In short

A district council transferred its housing stock and housing staff to a newly formed registered social landlord. The transferring staff's local government pension was about £2.4 million in deficit. The parties signed a non-binding agreement in principle which, on its natural reading, meant the housing company would pay that deficit, with the cost effectively shared through a price reduction and a top-slice of an expected VAT concession. The formal transfer contract, however, required the council to pay the £2.4 million within five days of completion.

The council asked the High Court to rectify the contract, arguing either that both parties were mistaken or that the housing company had stood by while the council signed under a unilateral mistake. The trial judge dismissed the rectification claim, treating a last-minute clause inserted at the funder's request as an objective change of the parties' common intention. The council appealed on rectification only.

The Court of Appeal allowed the appeal by a majority and ordered rectification for common mistake. The majority held that the new clause did not, viewed objectively, amount to a renegotiation of the earlier deal: a reasonable observer would have thought it a drafting mistake. A dissenting judgment would have held the council to the contract, treating the clause as a clear signal that the housing company no longer stood by the earlier accord. The majority did not need to decide the alternative claim based on unilateral mistake.

Decision

The appeal allowed. [228]
Rectification of the Transfer Contract granted. [185]

Issues

Did the 1 November 2007 exchanges inserting clause 14.10.3, viewed objectively, amount to Daventry & District Housing departing from the prior accord that it would pay the £2.4 million pension deficit?
No. A reasonable observer, taking the commercial context into account, would have thought the housing company was making a mistake in the drafting of a contract intended to give effect to the prior accord, not signalling that it no longer intended to fund the deficit. The prior objective common intention therefore continued to execution. [213]
Is Daventry District Council entitled to rectification of the transfer contract for common mistake, so that Daventry & District Housing rather than the Council is liable to pay the pension deficit?
Yes. Judged objectively, both parties were mistaken in believing that the executed contract conformed with their prior commercial agreement, and that is a common mistake of the kind identified in Chartbrook. The Council is entitled to rectification. [225]
The test
Swainland requirements for rectification for mutual mistake, as restated after Chartbrook [80]
1. the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified
2. which existed at the time of execution of the instrument sought to be rectified
3. such common continuing intention to be established objectively, that is to say by reference to what an objective observer would have thought the intentions of the parties to be
4. by mistake, the instrument did not reflect that common intention
Does clause 14.10.2, which contemplated that the Council would fund the transferring employees' pension deficit, prevent rectification of clause 14.10.3?
No. Clause 14.10.2 can be rectified along with clause 14.10.3 to reflect the prior accord. Any inconsistency goes to the form of the order, not to whether rectification should be granted. [218]
Should rectification be refused as a matter of discretion because the housing company's board would not have entered a contract under which it paid the pension deficit?
No. Any unfairness to the board is outweighed by the conduct of its principal negotiator, for which the company must accept responsibility. That it might not have signed a contract on the prior-accord terms is no defence. [224]

Reasoning

The court proceeded on the House of Lords' analysis that a common continuing intention for rectification is what an objective observer would have thought the parties' intention to be, not an uncommunicated subjective belief. [80]
A formal if non-binding prior accord was reached on 11 October 2007 in Version 1 and the Valuation. Interpreted as a matter of ordinary language, it placed liability to meet the pension deficit on the housing company, not the council. [199]
Both the council and the housing company's board shared a mistaken belief that the transfer contract accorded with that prior commercial agreement, though their reasons for that belief were diametrically opposite. [147]
The majority treated the 1 November emails inserting clause 14.10.3 as a mistake in documenting the prior accord rather than a renegotiation. The contractual terms had already been fully negotiated; the solicitors' function was to draft a contract reflecting those terms, and the new clause came from the funder to give comfort, not to change the deal. [213]
It is not enough, to defeat rectification, that the provision put forward clearly departed from the prior accord. Clear contractual words are often the very thing rectification is sought to correct. [211]
Clause 14.10.2, which had been in the draft from before the prior accord, was itself a plain mistake in the eyes of a reasonable observer and could be rectified with clause 14.10.3. [216]
Any concern that rectification would land the housing company with a contract it would never have signed was outweighed by its negotiator's conduct: he knew how the council understood the prior accord, did not disabuse the council, and allowed his own board to believe the opposite. [224]

Written by AI from the judgment on 4 September 2026. Each ¶ links to the paragraph it came from. Read those before relying on it.

