ON APPEAL FROM
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
MR JUSTICE VOS
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE TOULSON
LORD JUSTICE ETHERTON
| DAVENTRY DISTRICT COUNCIL
|- and -
|DAVENTRY & DISTRICT HOUSING LIMITED
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A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
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Mr Nigel Jones QC and Ms Alison Meacher (instructed by Wright Hassall LLP) for the Respondent
Hearing dates : 9th and 10th May 2011
Crown Copyright ©
Lord Justice Etherton :
The factual background
"DDC proposes that DDH pays the pension fund deficit by a reduction in the purchase price of £2.4M which is then refunded to DDC as a top-slice from the VAT shelter"
"Both DDC and DDH are committed for both parties without causing any detriment to the other and will ask both PwC and Tribal to now work together creatively on this agreement to resolve the outstanding elements such as minor asset values and right to buy receipts".
It is common ground that the Valuation was not intended to be legally binding.
"In relation to the Transferring Employees the Council [DDC] shall make a payment of £2.4 million pounds (being an amount representing the deficit in the funding of the Transferring Employees pension benefits up until the Completion Date) within five business days of the Completion Date"
"14.10.1 [DDH] shall procure that those of the Transferring Employees who are members of the Superannuation Scheme as at the Completion Date …will be able: (a) to continue to be members of or eligible to be members of … the Superannuation Scheme by [DDH's] gaining and maintaining admission body status of that scheme …
14.10.2 In relation to the Transferring Employees and the Support Service Employees [DDC] shall make payments to the appropriate administering authority or the administrators of the Superannuation Scheme for immediate credit to the Scheme as are necessary to ensure that all liabilities in respect of the benefits accrued by (1) the Transferring Employees up to the Completion Date and (2) the Support Services Employees up to the Transfer Date are fully funded based upon the actuarial assumptions used for the 2007 actuarial valuation. For the avoidance of doubt, this means funded to the extent necessary to ensure that there shall be no liability on [DDH] to make any contributions to the Superannuation Scheme in relation to the cost of funding the accrued benefits in relation to the period of time up to the Completion Date in respect of the Transferring Employees (and the Transfer Date in respect of the Support Services Employees) and until such payments are made by [DDC] shall indemnify [DDH] against all costs proceedings damages expenses and Support Services Employees' liabilities and claims of whatever nature in respect of the Transferring Employees and the Support Service Employees said accrued benefits. [DDC] shall be responsible for corresponding with the Superannuation Scheme's actuary in relation to the certification by the Superannuation Scheme's actuary as is mentioned above and shall bear the costs incurred in relation to the obtaining of the said actuarial valuation.
14.10.3 Without prejudice to the provisions of clause 14.10.2, in relation to the Transferring Employees the Council [DDC] shall make a payment of £2.4 million pounds (being the amount calculated by Mercers as representing the deficit in the funding of the Transferring Employees pension benefits up until the Completion Date) within five business days of the Completion Date".
"Mr Roebuck decided that he would, in effect, say 'snap', arguing that the document meant that DDC, not DDH, would make the deficit payment, and intending to take advantage of the drafting mistake that Mr Roebuck knew that Mr Bruno had made."
"The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention".
"60 Now that it has been established that rectification is also available when there was no binding antecedent agreement but the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified, it would be anomalous if the "common continuing intention" were to be an objective fact if it amounted to an enforceable contract but a subjective belief if it did not. On the contrary, the authorities suggest that in both cases the question is what an objective observer would have thought the intentions of the parties to be. Perhaps the clearest statement is by Denning LJ in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd  2 QB 450, 461:
"Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties- into their intentions - any more than you do in the formation of any other contract. You look at their outward acts, that is, at what they said or wrote to one another in coming to their agreement, and then compare it with the document which they have signed. If you can predicate with certainty what their contract was, and that it is, by a common mistake, wrongly expressed in the document, then you rectify the document; but nothing less will suffice."
61 Likewise in Etablissements Georges et Paul Levy v Adderley Navigation Co Panama SA (The Olympic Pride)  2 Lloyd's Rep 67, 72, Mustill J said:
"The prior transaction may consist either of a concluded agreement or of a continuing common intention. In the latter event, the intention must have been objectively manifested. It is the words and acts of the parties demonstrating their intention, not the inward thoughts of the parties, which matter."
