Daventry District Council v Daventry & District Housing Ltd

For rectification based on common mistake, the parties’ continuing intention is determined objectively from their communications and the surrounding context. A clearly inconsistent clause introduced during drafting does not necessarily show abandonment of a prior accord. The court must decide whether a reasonable observer would regard the parties as renegotiating their bargain or attempting, mistakenly, to record it.

Rectification may therefore be granted where both parties mistakenly believe that the executed contract conforms to their prior objectively construed accord, even though their subjective understandings differ. The remedy remains discretionary. Conduct and knowledge attributable to the defendant may outweigh both the defendant’s innocent subjective understanding and the claimant’s carelessness.

Daventry District Council agreed to transfer its housing stock and staff to Daventry & District Housing Ltd. Their signed, non-binding valuation agreement objectively provided that the housing company would pay a £2.4 million pension deficit. The council understood the agreement in that way, while the housing company’s board understood that the council would pay.

During the separate drafting process, clauses 14.10.2 and 14.10.3 were included in the final contract. They placed the payment obligation on the council. The council approved the drafting without appreciating its effect. Its principal negotiator for the housing company knew how the council understood the earlier accord but had promoted the opposite understanding to the housing company, its solicitors and its funder.

Vos J, in [2010] EWHC 1935 (Ch), dismissed the council’s claims for rectification based on mutual and unilateral mistake. The council appealed only against the refusal of rectification. The central issue was whether the drafting exchanges displaced the parties’ prior objectively established accord or mistakenly failed to record it.

1. By a majority, the appeal was allowed and rectification ordered. The Master of the Rolls and Toulson LJ held that the contract did not reflect the parties’ prior objectively construed accord. Etherton LJ dissented and would have dismissed the appeal.

2. The court proceeded on Lord Hoffmann’s analysis in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38. Although that analysis was technically obiter, it was the considered and unanimous opinion of the House of Lords following argument. A common continuing intention for rectification is assessed objectively. Antecedent negotiations and some evidence of subjective understanding are admissible because the claimant must prove that execution of the instrument involved a mistake.

3. The majority held that the parties’ signed valuation was a prior accord under which the housing company was to bear the pension deficit. Both parties intended the solicitors’ drafting process to produce a contract reflecting that accord. Their mistaken belief that the final contract did so was a relevant common mistake, although their subjective reasons were opposite.

4. The introduction of an unambiguous inconsistent clause during drafting did not, by itself, establish that the housing company had resiled from the prior accord. The question depended on all the circumstances. The commercial terms had already been negotiated; the new clause came from the funder during a drafting process; it was not presented as a renegotiation; and its financial effect was commercially capricious. A hypothetical reasonable observer would have regarded the clause as a drafting mistake rather than as notice of a changed bargain.

5. Rectification remained discretionary. It was not refused merely because the housing company’s board had understood the transaction differently, the company might not otherwise have contracted, or the council had carelessly approved the clauses. The knowledge and conduct of the housing company’s principal negotiator were attributable to it. His failure to disclose the parties’ cross-purposes and his role in causing the inconsistent drafting outweighed those considerations.

6. Etherton LJ considered that the clear clause objectively communicated a departure from the earlier accord and that the operative cause of the council’s mistake was its own gross carelessness. The majority rejected that application of the objective test. The precise wording of the rectification order was left for agreement or further argument.

1. Court of Appeal (Civil Division): By a majority, allowed the council’s appeal from the refusal of rectification and ordered rectification of the transfer contract: [2011] EWCA Civ 1153.

2. High Court, Chancery Division: Vos J dismissed the claims for rectification based on common and unilateral mistake, and the alternative damages claim: [2010] EWHC 1935 (Ch). The appeal concerned only rectification.