I was surprised at the Court of Appeal’s recent decision in Daventry District Council v Daventry & District Housing Ltd. To me, this seems at odds with what I thought were the well-established rules of contract interpretation and rectification.
The Council’s intentions
This case concerned a contract between Daventry District Council (the Council) and Daventry & District Housing Limited (DDH). A critical part of the commercial negotiations was the deficit of £2.4 million in the pension scheme in relation to staff who would be transferring from the Council to DDH. The Council intended that DDH should pick up the tab for the £2.4m deficit and produced a written proposal which DDH’s chief negotiator, “R”, agreed in principle.
The Council intended the proposal to be understood as meaning that DDH would fund the deficit initially but that liability would ultimately be shared. R knew that this was what the Council intended. However, the wording was ambiguous and R informed the board of DDH and its legal and financial advisors that the Council would be liable for the pension deficit, not DDH. Keeping quiet throughout the negotiations, R was the only person who knew that the parties were not on the same page when it came to who should pay the £2.4m.
The contract provided that the Council was liable to pay the pension deficit. When the Council realised what it had done it applied for rectification on the basis that the agreement in principle had been for DDH to pay it. The application was refused at first instance, but the Court of Appeal allowed the Council’s appeal and granted rectification.
What is particularly interesting is that the contract between the Council and DDH contained a clear unambiguous provision that the Council would pay the £2.4m into the pension fund. This clause was introduced quite late in the negotiations, but another clause, which was included in the initial draft, also provided that the Council would pay the deficit (albeit there was some debate as to what this provision was intended to mean). The contract was negotiated and agreed by the Council and its advisors. At no stage did they object to either provision: the Council did not appear to realise that the terms of the contract were inconsistent with its intention that DDH was to pay the £2.4m.
Was the Court of Appeal right?
In a rectification claim, the parties’ intentions must be judged objectively from their words and actions. Applying this to the facts, the Court of Appeal decided that the provisions in question had to be interpreted in the context of the commercial terms of the agreement in principle and that the parties’ words and actions must be interpreted in accordance with commercial reality even though there was clear wording in the contract to the contrary. The court focused on the fact that it did not make commercial sense for the Council to allow DDH, in effect, to have a £2.4m windfall and this overrode the unambiguous contrary contractual provisions.
I thought this was a bit tough on DDH. It entered into a commercial contract with the Council, negotiated at arms’ length and documented by the parties’ respective legal advisers, which provided, in clear unambiguous terms, that the Council was to pay the pension deficit. The Council accepted this without objection and, it seems to me, in doing so (judged objectively) the parties reached a new agreement. DDH, who had no intention of paying the deficit (because it had no funding to meet it) and would not have entered into the contract on that basis, is now stuck with a liability to pay £2.4m.
The majority in the Court of Appeal was keen to ensure that justice was done, so that R’s “sharp practice” during the negotiations would not benefit DDH. These “special” and “striking” features heavily influenced their decision.
The lessons to be learnt from this case are based on the old adages of honesty is the best policy and cheats never prosper. Commercial realities mean that it does not always make sense to show your hand during negotiations. However, if it becomes obvious that your contractual counterparty intends to contract on a different basis, it is best to speak up and have an open discussion about it, rather than keeping quiet in the hope that you may gain an advantage. The courts clearly do not take kindly to that kind of approach. But will the Supreme Court have the last word?