as was the correction.
24. I can see no legitimate reason not to regard this attempt to take advantage of an obvious drafting error as inequitable. I am not moved by the fact that the landlords get an advantage that had never been agreed. That is simply a consequence of the attempt to take advantage of the blunder. Besides in reality Mr Levan's conduct amounted to an agreement – by accepting the clause knowing what the other side thought it meant, he was accepting just that and equity should not allow him to resile.
25. Nor am I impressed with the point argued (it is fair to say faintly) that in effect Mr Levan's conduct was a proper response because Miss Gowman was "trying it on". There was nothing underhand in what she did - I cannot think that she expected her draft clause to go unnoticed. Certainly no reasonable man would think she so expected given that it was to be read by an experienced solicitor on the other side. It was there to be negotiated.
26. So although this may be the first case of rectification where there was no prior agreement, I think the Judge was right to hold that he would have rectified the lease if he had not already concluded that it should be construed as a condition on the tenant's right to break.
27. I would therefore dismiss this appeal.

Lord Justice Longmore:

28. I agree with Jacob LJ that, as a matter of construction, the word "Landlord" in clause 10 of the lease must be construed as "Tenant". That is what the parties must have intended; to give the word "Landlord" its normal meaning would be absurd; there has just been a mistake made by whichever party it was that drafted the clause. It is the kind of mistake which can easily be made by any draftsman as all judges and law reporters know from their own experience (see eg the report of Manchester City Council v Higgins in The Times December 14^th 2005 where on any rational reading the word "tenant" in the third paragraph of the reported judgment must be read as "landlord".
29. Mr Fancourt QC for the Tenant submitted that the mistake which was made was that the proviso should have contained a condition that was suitable for performance by the Landlord. That would necessitate a mistake in relation to three whole lines of text not a single word and is, to my mind, fanciful.
30. The slight oddity is that, if one reads the first sixteen paragraphs of the judgment which deal with the question of construction, one finds that by a process of construction, an agreement has been reached in terms which the Landlord's solicitors own precedent book says that no well advised tenant is likely to accept. Any concern which this observation may instil must, however, be squashed because, even if the precedent book is correct, the lease has been entered into by the Tenant who must abide by the meaning of the agreed wording, well-advised or not. The internal thought processes of one side or the other are irrelevant to the construction of the written document.
31. There can, moreover, be no doubt that tenants do, as a matter of fact, agree clauses in some such terms as appear in the present case, see Bass Holdings Ltd v Morton Music Ltd [1988] Ch 493, Bairstow Eves (Securities) Ltd v Ripley (1993) 65 P&CR 220 and Fitzroy House Epworth Street (No 1) Ltd & anr v The Financial Times Ltd [2005] EWHC 2391(TCC), [2005] 46 EGCS 176 currently under appeal to this court.
32. Having reached a definite conclusion on construction, I would prefer to express no opinion on the Landlord's alternative case on rectification. I would merely point out that if May LJ were to agree with Jacob LJ on this question and our decision were thus to have two rationes decidendi (both of which are equally binding) it will, so far as the researches of counsel went, be the first time that this court has held (as a matter of ratio) that a written document can be rectified for unilateral mistake when there was no antecedent agreement about the content of the clause sought to be rectified.

Lord Justice May:

33. I agree that this appeal should be dismissed for the reasons given by Jacob LJ in paragraphs 3 to 17 of his judgment. A decision on the alternative ground of rectification is not necessary to a determination of the appeal, although I record that, if it had been necessary, I should have been inclined to agree with Jacob LJ here also. I acknowledge that there had been no antecedent agreement, but the four conditions referred to by Buckley LJ in Thomas Bates v Wyndhams [1981] 1 WLR 505 at 516 are acknowledged to have been fulfilled, and the equity would arise, I think, from Mr Levan's calculated silence, whereby, on one view, he agreed to a proposed clause in the draft lease understanding what it intended to say.