article
Crossed wires
27 July 2009
On Wednesday 1 July, Lord Hoffman handed down his final judgment
in the House of Lords on the case of Chartbrook vs Persimmon Homes,
and the directors of the latter breathed a collective sigh of
relief.
The case is relevant to anyone who might have to resolve an
ambiguity in a contract or other document, particularly if one
interpretation leads to an absurdity or an irrational result. The
case revolved around a provision in a development agreement that
defined how payment due to Chartbrook should be calculated. The
court was asked to rule on the meaning of the clause in
question.
The trial judge and the Court of Appeal favoured Chartbrook’s
interpretation, which would have resulted in Persimmon paying, in
addition to an agreed minimum land value, 23.4% of the net sales
price of every dwelling, or about £3.5m more than would be due if
Persimmon’s interpretation was correct .
Fortunately for Persimmon, Lord Hoffman decided Chartbrook’s
interpretation of the clause made “no commercial sense” and allowed
Persimmon’s appeal.
The decision provides a lesson for developers and their lawyers
alike. It reminds us it is imperative to ensure contracts are clear
and unambiguous. When it comes to payment, as the lords agreed,
formulae are often clearer than words. To put matters of
interpretation beyond doubt, it is wise to include worked examples
of payment calculations within contracts. Also, the potential for
confusion is increased when a definition is built up on a number of
other defined terms.
The decision is also relevant to parties to building contracts,
especially since modern forms, such as PPC2000, rely on parties
filling in numerous spaces with substantive drafting, to get them
to think about risk allocation and responsibility. What happens,
for example, if the price framework in PPC 2000 is not properly
tied into the contract, or if in the NEC form, one of the blanks in
the contract data is filled in so as to make it nonsensical?
This judgment examined the circumstances in which the court can
determine the meaning of a clause, if one meaning gives an
arbitrary and irrational result. Another of the law lords, Lord
Walker, said the result of Chartbrook’s interpretation of the
clause was “not merely surprising but totally incredible”.
Lord Hoffman commented that what was striking about the
Chartbrook interpretation of the clause was that its result made a
nonsense of the language and the structure of the rest of schedule
six of the agreement, in which the disputed clause sat. He said it
was “possible for the concepts employed by the parties to be
combined in a rational way”.
He went on to state that for the court to “correct mistakes by
construction”, two conditions should be satisfied. First, there
should be a clear mistake in the document. Second, it should be
clear what correction ought to be made in order to cure the
mistake. If those conditions were satisfied, then the court could
make the correction.
Lord Hoffman explained that there were two qualifications to
this. One was that the “correction of mistakes by construction” is
distinct from rectification. Second, he said that when deciding
whether there is a mistake, the court should take into account the
background and context of the document because that was intrinsic
to interpreting a document.
That said, the court was clear that this did not mean referring
to precontract negotiations. It was very much against this. Rather,
it was looking at other provisions in the contract, in this case
those in schedule six.
Lord Hoffman reiterated that all that was required was that it
should be clear that something had gone wrong with the language of
the document “and that it should be clear what a reasonable person
would have understood the parties to have meant”. He found that in
this case, both of these requirements had been satisfied.
He went onto consider two other arguments advanced by Persimmon,
concerning the taking into account pre-contractual negotiations,
and rectification of the contract. The case was not decided on
these grounds.
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