KPMG LLP v Network Rail Infrastructure Ltd

Rectification for mutual mistake requires convincing proof of a common intention that continued to the instrument’s execution. A prior accord does not suffice where one party subsequently intended to accept a substantive alteration.

In construing a contract, a prior concluded agreement and its attached draft may form part of the admissible factual background. The court may correct an obvious drafting omission as a matter of construction where the context shows both that language has gone wrong and the substance of the intended correction. Precise recovery of every omitted word is unnecessary if the intended gist is clear.

KPMG LLP appealed against Blackburne J’s decision in the Chancery Division, which had rectified a reversionary sub-underlease for mutual mistake. The lease contained a defective break clause. Words concerning a condition of increased rent had been omitted from the final executed lease.

KPMG contended that the clause, read as written, created two additional free-standing rights to determine. Network Rail contended that the lease should be rectified or construed so as to preserve only three break rights, each conditional on a rent review and an increase in rent.

The central issues were whether mutual intention persisted until execution and whether the court could use the earlier agreement for lease and draft lease to correct the omission by construction.

1. Appeal dismissed. Carnwath LJ, with whom Sir Paul Kennedy and Mummery LJ agreed, held that Network Rail had not established the common continuing intention required for rectification. The evidence showed that PMM had accepted its solicitor’s understanding that the omission was a favourable deliberate change. The judge’s contrary inference was not supported by the documentary and oral evidence.

2. The alternative rectification argument also failed. Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71 permitted equity to supply unagreed legal mechanics for a clear shared commercial intention. It did not permit rectification to preserve only those parts of the parties’ intentions which coincided while disregarding a substantive disagreement about the increased-rent condition.

3. The earlier agreement for lease and its attached draft lease were admissible contextual material. They were detailed negotiated documents and were important evidence of the intended structure of the break clause. A later lease and the possibility of successors in title did not create a rule excluding available background evidence.

4. Correction of an obvious mistake is part of contractual construction, rather than rectification. Applying the reasoning in Homburg Houtimport BV v Agrosin Private Ltd [2004] 1 AC 715, the court could correct the omission because the defective parenthesis plainly showed that something had gone wrong and the earlier draft disclosed the intended substance. It was enough to ascertain the gist of the omitted material; the court was not required to establish the exact textual history beyond doubt.

5. The clause’s structure showed that it was designed to confer three, not five, rights to determine. The construction based on the 1974 draft, restoring the increased-rent condition, was far more consistent with the parties’ objective intention than KPMG’s construction. KPMG’s appeal was therefore dismissed, albeit by construction rather than rectification.

• Court of Appeal (Civil Division): KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363. Appeal dismissed on construction, although the court rejected the first-instance basis of rectification for mutual mistake.
• Chancery Division: Blackburne J upheld Network Rail’s claim for rectification based on mutual mistake. He rejected unilateral mistake and indicated that, absent rectification, he would have preferred KPMG’s construction. No lower-court citation is stated in the judgment.