Scottish Widows Fund and Life Assurance Society v BGC International

Contractual language is construed objectively in its commercial and documentary context. The court may correct a detectable linguistic error where the parties’ intended meaning is clear, but it must not make a new bargain merely because the result appears disadvantageous. Related transaction documents may be read coherently, while negotiations are generally excluded except insofar as they illuminate the transaction’s objective commercial purpose. Where a lease was intended to remove a rent subsidy after a defined period, a provision referring only to the immediately preceding review date could be read as referring to any preceding review date if that was the meaning a reasonable person would have understood. Rectification requires an objectively manifested common continuing intention and is not established by subjective beliefs where the consensus is documentary.

Scottish Widows had granted BGC a sub-sub-underlease of premises subject to an onerous, upward-only rent payable under superior leases. The Relevant Lease provided for a reduced rent during a period intended to reflect the economic effect of a £10 million reverse premium, followed by rent provisions referring to the Subsequent Rent and the open-market rent at the immediately preceding review date.

After a fall in market rents, the parties disputed whether the post-2010 rent could remain below the rent payable by Scottish Widows under the superior lease. Scottish Widows sought construction of the Relevant Lease in its favour and, alternatively, rectification. The central issues were the proper objective construction of clause 2(c), the admissibility and weight of negotiation evidence, and whether rectification or laches affected the result.

1. Construction. The Relevant Lease was construed so that, from 18 December 2010, BGC had to pay the higher of the fixed Subsequent Rent of £1,285,424 and the rent which would have been payable under the review provisions absent the subsidy. Clause 2(c) contained a detectable drafting defect: it failed to specify how its alternatives were to be selected and, in context, its reference to the immediately preceding review date did not express the parties’ intended mechanism.
2. The court’s task was a single objective inquiry into the meaning a reasonable person, with the parties’ admissible background knowledge, would have attributed to the document. The whole contractual document and connected transaction documents could be considered together. Commercial purpose and practical context were relevant, but pre-contractual negotiations could not be used for detailed linguistic construction. A commercially unattractive result did not, without more, justify departing from the language used.
3. The Supplemental Agreement supported the conclusion that the parties contemplated eventual alignment of rents and the end of the reverse-premium subsidy. The irregular possibility that clause 2(c), read literally, would leave Scottish Widows bearing an indefinite subsidy lacked commercial coherence and indicated an error in expression.
4. Rectification. Consideration of rectification was technically unnecessary after the construction conclusion. Had the alternative construction been adopted, rectification would have failed. The documentary negotiations showed no prior objectively manifested consensus differing from the engrossed Relevant Lease. Subjective understandings of the parties’ advisers carried little weight where the alleged consensus was expressed in writing.
5. Laches. If rectification had otherwise been established, the defence would have failed. Time runs from discovery of the mistake, and detrimental reliance is ordinarily required; mere delay was insufficient and BGC had identified no inequitable reliance.

The court therefore granted the construction contended for by Scottish Widows. Costs and any application for permission to appeal were left for a further hearing.