▶Case Law Cited16

▶Cited By31

Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153

Case No A3/2010/2195

[2011] EWCA Civ 1153

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM

IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION

MR JUSTICE VOS

HC09C01840

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 09/05/2011

Before

THE MASTER OF THE ROLLS

LORD JUSTICE TOULSON

LORD JUSTICE ETHERTON

Between

DAVENTRY DISTRICT COUNCILAppellant

DAVENTRY & DISTRICT HOUSING LIMITEDRespondent

(Transcript of the Handed Down Judgment of

WordWave International Limited

A Merrill Communications Company

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Mr Ian Croxford QC and Mr Jonathan Evans (instructed by Sharpe Pritchard) for Appellant

Mr Nigel Jones QC and Ms Alison Meacher (instructed by Wright Hassall LLP) for Respondent

Hearing Hearing dates : 9th and 10th May 2011

Judgment

Lord Justice Etherton :

Introduction

[1]This is an appeal from an order of Vos J dated 30 July 2010 dismissing the claim of the appellant, Daventry District Council (“DDC”), for rectification of a contract dated 5 November 2007 (“the Contract”) with the respondent, Daventry & District Housing Limited (“DDH”), and an alternative claim for damages. The appeal relates only to the dismissal of the claim for rectification. The claim for rectification is on the grounds of mutual mistake or, alternatively, unilateral mistake. It focuses a spotlight on the relevance of subjective intention and objective assessment of intention and mistake in rectification claims, and on the application of the principles for rectification explained by Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd

[2009] 1AC 1101

at [57] to [66].

The factual background

[2]Rectification claims are highly fact specific. The factual background in the present case is extensive and detailed. In his comprehensive judgment Vos J presented the background facts over 73 paragraphs. I shall summarise the facts as briefly as possible, but it will inevitably be necessary to descend into some detail for an understanding of the appeal and its resolution. In relation to the critical period between 31 October 2007 and 5 November 2007, where the events and the number and roles of the people involved can easily present a confusing picture to the reader, I shall, for the sake of easier comprehension, deviate from a strictly chronological account. I gratefully acknowledge that my summary borrows heavily from the history comprehensively set out in the Judge’s judgment.

[3]In October 2004 the Office of the Deputy Prime Minister published the "Housing Transfer Manual 2005 Programme". The Ministerial Foreword referred to the progress that had been made in reducing the number of homes owned by councils that fell below the "Decent Homes Standard", and said that local authorities had three options where they needed additional investment to achieve this objective. One of the options was to transfer their housing stock to a Registered Social Landlord (“an RSL”).

[4]DDC wished to transfer its stock of council housing and garages to DDH, a specially formed RSL, which was incorporated on 10 April 2006 as a company limited by guarantee and was registered as a charity on 21 September 2007. In the run-up to the Contract, the newly formed DDH was managed by a board comprising 4 councillors from DDC, 4 independent directors, 3 tenants and one co-optee.

[5]Alongside the transfer of DDC's housing stock, DDC agreed also to transfer its housing department staff to DDH. The staff were members of the section of the Local Government Pension Scheme ("LGPS") administered by Northamptonshire County Council ("NCC"). It was part of the arrangement between DDC and DDH that transferring staff should remain members of LGPS and that DDH should become a participating employer in that scheme. In common with many pension schemes, the part referable to the transferring employees was at that time under-funded. Actuarial estimates revealed that a payment of some £2.4 million was necessary to make up the deficit. It is common ground between the parties that DDC bore the primary responsibility to make up the deficit, and that it was envisaged that, going forward, DDH would be embarking upon its new activities with a fully funded pension scheme.

[6]There were complicated negotiations concerning the calculation of the price that DDH would pay DDC. These involved a number of elements. One was a fund called the "VAT shelter" expected to amount to some £8.4 million, over a period of some 10 years from the date of the intended contract, that was to be generated by VAT concessions on the upgrading works that DDH would, in due course, undertake. So far as concerns the pension deficit, it was a matter for negotiation and agreement when or how it was to be paid.

