Mistakes in Contracts: Will the Court intervene?

The Court is often reluctant to interfere with the relationship between contracting parties.  If however there is a mistake in the drafting of a contract, a party can apply to the Court for rectification of that mistake.  Rectification is typically sought where a contract contains a misdescription (for example, a “landlord” is referred to in the contract as a “tenant”) or where crucial words are missing from the contract (for example, “the shall” appears in the contract rather than “the tenant shall”).

The Court will allow rectification in two circumstances.

The first is where there is a ‘common mistake’. This is where both contracting parties mistakenly believe that the contract gives effect to their common intention but it does not in fact do so.

The second is where there is a ‘unilateral mistake’. This is where one party mistakenly believes that the contract records the agreement between the parties, where the other party knows that there is a mistake in the contract and takes advantage of the other party’s lack of knowledge of this mistake. In simple terms, it is where one party knows about the mistake and keeps quiet about it.   

In order to persuade the Court to rectify a contract on the basis of common mistake (where both parties are mistaken as to the contents of the contract), the party seeking rectification must satisfy the Court in relation to the following:-

• that both parties had a common and continuing intention in respect of a particular matter in the contract;

• that there was an outward expression of that common and continuing intention (ie evidence of conversations, emails or heads of agreement);

• that the intention continued at the time that the contract was signed; and

• by mistake, the contract did not reflect the parties’ common intention.

In the case of Persimmon Homes Limited v Hillier & Creed earlier this year, the Court was asked to rectify a Share Purchase Agreement and accompanying Disclosure Letter on the basis of what was claimed to be common mistake.

The facts of the case were that in October 2012, Persimmon entered into two Share Purchase Agreements to purchase all of Mr Hillier’s and Mr Creed’s shares in various companies that purportedly owned 6 plots of development land. 

It subsequently transpired after the execution of the Share Purchase Agreement that Persimmon had only acquired shares from companies owning 4 out of the 6 plots of development land.

Persimmon applied to the High Court for rectification of the Share Purchase Agreements and the Disclosure Letter.  The Court was referred to the due diligence documents which suggested that Persimmon would acquire control of Mr Hillier’s and Mr Creed’s interests in all 6 plots of development land, regardless of which of the specific companies was the registered owner.  The Court was also referred to Persimmon’s initial offer which had made it clear that the proposed purchase price related to all 6 plots of development land.

The High Court held that Persimmon had certainly entered into the transaction with Mr Hillier and Mr Creed believing that all 6 plots of land would be acquired.  Furthermore, and crucially for establishing common mistake, correspondence passing between the parties during negotiations demonstrated that both Persimmon and Mr Hillier and Mr Creed had understood that all 6 plots of development land would be acquired by Persimmon.

As a result of the High Court’s decision, Persimmon was entitled to damages for the difference between the value of the companies it had acquired had those companies owned all 6 plots of land, and the actual value of the companies that it had acquired owning just the 4 plots of land.

Mr Hillier and Mr Creed appealed to the Court of Appeal.  The appeal was dismissed.

The Court of Appeal reviewed the evidence and agreed with the High Court Judge that the evidence suggested that Mr Hillier and Mr Creed had held out that all 6 plots of development land were to be included in the sale and that this was the common understanding of the parties.  The documents sent to Persimmon by Mr Hillier and Mr Creed as part of the due diligence process were key.  All parties had proceeded on the basis that all 6 plots would be transferred as part of the Share Purchase Agreement.

The Court of Appeal concluded that the Share Purchase Agreement did not accurately record the common intention of the parties and ordered rectification of the agreement.  The Court also ordered rectification of the Disclosure Letter.

The decision meant that Persimmon were entitled to pursue Mr Hillier and Mr Creed for damages for breach of warranty.

The case is a rare example of a successful rectification claim and serves as a useful reminder that the Court will intervene when it is clear that contractual documents (including disclosure letters) do not reflect the common intention of the contracting parties. A claimant must of course be able to demonstrate that there was a clear and identifiable common intention that is not reflected in the resulting agreement.

For any queries in relation to issues raised in this blog, please contact the Litigation Team at aet@hughes-paddison.co.uk or 01242 586841.