House of Lords
Published July 2, 2009
Chartbrook Ltd and Another v Persimmon Homes Ltd and Another
Before Lord Hope of Craighead, Lord Hoffmann, Lord Rodger of Earlsferry, Lord
Walker of Gestingthorpe and Baroness Hale of Richmond
Speeches July 1, 2009
There were no grounds for the House of Lords to depart from the long standing
rule that excluded evidence of what was said or done during the course of
negotiating a contract for the purpose of drawing inferences about what the
contract meant.
The House of Lords so held, allowing an appeal by the defendants, Persimmon
Homes Ltd and Persimmon plc, from the dismissal by the Court of Appeal (Lord
Justice Tuckey and Lord Justice Rimer, Lord Justice Lawrence Collins
dissenting) (\ EWCA Civ 183) of their appeal from Mr Justice Briggs (\ EWHC
409 (Ch)) who gave judgment for the claimants, Chartbrook Ltd and Stephen
Vantreen, for £4,189,051.50, plus interest, and dismissed Persimmon’s
counterclaim for rectification of a contract entered into between them and
the claimants on October 16, 2001, for the development of a site which the
claimants owned at Hardwick’s Way, Wandsworth, London.
Mr Christopher Nugee, QC and Mr Julian Greenhill for Persimmon; Mr
Robert Miles, QC and Mr Timothy Morshead for the claimants.
LORD HOFFMANN said that the structure of the agreement was that the defendants
would obtain planning permission, construct a mixed residential and
commercial development and sell the properties on long leases.
The claimants would grant the leases at the direction of the defendants, who
would then receive the proceeds for their own account and pay the claimants
an agreed price for the land.
After the development was built there was a dispute over the price which
became payable, and the calculation set out in the terms of the contract for
an additional residential payment which was defined in the contract. The
defendants calculated that sum as £897,051 compared with the claimants’
claim for £4,484,862.
The principles on which a contract, or any other instrument or utterance,
should be interpreted were those set out by the House in Investors
Compensation Scheme Ltd v West Bromwich Building Society (The Times June 24,
1997; \ 1 WLR 896, 912-913).
The question was what a reasonable person having all the background knowledge
which would have been available to the parties would have understood them to
be using the language in the contract to mean.
It was emphasised that their Lordships did not easily accept that people had
made linguistic mistakes, particularly in formal documents, but in some
cases the context and background drove a court to conclude that something
must have gone wrong with the language. In such a case the law did not
require a court to attribute to the parties an intention which a reasonable
person would not have understood them to have had.
To interpret the definition of “additional residential payment” in accordance
with ordinary rules of syntax made no commercial sense.
All that was required was that it should be clear that something had gone
wrong with the language and that it should be clear what a reasonable person
would have understood the parties to have meant.
In his Lordship’s opinion both those requirements were satisfied, and the
appeal was allowed.
The defendants also advanced the alternative argument of considerable
importance that the pre-contractual negotiations which were determinative
confirmation of the defendants’ argument on the construction should be taken
into account.
The rule that pre-contractual negotiations were inadmissible was clearly
affirmed by the House in Prenn v Simmonds (\ 1 WLR 1381), but had been
established for a long time: see Inglis v John Buttery and Co ((1878) 3 App
Cas 522).
To allow evidence of pre-contractual negotiations to be used in aid of
construction would therefore require the House to depart from a long and
consistent line of authority the binding force of which had frequently been
acknowledged.
The House was nevertheless invited to do so on the ground that the rule was
illogical and prevented a court from putting itself in the position of the
parties and ascertaining their true intent.
It would not be inconsistent with the English objective theory of contractual
interpretation to admit evidence of previous communications between parties
as part of the background which might throw light upon what they meant by
the language they used.
There were no conceptual limits to what could properly be regarded as
background. Prima facie, therefore, the negotiations were potentially
relevant background.
They might be inadmissible simply because they were irrelevant to the question
which the court had to decide, namely what the parties would reasonably be
taken to have meant by the language which they finally adopted to express
their agreement. That would usually, but not always, be the rule.
The admission of pre-contractual negotiations would create greater uncertainty
of outcome in disputes over interpretation and add to the cost of advice,
litigation or arbitration.
That reflected what might be a sound practical intuition that the law of
contract was an institution designed to enforce promises with a high degree
of predictability and that the more one allowed conventional meanings or
syntax to be displaced by inferences drawn from background, the less
predictable the outcome was likely to be.
Pre-contractual negotiations seemed capable of raising practical questions
different from those created by other forms of background.
Whereas surrounding circumstances were, by definition, objective facts which
would usually be uncontroversial, statements in the course of
pre-contractual negotiations would be drenched in subjectivity and might, if
oral, be very much in dispute.
Experience in the analogous case of resort to statements in Hansard under the
rule in Pepper v Hart (The Times November 30, 1992; \ AC 593) suggested that
such evidence would be produced in any case in which there was the remotest
chance that it might be accepted and that even those cases would be the tip
of a mountain of discarded but expensive investigation.
Pepper v Hart had also encouraged ministers and others to make statements in
the hope of influencing the construction which the courts would give to a
statute, and it was possible that negotiating parties would be encouraged to
improve the bundle of correspondence with similar statements.
The conclusion was that there was no clearly established case for departing
from the exclusionary rule. Their Lordships were being asked to depart from
a rule which had been in existence for many years and was several times
affirmed.
The power to do so under Practice Statement (Judicial Precedent) (\ 1 WLR
1234) was intended to be applied only in a small number of cases in which
previous decisions were thought to be impeding the proper development of the
law or had led to results which were unjust or contrary to public policy. It
could not confidently be said that that was true of the exclusionary rule.
There were two legitimate safeguards which would in most cases prevent the
rule from causing injustice. But they would have to be specifically pleaded
and clearly established. They were rectification and estoppel by convention.
If the parties had negotiated an agreement upon some common assumption, which
might include an assumption that certain words would bear a certain meaning,
they might be estopped from contending that the words should be given a
different meaning.
Both of those remedies lay outside the exclusionary rule, since they started
from the premise that, as a matter of construction, the agreement did not
have the meaning for which the party seeking rectification or raising an
estoppel contended.
The defendants were also entitled to succeed in their claim for rectification.
Lord Hope, Lord Rodger, Lord Walker and Lady Hale delivered speeches agreeing
with Lord Hoffmann.
Solicitors: Mayer Brown International LLP; Carter-Ruck.