[7]As a shell company, limited by guarantee, and an RSL, DDH’s negotiating latitude was constrained by Government regulation and the requirements of its funders, the Royal Bank of Scotland Plc (“RBS”). Throughout the process DDH was preparing a business plan to show what it would receive by way of funding and what it would spend. There were numerous incarnations of the business plan, which was an evolving document as the negotiations continued. DDH never shared its business plan with DDC, but repeatedly asserted that the business plan could only support payments of particular amounts. DDH could only sensibly agree to make payments that it was funded to make. Thus, any payment it contracted for had either to be in its business plan, as being financed by its funders RBS, or had to be met from some other defined source. The only possible such source discussed in the negotiations was the VAT shelter. The intended VAT shelter was, as I have said, estimated to yield some £8.4 million over a period of some 10 years from the date of the intended contract, but that figure was only an estimate, and was known to be subject to risks, because the rate of VAT could change and Government regulations affecting VAT could also change.

[8]The drafting of the Contract took place in parallel with the negotiation of the commercial terms. Those responsible for the former were generally only peripherally involved with the latter and vice versa.

[9]In June 2007 Mr Philip Heath, of DDC’s solicitors, Cobbetts, sent the first draft of the Contract to Ms Carol Matthews, of DDH’s solicitors, Wright Hassall LLP. It contained a draft clause 14.11.2 that provided for DDC to use all reasonable endeavours to procure that the accrued benefits of transferring employees were fully funded at the date of completion.

[10]A revised Memorandum of Understanding signed on 2 July 2007 provided that: “Any pension under-funding will be met by the Council at the point of transfer, though this may be through a reduction in the price paid".

[11]On 7 September 2007 Mr Brian Roebuck, who was acting for DDH in the negotiations and played a central role in them, sent Mr Ken Bruno of DDC two proposals to resolve the impasse that the negotiations had then reached.

[12]On 20 September 2007 Mr Bruno prepared a counter-proposal from DDC to DDH referred to as “Version 1”. It stated, among other things, under the heading “Context” that “DDChas a liability to cover £2.4M pensions deficit”. Under the heading “Proposal” it said in paragraph 3:

“DDC proposes that DDH pays the pension fund deficit by a reduction in the purchase price of £2.4M which is then refunded to DDC as a top-slice from the VAT shelter”

[13]Mr Bruno understood that to mean that the pension deficit would be a deduction from the valuation, and would be paid by DDH to NCC, and that £2.4 million would be top-sliced from the VAT shelter to DDC to represent DDH's share of the deficit.

[14]Version 1 was passed to Ms Hayley Davies of DDH on 20 September 2007. Later on that day a DDH board meeting took place, which was attended by 10 directors and 10 advisers, the latter group including Ms Matthews, Mr Nigel Page of PriceWaterhouseCoopers, Ms Davies, Ms Lindsay Williams, DDH’s chief executive, and Mr Roebuck. Ms Davies handed Mr Roebuck a copy of Version 1 before the start of the meeting. He looked briefly at it, and told her that he did not think the numbers would work. The Judge found that Mr Roebuck immediately understood Version 1 to be saying that DDH would pay the pension deficit in addition to allowing a further £2.4 million by way of top slice to DDC. Mr Roebuck decided, however, during the board meeting to construe Version 1 as meaning that DDH would not have to pay the pension deficit. He announced at the end of the meeting that he thought that Mr Bruno's latest proposal was workable. Each of Ms Davies, Ms Williams and Ms Elaine Bradbury, the chair of DDH, derived their understanding of Version 1 from Mr Roebuck. They all shared his stated understanding.

[15]On 21 September 2007 Mr Bruno telephoned Ms Davies to ask what Mr Roebuck's reaction had been to Version 1. Ms Davies told Mr Bruno that Mr Roebuck thought that DDH might be able to agree the proposal, subject to some adjustment on set-up costs. Mr Bruno, from that moment on, proceeded on the basis that an agreement in principle had been reached and that his proposal had been agreed. The Judge found that Mr Roebuck knew from 20 September 2007 onwards that Version 1 could be read in two ways and that Mr Bruno had intended it to be read as requiring DDH to pay the pension deficit.

