Chartbrook Limited (Respondents) v Persimmon Homes Limited and others (Appellants) and another (Respondent)

A contract is interpreted according to what a reasonable person, possessing the background knowledge available to the parties, would understand its language to mean. A strong case is required before the court concludes that the language has gone wrong. Where both the linguistic mistake and the intended meaning are clear, the court may give effect to that meaning without any limit on verbal rearrangement.

Pre-contractual negotiations remain inadmissible when used to infer the meaning of the concluded contract. They may, however, prove relevant background knowledge or support rectification or estoppel. Rectification depends upon an objectively manifested common continuing intention which the instrument, by mistake, failed to record. The parties’ undisclosed subjective beliefs do not determine the content of that prior consensus.

Chartbrook Limited, the landowner, contracted with Persimmon Homes Limited for the development of a mixed residential and commercial site. The contractual price included an Additional Residential Payment calculated by a disputed formula. Chartbrook’s construction produced a payment of about £4.48 million, while Persimmon’s construction produced about £897,000.

Briggs J accepted Chartbrook’s construction in [2007] EWHC 409 (Ch). A majority of the Court of Appeal upheld it in [2008] EWCA Civ 183, Lawrence Collins LJ dissenting. The courts below also rejected Persimmon’s alternative rectification claim.

The principal issue was whether the formula should be given its conventional syntactical meaning or construed in accordance with the commercial structure of the agreement. Persimmon also invited the House to reconsider the exclusion of pre-contractual negotiations and, alternatively, to rectify the agreement.

1. Appeal allowed unanimously. Lord Hoffmann delivered the leading speech. Lord Walker reached the same conclusion by his own analysis of the agreement, and Lord Hope, Lord Rodger and Baroness Hale agreed that Persimmon’s construction was correct.

2. Per Lord Hoffmann and Lord Walker, the agreement had to be read objectively and as a whole. Conventional syntax could not be decisive where it made the structure and terminology of the bargain arbitrary and commercially irrational. The expressions “minimum guaranteed” and “additional” indicated that the landowner was to receive a guaranteed minimum land value and a contingent additional payment. Mere favourability to one party would not have justified departing from conventional language, but the competing construction failed to give the contractual concepts a rational function.

3. The Additional Residential Payment therefore meant the excess, if any, of 23.4% of the achieved residential price, after deducting Costs and Incentives, over the Minimum Guaranteed Residential Unit Value. The court may correct language through construction where it is clear both that the language has gone wrong and what a reasonable person would have understood the parties to mean. This is part of the single task of interpretation, not a separate doctrine analogous to rectification. There is no limit on the amount of verbal rearrangement permissible once those requirements are satisfied.

4. Per Lord Hoffmann, in reasoning expressly supported by the other members of the House but unnecessary to the disposition, the rule reaffirmed in Prenn v Simmonds [1971] 1 WLR 1381 should be retained. Pre-contractual negotiations cannot be used to draw inferences about the meaning of the concluded contract. The rule promotes economy and predictability. It does not prevent negotiations from proving a relevant background fact or supporting rectification or estoppel.

5. The supposed exception in Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd’s Rep 708 was disapproved. Evidence of a shared, unconventional linguistic usage may establish a “private dictionary”. Agreement during negotiations upon one conventional meaning of an ambiguous word does not create such an exception.

6. On rectification, Lord Hoffmann considered that a common continuing intention is identified objectively from the parties’ words and conduct. An undisclosed subjective understanding may be evidence, but does not determine the content of the consensus. On the hypothetical assumption that Chartbrook’s construction was correct, the accepted pre-contractual proposal objectively established Persimmon’s meaning and both parties were mistaken in believing that the instrument recorded it. Persimmon would therefore have been entitled to rectification.

• House of Lords: In [2009] UKHL 38, unanimously allowed Persimmon’s appeal, rejected the construction adopted below and dismissed Chartbrook’s claim.
• Court of Appeal: In [2008] EWCA Civ 183, Tuckey and Rimer LJJ upheld Chartbrook’s construction, Lawrence Collins LJ dissenting. The court unanimously upheld the rejection of rectification.
• High Court, Chancery Division: In [2007] EWHC 409 (Ch), Briggs J accepted Chartbrook’s construction and dismissed Persimmon’s rectification claim.