Scottish Widows Fund and Life Assurance Society v BGC International

A court may correct contractual language through interpretation only where the document, read with the admissible background, clearly establishes both the linguistic or syntactical mistake and the parties’ intended meaning. It cannot rewrite a contract merely because the parties failed to provide for a contingency or the literal result later proved commercially disadvantageous.

Interpretation is a single process in which the words are read against the admissible background. Pre-contractual negotiations are generally excluded and require considerable caution even when offered as evidence of a transaction’s objective aim. Rectification requires an objectively demonstrated, outwardly expressed and continuing common intention which the executed instrument mistakenly failed to record.

Scottish Widows sublet over-rented premises to BGC under a lease providing rent concessions and later rent calculated by reference to the open market rent on the immediately preceding review date. A contemporaneous supplemental agreement recorded an intention to align rents under the parties’ leases, subject to the rent provisions of the sublease.

Following an unexpected decline in rental values, Scottish Widows contended that the rent clause should be interpreted or rectified to refer to the highest market rent at any preceding review. Norris J, in [2011] EWHC 729 (Ch), adopted that interpretation but dismissed the alternative rectification claim. BGC appealed on interpretation and Scottish Widows cross-appealed on rectification.

The central issues were whether the court could correct the clause through interpretation and whether the negotiations disclosed an outwardly expressed, continuing common intention sufficient for rectification.

1. The appeal was allowed and the cross-appeal dismissed. Arden LJ delivered the leading judgment. Davis LJ agreed and gave concurring reasons; the President of the Queen’s Bench Division agreed with both judgments.

2. A court may correct words through interpretation where the document, read against the admissible background, clearly reveals a mistake, clearly reveals what the parties intended, and the mistake concerns language or syntax. The power does not extend to supplying contractual protection against a circumstance for which the parties failed to provide. That would rewrite the bargain rather than interpret it.

3. The relevant rent clause, once the undisputed words needed to make its comparison operative were supplied, was clear, coherent and workable. Its reference to the immediately preceding review date was consistent with the surrounding rent provisions. The commercially disappointing result arose because the drafting assumed rising rental values and did not protect against a further decline. Neither the existence nor the required correction of the alleged wider mistake was clear.

4. The supplemental agreement did not establish that rent alignment took precedence. Its statement of intention created no obligation to achieve alignment and was expressly made without prejudice to the rent clause. The rent clause was therefore paramount. The absence of a fixed final date for alignment also undermined the proposed construction.

5. Contractual interpretation is a single, unitary process in which the words are examined against the admissible factual background. The court need not first identify an ambiguity. Pre-contractual negotiations remain generally inadmissible for detailed interpretation. Considerable caution is also required before communications made during negotiations are treated as evidence of the transaction’s objective aim, because they may reflect only provisional negotiating positions.

6. Rectification required an objectively demonstrated common continuing intention concerning the particular matter, an outward expression of accord, continuation of that intention at execution, and a mistaken failure by the instrument to record it. The negotiations remained fluid, and the late communications were ambiguous about the rent payable after the concession period. They disclosed no sufficiently granular consensus that BGC would assume the full onerous rent once it had received benefits valued at £10 million. Rectification was therefore properly refused.

1. Court of Appeal (Civil Division): In [2012] EWCA Civ 607, unanimously allowed BGC’s appeal on contractual interpretation and dismissed Scottish Widows’ cross-appeal on rectification.
2. High Court of Justice, Chancery Division: Norris J, in [2011] EWHC 729 (Ch), construed the rent clause as referring to any preceding review date but dismissed the alternative claim for rectification.