[16]On 3 October 2007 there was a page turning session to go through the latest (fourth) draft of the Contract that had undergone significant amendment since the original draft of June 2007. That meeting was attended by, among others, Mr Bruno, Mr Mark Longhill of DDC’s advisers Tribal Consulting, and DDC's solicitors, Mr Heath and Ms Elizabeth Hargreaves, and, on the part of DDH, by Ms Williams and DDH's solicitor, Ms Matthews. The draft had, by that time, been commented upon by both parties and by Ms Ruth Snell of Addleshaws, the solicitors acting for RBS. There was a discussion about Ms Snell's suggested amendments to clause 14.11. Ms Snell had suggested that clause 14.11.2 (which ultimately became clause 14.10.2 in the Contract) should be further amended so as to provide expressly that DDC should "make payments" to NCC as were necessary to ensure that the pension fund for the transferring employees was fully funded up to the date of completion based on the actuarial valuation. A further provision was included in draft clause 14.11.2 to make clear that there should be no liability on DDH to make any contributions to the pension scheme in relation to accrued benefits for transferring employees up to the date of completion. Neither Mr Bruno nor Mr Heath objected to the inclusion of this provision. The Judge found that Mr Bruno did not understand that this provision was, even possibly, inconsistent with his understanding of Version 1, even though he did think at that stage that his proposal had been agreed in principle by DDH. Mr Bruno was also involved on this occasion in a discussion about whether there should be a claw back of the pension deficit payment if it turned out that it was less than had been paid. Even that did not make Mr Bruno realise that the draft Contract envisaged that DDC would pay the deficit. His understanding was that DDH would be paying the deficit, even though the 'liability' for the deficit was DDC's, and that the responsibility for it was being split 50/50 with DDH, which was why he did not think there needed to be a claw back mechanism. Whatever the reason, Mr Bruno was oblivious to the reality that most of the others present at this meeting thought DDC was to pay the deficit and the draft under discussion was drafted on that basis.

[17]Although a DDC transfer team meeting took place in the afternoon of 3 October 2007, attended by Ms Judith Gregory, Mr Bruno and Mr Longhill, and Mr Heath and Ms Hargreaves of Cobbetts, at which Mr Longhill mentioned that DDH was to pay the pension deficit, DDC's solicitors never came to understand that this was the case.

[18]Also on 3 October 2007 Ms Hargreaves emailed Mr Bruno the fifth draft of the Contract, which she had revised pursuant to the 3 October 2007 page turning meeting. The draft included clause 14.11.2 proposed by Ms Snell. Mr Bruno did not make any adverse comment on that drafting.

[19]On 5 October 2007 Mr Page sent Tribal Consulting an e-mail in which he said, among other things, that:

“DDH is to pay £2.4 million to the pension fund to cover the deficit on transferring staff pensions” and that the first £2.4 million of the VAT shelter: “is to be paid to DDC (to compensate it for the reduction in the valuation that allowed the pension deficit to be paid by DDH)”

. Mr Page sent a copy of that e-mail to Mr Roebuck. That e-mail and another sent by him to Mr Roebuck on that day made very clear Mr Page’s understanding that Version 1 envisaged that DDH would pay the £2.4 million pension deficit.

[20]On 9 October 2007 Ms Gregory reported to the corporate board of DDC that it had been agreed that the pension deficit would be deducted from the purchase price and that DDH would then make the payment to NCC.

[21]On 8 or 9 October 2007 Mr Bruno sent Ms Davies a copy of Mr Page's 5 October 2007 e-mail.

[22]On 9 October 2007 Mr Bruno sent Ms Davies version 2 of the 20 September 2007 proposal ("Version 2"). Version 2 was in substantially the same form as Version 1, save that it was on DDC notepaper, and was headed “Proposal on Valuation” and was prefaced with an introduction. On the same day Ms Davies sent Mr Roebuck Version 2 and Mr Page’s 5 October 2007 e-mail.

[23]On 10 October 2007 Mr Page presented some slides explaining the transaction at a seminar for DDH's board. The slides had been approved by Mr Roebuck. The Judge accepted the evidence of those who attended the board seminar that they did not understand that the slides were saying that DDH was to pay the deficit.

[24]On 11 October 2007 Ms Davies secured the signatures of both parties to a further version of the 20 September proposal, called “the Valuation". It was on a single sheet of joint notepaper of DDC and DDH and was signed by Ms Gregory for DDC and by Ms Davies for DDH. It included only the tables and figures from Version 1, with the introductory words: “This confirms that [DDC] and [DDH] have agreed the following outline valuation", and concluded: "Both DDC and DDH are committed for both parties without causing any detriment to the other and will ask both PwC and Tribal to now work together creatively on this agreement to resolve the outstanding elements such as minor asset values and right to buy receipts". It is common ground that the Valuation was not intended to be legally binding.