62 An example of the application of this objective ascertainment of the terms of the prior transaction is George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive (1950) 84 Ll L Rep 97 in which a landlord negotiating a new lease proposed to the tenant that "the terms and conditions contained in the present lease to be embodied in the new lease where applicable". The tenant accepted this offer, but the new lease as executed made the tenant liable for repairs which under the old lease had been the responsibility of the landlord. In answer to a claim for rectification, the landlord said that the new lease was in accordance with what he had understood to be the effect of his offer. The Court of Appeal said that this was irrelevant. What mattered was the objective meaning of what the landlord had written. Evershed MR said, at p 107:
"If the defendants ... did misconstrue [the letter] that is unfortunate for them, but at least they cannot be heard to say that their letter was intended to mean anything other than that which the words convey to the reader as a piece of ordinary English."
63 As against these authorities, there are two cases upon which Mr Miles relied. The first is Britoil plc v Hunt Overseas Oil Inc  CLC 561, in which the Court of Appeal by a majority (Glidewell LJ and Hobhouse LJ, Hoffmann LJ dissenting) refused to rectify an agreement which was alleged not to be in accordance with what had previously been agreed in summary heads of agreement. Hobhouse LJ, who gave the majority judgment, affirmed the decision of Saville J, who said that the defendants had failed to establish that there was a prior common agreement or intention in terms that the court could ascertain or (which is probably another way of saying the same thing) that the definitive agreement failed to reflect that prior agreement. In other words, the language of the heads of agreement was too uncertain to satisfy the requirement stated by Denning LJ in Rose's case  2 QB 450, 461 that one should be able to "predicate with certainty what their contract was". Hobhouse LJ noted, at p 571, that Saville J "did not base himself upon any consideration of the evidence as to the actual state of mind of the parties" and in my opinion the case lends no support to the view that a party must be mistaken as to whether the document reflects what he subjectively believes the agreement to have been.
64 The other case is the decision of Laddie J in Cambridge Antibody Technology Ltd v Abbott Biotechnology Ltd  FSR 590, in which he rejected a submission that evidence of the subjective state of mind of one of the parties contained in statements which had not been communicated to the other party ("crossed the line") was inadmissible. In my opinion, Laddie J was quite right not to exclude such evidence, but that is not inconsistent with an objective approach to what the terms of the prior consensus were. Unless itself a binding contract, the prior consensus is, by definition, not contained in a document which the parties have agreed is to be the sole memorial of their agreement. It may be oral or in writing and, even if the latter, subject to later variation. In such a case, if I may quote what I said in Carmichael v National Power plc  1 WLR 2042, 2050-2051:
"The evidence of a party as to what terms he understood to have been agreed is some evidence tending to show that those terms, in an objective sense, were agreed. Of course the tribunal may reject such evidence and conclude that the party misunderstood the effect of what was being said and done."
65 In a case in which the prior consensus was based wholly or in part on oral exchanges or conduct, such evidence may be significant. A party may have had a clear understanding of what was agreed without necessarily being able to remember the precise conversation or action which gave rise to that belief. Evidence of subsequent conduct may also have some evidential value. On the other hand, where the prior consensus is expressed entirely in writing, (as in George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive 84 Ll L Rep 97) such evidence is likely to carry very little weight. But I do not think that it is inadmissible".
"For this doctrine - that is to say the doctrine of A. Roberts & Co. Ltd v. Leicestershire County Council - to apply 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."
"133. … Mr Croxford [leading counsel for DDC]) may be right in saying that, subjectively, there was no reason to think that either of their intentions had changed – as I have described them above. The commercial negotiators were not involved directly in the debate, and the reason for the new clause was purely to give the funders comfort, and was not intended to effect a change in the deal. But the parties are bound by the actions of their properly authorised solicitors. They cannot be heard to say that they did not properly instruct them. Objectively viewed, once Cobbetts had approved clause 14.10.3, they had changed DDC's objectively viewed intentions, whatever DDC might itself have thought. I should say that I have no doubt that Mr Bruno and DDC's other representatives did not, subjectively, understand that DDC's intention had changed. They simply made a mistake in failing properly to read and understand the new provision. Mr Heath and Ms Hargreaves may have understood it, but it appears that DDC may have failed to get through to them the commercial deal as DDC understood it to be. Thus the normal safeguards that are in place in such a situation were defective, because DDC's solicitors were seemingly out of the commercial negotiation loop.
134. It is true that DDH did not point out to DDC that the deal was changing, but for the purpose of ascertaining continuing common intention, that does not matter. Nobody looking objectively at the exchange of emails on 1st November 2007 could possibly reach any conclusion, other than that the parties had by their solicitors then agreed that DDC would be paying the pension deficit.
