Chartbrook Ltd v Persimmon Homes Ltd & Ors

The House of Lords allowed the appeal and construed the disputed contractual definition of the Additional Residential Payment (ARP) in Schedule 6 in favour of Persimmon. Applying the objective approach to contractual interpretation (Investors Compensation Scheme principles), the court held that the ARP meant 23.4% of the net price achieved for each residential unit (after deduction of Costs and Incentives), and the ARP is the excess of that figure over the Minimum Guaranteed Residential Unit Value (MGRUV). The House rejected any change to the long-established rule excluding pre-contractual negotiations from aid to interpretation. The court also considered rectification principles and confirmed that rectification requires an objective demonstration of a common continuing intention which the written document, by mistake, fails to record.

The dispute concerned the price payable under a development agreement dated 16 October 2001 between Chartbrook (landowner) and Persimmon (developer). Schedule 6 divided the price into Total Land Value (TLV) and a Balancing Payment (labelled Additional Residential Payment or ARP). The parties agreed the simple elements of TLV but contested the correct construction of the ARP formula, in particular whether Costs and Incentives (C & I) should be deducted before or after applying the 23.4% percentage and whether the ARP was intended as an additional contingent payment only if market receipts exceeded the guaranteed land element.

The House considered the competing constructions offered at first instance (Briggs J: [2007] EWHC 409 (Ch)) and the Court of Appeal ([2008] EWCA Civ 183), and applied the standard objective principles of contractual interpretation as stated in Investors Compensation Scheme Ltd v West Bromwich Building Society. The majority concluded that conventional syntax alone left a real ambiguity about the placement of the deduction of C & I, and that commercial context and the parties' evident bargain required reading the provision so that C & I were deducted from the realised sale price to obtain a net price, then 23.4% of that net price was calculated and the ARP was the excess of that 23.4% figure over the MGRUV. This interpretation gave a rational commercial effect to the defined labels ("Minimum Guaranteed Residential Unit Value", "Additional Residential Payment") and avoided anomalous results under Chartbrook's construction.

The House addressed two subsidiary but important questions. First, it declined to overrule or modify the established exclusionary rule that pre-contractual negotiations are inadmissible for construing formal written contracts, reaffirming the policy reasons for maintaining the rule, although acknowledging that background facts are admissible and that prior negotiations may be relevant background in exceptional circumstances. Second, the House reviewed rectification law and confirmed rectification requires proof of a common continuing intention objectively ascertained and that the executed document, by mistake, did not reflect that intention; in this case rectification was unnecessary because the court resolved the dispute by construction.

• Nature of claim: disputed interpretation of a commercial contract price formula and alternative claim for rectification.
• Issues framed: (i) correct construction of the ARP in Schedule 6; (ii) whether evidence of pre-contractual negotiations should be admitted to aid construction; (iii) whether rectification should be ordered.
• Court’s reasoning: applied established objective interpretative principles; held construction should give commercial sense to defined terms and resolved syntactical ambiguity by reference to commercial purpose and context; refused to alter the exclusionary rule; reiterated objective test for rectification.

Appeal allowed. The House construed the ARP as 23.4% of the net price achieved for each residential unit (after deducting Costs and Incentives), and ARP is the excess of that figure over the MGRUV. The House declined to modify the longstanding rule excluding pre-contractual negotiations from interpretation and confirmed that rectification requires an objectively ascertainable common continuing intention which the written document, by mistake, fails to record. Because construction resolved the dispute, rectification was unnecessary.

First instance: Briggs J, Chancery Division, [2007] EWHC 409 (Ch). Appeal: Court of Appeal, [2008] EWCA Civ 183 (majority against Persimmon; Lawrence Collins LJ dissenting). Final appeal to the House of Lords: [2009] UKHL 38 (this judgment).