[25]On 11 October 2007 Mr Roebuck presented a paper to the DDH board seeking the board's formal approval of the Valuation. He intended to, and did, convey to the board that DDH would not be paying the pension deficit. The DDH board duly agreed the valuation and the proposals relating to the VAT shelter set out in Mr Roebuck's report.

[26]On 29 October 2007 Ms Hargreaves sent Mr Bruno a further draft of clause 14 of the intended Contract, showing substantially the same provisions in clause 14.11.2 as he had previously seen on 3 and 5 October 2007. Ms Hargreaves specifically asked Mr Bruno to confirm that the clauses were satisfactory. Again, Mr Bruno does not seem to have understood that the clause was possibly inconsistent with his understanding of the Valuation and of the 20 September proposal.

[27]On 30 October 2007 a further page-turning telephone meeting took place between Ms Matthews, Mr Heath, Ms Williams and Ms Davies. Neither Mr Bruno nor Ms Gregory attended for DDC. Once again, the draft of clause 14.11.2 was discussed and agreed by Mr Heath.

[28]On 31 October 2007 Ms Matthews and Mr Roebuck, together with Ms Snell and Mr Alex Gipson of RBS ("Mr Gipson") spoke on the telephone. Mr Gipson suggested the insertion of a new clause in the draft Contract requiring DDC to make the deficit payment to NCC on completion.

[29]From this moment, until the execution of the Contract, there are a complex series of communications, which, for clarity, I shall take thematically rather than strictly chronologically.

[30]Mr Gipson’s suggestion of a new clause making DDC liable to make the deficit payment of £2.4 million to NCC was followed up on 1 November 2007 in a telephone conversation between Ms Matthews of Wright Hassall, Mr Heath of Cobbetts and Ms Snell of Addleshaws. Mr Heath agreed that such a clause could go in, and, as a result, Ms Snell's colleague drafted clause 14.11.3 (which became clause 14.10.3 in the Contract), making it clear that DDC should pay the pension deficit within 5 days of completion.

[31]On 1 November 2007 Ms Snell emailed the draft clause 14.11, including the new clause 14.11.3, to Ms Hargreaves and Mr Heath, and copied it to Ms Matthews. The draft clause 14.11.3 was in the following terms which, it is common ground, were unambiguous: “In relation to the Transferring Employees the Council [DDC] shall make a payment of £2.4 million pounds (being an amount representing the deficit in the funding of the Transferring Employees pension benefits up until the Completion Date) within five business days of the Completion Date"

[32]Ms Hargreaves emailed Mr Bruno asking whether the enclosed tracked amendments to clause 14.11 (including the new draft clause 14.11.3) were acceptable, attaching the e-mail from Ms Snell saying that she understood that DDC was to get a top slice of £2.4 million from the VAT shelter and that "the provisions in the pensions clause deal with the payment of that sum into the pension fund".

[33]Less than two hours later on 1 November 2007 Mr Bruno emailed Ms Hargreaves saying "[s]ubject to you or Philip [Heath] telling me any different, 14.11 looks OK to me".

[34]Ms Hargreaves then returned the draft contract to Ms Matthews with the new clause 14.11.3 included.

[35]On the evening of 1 November 2007 a further DDH board meeting took place, this time attended by Mr Page and Ms Matthews. The Board was told by Ms Matthews that DDC would be paying the £2.4 million, and received a report from Grant Thornton validating DDH's business plan (which made no provision for the payment of the deficit by DDH).

[36]At the same time as those communications were taking place, there were other exchanges between NCC and the representatives of DDC and DDH respectively, which, so far as DDH was concerned, were consistent with the draft clause 14.11.3 (the future 14.10.3) but, so far as DDC was concerned, were inconsistent with that clause and consistent with an intention or belief that DDH would be paying the £2.4 million deficit.

[37]Thus, in response to an e-mail on 31st October 2007 from Ms Sue Merrett of NCC to Mr Bruno, copied to Mr Ian Gibbon of NCC, saying that she had spoken to Wright Hassall about the liability of £2.4 million, and asking how it would be paid, Mr Bruno emailed: "This is to be paid by [DDH]. As such I am not party to the detail in terms of how, when etc. Were Wright Hassall not able to furnish you with this information?".

[38]In response to an e-mail on 1 November 2007 from Ms Tina Patel of Wright Hassall to Mr Gibbon asking him to confirm that the "contribution rate based on transferring employees will be fully funded at completion", he replied by e-mail on 2 November 2007, copied to Mr Bruno and Ms Merrett, saying that he had been advised by DDC that "any under funding at the time of the commencement of the contract will be paid by [DDH]".