135. For this reason, in my judgment, the claim to rectify the Transfer Contract on the grounds of common mistake must fail, since the crucial ingredient is missing. The common intention of the parties did not continue beyond the 1st November 2007. By the date of the Transfer Contract, the parties are to be taken as having intended to include clause 14.10.3 which unambiguously provides that DDC should pay the pension deficit to NCC.
"150. DDC says that none of the lawyers or anyone else understood that the agreement of clause 14.10.3 was a change in the bargain agreed between the parties. This is, of course, true. The solicitors on both sides always thought DDC was paying the deficit, because clause 14.10.2 so provided, and clause 14.10.3 was only introduced out of an abundance of caution by RBS. Mr Bruno and Ms Gregory never understood that there was a problem, and, surprisingly perhaps, did not see clause 14.10.3 as changing anything. Mr Roebuck may have seen RBS's proposal as his redemption, but DDH saw it as in line with the existing deal. As it seems to me, however, this misses the point. The question is whether DDH was aware of DDC's mistake, and failed to draw it to its attention. On any basis, the proposal of clause 14.10.3 must have drawn to DDC's attention that DDH wanted DDC to pay the deficit. Can it really be said that, after that, DDH knew that DDC was mistaken? The fact that the proposed clause was not seen as a change is a function of the underlying mistake and the failure by DDC's representatives properly to read the contractual provisions. But it seems to me that that is DDC's own fault. The proposal of clause 14.10.3 was a clear exposition of what DDH thought the Transfer Contract was to achieve, and DDC failed to understand that at its peril.
151. Secondly, DDC argues that the DDC negotiators (Ms Gregory and Mr Bruno) are to be regarded as separate from the solicitors (Mr Heath and Ms Hargreaves). It was not enough, says Mr Croxford, for DDH's solicitors to raise clause 14.10.3 with Cobbetts. Mr Roebuck had to ring Mr Bruno or Ms Gregory to alert them to the problem. This submission cannot, in my judgment, succeed. When commercial parties (a term I use in this context to include the Claimant Council) use commercial solicitors, they cannot ignore what they are told. The relationship between the solicitor and the client is a matter for the client, not for the counterparty to the transaction. Mr Roebuck was entitled to assume, unless he is shown to have known something different, that Cobbetts were properly instructed and properly informed their client. DDC did not establish that Mr Roebuck knew either that Cobbetts did not communicate properly with DDC, or that Mr Roebuck knew that Mr Bruno had not properly understood clause 14.10.3 as being contrary to his previous understanding. It is true that Mr Roebuck probably ought, for his own peace of his professional mind, to have picked up the telephone to Mr Bruno to make sure that this problem was brought to attention. But that is not the question with which I am here concerned. The difference between the commercial negotiators and the solicitors on DDC's side does not allow DDC to ignore what its solicitors had agreed on its behalf, and what its solicitors had been alerted to by the proposal of clause 14.10.3. Moreover, as appears later, I do not think that the failure to telephone Mr Bruno was unconscionable, when Mr Roebuck was entitled to rely on DDC's solicitors' agreement.
153. For these reasons, I do not think that either of the 2nd and 3rd requirements of unilateral mistake are made out here. By the date of execution of the Transfer Contract, it cannot be said that Mr Roebuck knew that DDC was still mistaken as to what the Transfer Contract provided, or even that DDC still mistakenly thought that DDH would pay the pension deficit. In these circumstances, DDH cannot be held to have failed to correct that mistake.
154. The fifth requirement does not, in these circumstances, require resolution. But I will deal with it briefly nonetheless. In the circumstances I have described in detail above, Mr Roebuck undoubtedly behaved inappropriately between 20th September and 31st October 2007. It is, however, impossible, in the light of my previous findings to hold that Mr Roebuck behaved improperly after 1st November 2007, once he knew that DDC had agreed clause 14.10.3. It is true that he may have wondered whether DDC, in the light of all the history, really had agreed to give away the point. It is true that he must have regarded himself as extremely lucky. It is true, as Mr Croxford argues, that he still knew about Mr Page's 5th October emails, but it seems to me that the court cannot assume misconduct, and an ill motivation of the kind alleged needs to be fully proved, because it is always more likely that people will behave properly than improperly. On the evidence before the court, it seems to me that Mr Roebuck was entitled to assume that DDC knew what it was doing and that it had changed its mind. It would have been an honourable course if he had checked that out by making personal contact with Ms Gregory or Mr Bruno, but the court is not concerned with honour, but with the satisfaction of specific requirements for unilateral mistake rectification. Those requirements are not established in this case, and Mr Roebuck did not, after 1st November 2007, behave either inequitably or unconscionably.