[39]At some point on 2 November 2007 Ms Matthews wrote to Mr Gibbon saying that she had provided in the Contract that the estimated under-funding of £2.4 million was to be paid to NCC by DDC.

[40]Mr Bruno forwarded Mr Gibbon's e-mail to Mr Heath and Ms Hargreaves on the same day. Notwithstanding the clear terms of draft clause 14.11.3, to which they had just agreed, DDC's solicitors still seem not to have registered that DDC thought that DDH was paying the deficit.

[41]On 2 November 2007 Ms Matthews and Ms Snell spoke again with Mr Heath, as a result of which additional words of clarification were added to clause 14.11.3.

[42]The Contract was duly completed on 5 November 2007, but not before final price negotiations had taken place which resulted in DDH paying an additional £80,000 in respect of the Housing Revenue Account. Clause 14.10 provided as follows, so far as relevant: "14.10.1 [DDH] shall procure that those of the Transferring Employees who are members of the Superannuation Scheme as at the Completion Date …will be able: (a) to continue to be members of or eligible to be members of … the Superannuation Scheme by [DDH's] gaining and maintaining admission body status of that scheme … 14.10.2 In relation to the Transferring Employees and the Support Service Employees [DDC] shall make payments to the appropriate administering authority or the administrators of the Superannuation Scheme for immediate credit to the Scheme as are necessary to ensure that all liabilities in respect of the benefits accrued by (1) the Transferring Employees up to the Completion Date and (2) the Support Services Employees up to the Transfer Date are fully funded based upon the actuarial assumptions used for the 2007 actuarial valuation. For the avoidance of doubt, this means funded to the extent necessary to ensure that there shall be no liability on [DDH] to make any contributions to the Superannuation Scheme in relation to the cost of funding the accrued benefits in relation to the period of time up to the Completion Date in respect of the Transferring Employees (and the Transfer Date in respect of the Support Services Employees) and until such payments are made by [DDC] shall indemnify [DDH] against all costs proceedings damages expenses and Support Services Employees' liabilities and claims of whatever nature in respect of the Transferring Employees and the Support Service Employees said accrued benefits. [DDC] shall be responsible for corresponding with the Superannuation Scheme's actuary in relation to the certification by the Superannuation Scheme's actuary as is mentioned above and shall bear the costs incurred in relation to the obtaining of the said actuarial valuation. 14.10.3 Without prejudice to the provisions of clause 14.10.2, in relation to the Transferring Employees the Council [DDC] shall make a payment of £2.4 million pounds (being the amount calculated by Mercers as representing the deficit in the funding of the Transferring Employees pension benefits up until the Completion Date) within five business days of the Completion Date".

[43]It was not until 29 November 2007 that DDC alerted DDH to the problem.

The claim

[44]DDC issued proceedings on 3 June 2008. The claim was for rectification or, alternatively, damages for breach of a duty of care in tort for failure by DDH to alert DDC to a material change in the terms of the agreement. As I have said, the claim for rectification was put on the grounds of a common mistake or, alternatively, unilateral mistake. In relation to the latter claim, it was alleged that DDC intended that the pension deficit should be paid by DDH and believed that this had been agreed with DDH and that the Contract correctly reflected that intention and agreement; DDH, by at least Ms Davies and/or Mr Roebuck, knew that DDC so intended, but did not draw to DDC’s attention the fact that the Contract did not accord with DDC’s intention and belief; the error benefited DDH; and so it would be unconscionable for DDH to resist rectification of the Contract so as to bring it into line with DDC’s intention and belief.

[45]The Defence was, in very brief outline, that neither clause 14.10.2 nor clause 14.10.3 was included in error. Rather, they represented the true agreement between the parties in respect of the payment of the pension deficit. They represented the only agreement between the parties, as no earlier agreement had been reached that those clauses failed to reflect. As to unilateral mistake, DDH believed and intended throughout the negotiations with DDC that the discharge of the pension deficit was an obligation that rested solely with DDC; and DDH did not know, and had no reason to know or to believe, that DDC held a different intention or belief.

[46]Generally, the Defence alleged, DDH was not responsible for any mistake that DDC may have made, which was the result of one or more of (1) the incompetence of DDC’s solicitors in failing to understand what the words in what became clause 14.10.3 said, (2) the incompetence of DDC’s solicitors in failing to advise DDC as to the effect of those words, and (3) the incompetence of Mr Bruno in expressing agreement to that clause. Further, it was alleged that the claim to rectify clause 14.10.3 could not succeed because DDC’s obligation would still remain by reason of clause 14.10.2 and the two sub-clauses would then be incompatible.

[47]The Defence also denied that the relationship between the parties gave rise to a duty of care as alleged, or if there any duty of care, that DDH was in breach of it.

The judgment

[48]The judgment is substantial, detailed and conscientious. I propose to summarise its principal elements relatively briefly.

[49]The Judge considered that the language used by Mr Bruno in Version 1 could be read in two ways. The Judge accepted, however, that Mr Bruno intended that DDH should pay the pension fund deficit to NCC, and that, when it came to the final version of the draft Contract, he simply misunderstood what clause 14.10 was about. In broad terms, the evidence of the witnesses for DDC was that they believed that DDH was to pay the £2.4 million pension deficit to NCC.

[50]As regards DDH’s witnesses, the Judge found ([95]) Mr Roebuck to be an unsatisfactory witness, whose conduct in relation to the transaction fell short of proper professional standards. The Judge rejected his evidence in several important respects. The Judge was satisfied that Mr Roebuck knew from very shortly after he received Version 1 that Mr Bruno most probably intended by it that DDH should pay the pension deficit, but that, on one analysis of the document, it did not make that clear. The Judge suspected that Mr Roebuck persuaded himself during the course of the 20 September 2007 DDH board meeting, whilst he was studying Version 1, that his reading of it was sustainable, even correct. The Judge considered, however, that Mr Roebuck at that stage or thereafter should have raised the matter with Mr Bruno or Ms Gregory to ensure that the problem he had identified was resolved. Instead, in the words of the Judge:

“Mr Roebuck decided that he would, in effect, say 'snap', arguing that the document meant that DDC, not DDH, would make the deficit payment, and intending to take advantage of the drafting mistake that Mr Roebuck knew that Mr Bruno had made.”

[51]The other witnesses for DDH also gave evidence, which was accepted by the Judge that their understanding was that DDH had not agreed to pay the pension deficit.

[52]The Judge said ([106]) that the law on both common mistake and unilateral mistake was not much in dispute. He said that the requirements for rectification for common mistake were authoritatively stated by Gibson LJ at [33] in Swainland Builders Ltd v. Freehold Properties Ltd

[2002] 2 EGLR 71

at 74 as follows:- "The party seeking rectification must show that:(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2) there was an outward expression of accord;

(3) the intention continued at the time of the execution of the instrument sought to be rectified;

(4) by mistake, the instrument did not reflect that common intention".

[53]The Judge observed ([108]) that, in addition to those requirements, it was accepted on both sides that, for rectification to be appropriate, there must be convincing proof that the concluded instrument does not represent the common intention of the parties: Crane v. Hegeman-Harris Co

[1939] 1 All ER 662

, 664 (Simonds J).

[54]The Judge then quoted the following passages in the speech of Lord Hoffmann in Chartbrook on the question of what is necessary for and relevant to establishing a common continuing intention and an outward expression of accord:

"60 Now that it has been established that rectification is also available when there was no binding antecedent agreement but the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified, it would be anomalous if the "common continuing intention" were to be an objective fact if it amounted to an enforceable contract but a subjective belief if it did not. On the contrary, the authorities suggest that in both cases the question is what an objective observer would have thought the intentions of the parties to be. Perhaps the clearest statement is by Denning LJ in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450, 461: "

Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties- into their intentions - any more than you do in the formation of any other contract. You look at their outward acts, that is, at what they said or wrote to one another in coming to their agreement, and then compare it with the document which they have signed. If you can predicate with certainty what their contract was, and that it is, by a common mistake, wrongly expressed in the document, then you rectify the document; but nothing less will suffice." 61 Likewise in Etablissements Georges et Paul Levy v Adderley Navigation Co Panama SA (The Olympic Pride)

[1980] 2 Lloyd's Rep 67

, 72, Mustill J said:

"The prior transaction may consist either of a concluded agreement or of a continuing common intention. In the latter event, the intention must have been objectively manifested. It is the words and acts of the parties demonstrating their intention, not the inward thoughts of the parties, which matter." 62 An example of the application of this objective ascertainment of the terms of the prior transaction is George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive (1950) 84 Ll L Rep 97 in which a landlord negotiating a new lease proposed to the tenant that "the terms and conditions contained in the present lease to be embodied in the new lease where applicable"