"It is important to realise that in that case [viz. Agip] the defendants did not know of the plaintiffs' mistake, and the mistake was not in any way attributable to the defendants' conduct, but solely to the plaintiffs' carelessness in not reading the charter carefully. In these circumstances, it is plain that it would be quite inequitable to foist upon the defendants a contract they did not intend to make."
Lord Justice Toulson
(a) Mr Bruno intended his proposal to be understood as meaning that the pension deficit was being deducted from the valuation, that the £2.4 million would be paid by DDH to NCC and the top £2.4 million of the VAT shelter (which would otherwise have been shared) should go to DDC, with the result that the pension deficit liability would effectively be shared; and
(b) Mr Roebuck realised that this was how Mr Bruno intended the proposal to be understood.
"In relation to the Transferring Employees…[DDC] shall make payments to [NCC] as are necessary to ensure that all liabilities in respect of the benefits accrued by [relevant employees] up to the Completion Date are fully funded based upon the actuarial assumptions used for the 2007 actuarial valuation…
For the avoidance of doubt, this means funded to the extent necessary to ensure that there shall be no liability on [DDH] to make any contributions …in relation to the period of time up to the Completion Date…and until such payments are made by [DDC, DDC] shall indemnify [DDH] against all costs…and …liabilities…in respect of the …said accrued benefits."
(i) The DDH team (except Mr Roebuck) thought that, because the entire £2.4 million top slice from the VAT shelter was going to DDC, that would fully compensate DDC for paying the £2.4 million pension deficit. Mr Roebuck appreciated that this would not be so.
(ii) Mr Bruno and the DDC team knew that the valuation had been reduced by £2.4 million in respect of the pension deficit and understood that DDH would use the reduction to pay the deficit to NCC. The top slice from the VAT shelter would not indemnify DDC, since it had been agreed from the outset that the VAT shelter should prima facie be split 50/50. The top slicing of £2.4 million to DDC only gave a net benefit to DDC of £1.2 million, but in that way the pension deficit liability would be split.
(i) DDC proposes that DDH pays the pension fund deficit to NCC, utilising a reduction in the purchase price of £2.4 million, and DDH's half share of the deficit is then refunded to DDC as a top slice from the VAT shelter (DDC's construction), or
(ii) DDC proposes that there is a reduction in the purchase price of £2.4 million and that DDC will pay the pension fund deficit to NCC which is then refunded to DDC as a top slice from the VAT shelter (DDH's construction).
He concluded that DDC's construction required less violence to the words used and was the more natural construction. The judge rejected an argument advanced by DDH that at 11 October 2007 the objective meaning of the agreement was that DDC should pay the pension deficit, since that was the clear effect of the draft clause which had been discussed at the page turning meeting on 3 October 2007 at which Mr Bruno was present. The judge rejected the argument because he found that Mr Bruno's understanding of contractual matters was so obviously limited and because the email sent by Mr Page to DDC's financial consultants on 5 October 2007 entirely confirmed DDC's construction of Version 1.
"It is true that DDH did not point out to DDC that the deal was changing, but for the purpose of ascertaining continuing common intention, that does not matter. Nobody looking objectively at the exchange of emails on 1 November 2007 could possibly reach any conclusion, other than that the parties had by their solicitors then agreed that DDC would be paying the pension deficit."
Actual understanding and intention of the parties
"Mr Roebuck engineered a situation in which DDH's board and its solicitors were guided into thinking, from 10 October 2007 onwards, that the commercial deal agreed between the parties involved DDC, not DDH, paying the pension deficit."
"Mr Roebuck was entitled to assume, unless he is shown to have known something different, that [DDC's solicitors] were properly instructed and properly informed their client. DDC did not establish that Mr Roebuck either knew that [DDC's solicitors] did not communicate properly with DDC, or that Mr Roebuck knew that Mr Bruno had not properly understood clause 14.10.3 as being contrary to his previous understanding. It is true that Mr Roebuck probably ought, for his own peace of his professional mind, to have picked up the telephone to Mr Bruno to make sure that this problem was brought to attention. But that is not the question with which I am here concerned. "
"It is, however, impossible in the light of my previous findings to hold that Mr Roebuck behaved improperly after 1 November 2007, once he knew that DDC had agreed clause 14.10.3. It is true that he may have wondered whether DDC, in the light of all the history, really had agreed to give away the point. It is true that he must have regarded himself as extremely lucky…On the evidence before the court, it seems to me that Mr Roebuck was entitled to assume that DDC knew what it was doing and that it had changed its mind. It would have been an honourable course if he had checked that out by making personal contact with [Mr Bruno's assistant] or Mr Bruno, but the court is not concerned with honour, but with the satisfaction of specific requirements for unilateral mistake rectification. Those requirements are not established in this case, and Mr Roebuck did not, after 1 November 2007, behave either inequitably or unconscionably."
(1) Mr Bruno (whose intention and belief were that of DDC) always intended that DDH would pay the pension deficit.
(2) From 21 September 2007 when Mr Roebuck responded favourably to Version 1 (and, of course, from 11 October 2007 when the Valuation was signed) Mr Bruno believed that this was agreed.
(3) Mr Bruno did not realise that the Transfer Contract provided differently.
(4) The DDH board always intended that DDC would pay the pension deficit.
(5) The DDH board always believed that this was the effect of Version 1 and the Valuation.
(6) DDH rightly understood that this was the effect of the Transfer Contract.
Was there a relevant shared mistaken belief?
"The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention."
"This ruling [the ruling on rectification] is also likely to prove contentious. It is important to remember that rectification had been denied in the lower courts on the basis of two main findings of fact that the House refused to disturb. First, Chartbrook's intention was exactly what, we must assume for the purposes of this issue, the contract provided for. This meant that rectification was not available on the usual ground of common mistake in recording the terms of the contract. Secondly, Chartbrook did not know of, and had not in bad faith sought to take advantage of, Persimmon's mistake. Consequently, the latter could not satisfy what were thought to be the requirements for ordering rectification where there is mere unilateral mistake.
In view of these undisturbed findings of fact it is difficult to accept that Chartbrook was mistaken, at least in any usual sense of that word. The company intended the contract to provide the benefits that (we assume) it did provide for. The only principled basis for allowing rectification is the one I suggested earlier in this review ((2008) 124 LQR 608 at 636). Chartbrook ought to have been aware from the offers that preceded the drafting of the written contract that Persimmon did not intend to offer the pricing formula Chartbrook intended, and, as a result of the various communications between the parties, including Chartbrook's agreement in principle to the offers made by Persimmon, the latter were led reasonably to believe that the price they intended to offer was assented to."
"If whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms."
The Master of the Rolls
a) The negotiations between DDC and DDH for the transfer of DDC's housing stock and staff ("the staff") to DDH started in June, and were conducted by very senior personnel (primarily Mr Bruno for DDC and Mr Roebuck for DDH) and their respective external solicitors and financial advisers;
b) The negotiations had to address the question of the £2.4 million deficit ("the deficit") in respect of the staff pension scheme;
c) From 20 September, the negotiations were based on a document proffered by DDC to DDH, known as "Version 1";
d) The negotiations resulted in a formal signed agreement in principle ("the prior accord") on 11 October, and this reflected Version 1, and was contained in a signed "Valuation";
e) It could just about be argued that the prior accord required DDC to pay the deficit, but the interpretation which involved it being met by DDH "requires far less violence … and is the more natural construction", and made much better commercial sense, as the Judge said –  EWHC 1935 (Ch), para 124;
f) Mr Roebuck, DDH's principal negotiator, knew DDC believed this was the effect of the prior accord, and he knew that DDH's financial adviser had made it clear to DDC's consultants that that was the effect of the prior accord; but Mr Roebuck did not suggest to DDC that its understanding might be wrong;
g) However, the board of DDH believed that DDC would be paying off the deficit, and Mr Roebuck never disabused the board of this belief;
h) The parties' respective solicitors had been drafting the contract from June, and continued to do so after the prior accord;
i) The draft contract had always included clause 14.10.2, which suggested that DDC was to fund the deficit, and it remained in the contract;
j) On 1 November, RBS, who were DDH's funders, suggested to the solicitors including a new clause 14.10.3 in the contract, which clearly provided that DDC would pay the deficit;
k) DDC and DDH, through their respective solicitors, agreed to the inclusion of clause 14.10.3, and the Transfer Contract was executed on 5 November with clauses 14.10.2 and 14.10.3.