. The tenant accepted this offer, but the new lease as executed made the tenant liable for repairs which under the old lease had been the responsibility of the landlord. In answer to a claim for rectification, the landlord said that the new lease was in accordance with what he had understood to be the effect of his offer. The Court of Appeal said that this was irrelevant. What mattered was the objective meaning of what the landlord had written. Evershed MR said, at p 107:

"If the defendants ... did misconstrue [the letter] that is unfortunate for them, but at least they cannot be heard to say that their letter was intended to mean anything other than that which the words convey to the reader as a piece of ordinary English." 63 As against these authorities, there are two cases upon which Mr Miles relied. The first is Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561, in which the Court of Appeal by a majority (Glidewell LJ and Hobhouse LJ, Hoffmann LJ dissenting) refused to rectify an agreement which was alleged not to be in accordance with what had previously been agreed in summary heads of agreement. Hobhouse LJ, who gave the majority judgment, affirmed the decision of Saville J, who said that the defendants had failed to establish that there was a prior common agreement or intention in terms that the court could ascertain or (which is probably another way of saying the same thing) that the definitive agreement failed to reflect that prior agreement. In other words, the language of the heads of agreement was too uncertain to satisfy the requirement stated by Denning LJ in Rose's case [1953] 2 QB 450, 461 that one should be able to "predicate with certainty what their contract was"

. Hobhouse LJ noted, at p 571, that Saville J "did not base himself upon any consideration of the evidence as to the actual state of mind of the parties" and in my opinion the case lends no support to the view that a party must be mistaken as to whether the document reflects what he subjectively believes the agreement to have been. 64 The other case is the decision of Laddie J in Cambridge Antibody Technology Ltd v Abbott Biotechnology Ltd

[2005] FSR 590

, in which he rejected a submission that evidence of the subjective state of mind of one of the parties contained in statements which had not been communicated to the other party ("crossed the line") was inadmissible. In my opinion, Laddie J was quite right not to exclude such evidence, but that is not inconsistent with an objective approach to what the terms of the prior consensus were. Unless itself a binding contract, the prior consensus is, by definition, not contained in a document which the parties have agreed is to be the sole memorial of their agreement. It may be oral or in writing and, even if the latter, subject to later variation. In such a case, if I may quote what I said in Carmichael v National Power plc

[1999] 1 WLR 2042

, 2050-2051: "The evidence of a party as to what terms he understood to have been agreed is some evidence tending to show that those terms, in an objective sense, were agreed. Of course the tribunal may reject such evidence and conclude that the party misunderstood the effect of what was being said and done." 65 In a case in which the prior consensus was based wholly or in part on oral exchanges or conduct, such evidence may be significant. A party may have had a clear understanding of what was agreed without necessarily being able to remember the precise conversation or action which gave rise to that belief. Evidence of subsequent conduct may also have some evidential value. On the other hand, where the prior consensus is expressed entirely in writing, (as in George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive 84 Ll L Rep 97) such evidence is likely to carry very little weight. But I do not think that it is inadmissible".

[55]The Judge continued ([111]) that it was therefore clear, and accepted on both sides, that, in looking for the common intention of the parties, one is mostly concerned with what, objectively, one would regard as that intention from the way the parties expressed themselves. He said that, whilst the parties' subjective intentions may in some cases be relevant to establishing what objectively the parties are to be taken as having intended, such evidence will be of lesser weight where, as here, the parties' supposed prior consensus is contained in documents.

[56]Turning to the requirements for unilateral mistake, the Judge said ([112]) that these were reiterated by the Court of Appeal in George Wimpey UK Ltd v. V I Construction Ltd

[2005] EWCA Civ 77

at [38], approving the following statement of the principle by Buckley LJ in Thomas Bates Ltd v. Wyndham's (Lingerie) Ltd

[1981] 1 WLR 505

at page 515H-516B:

“For this doctrine - that is to say the doctrine of A. Roberts & Co. Ltd v. Leicestershire County Council - to apply I think it must be shown: first, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist rectification to give effect to A's intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake.”

[57]The Judge then turned to the question whether there was ever a common intention that DDH would pay £2.4 million to NCC in respect of the pension deficit. As to subjective intention, he accepted ([114]) that Mr Bruno and DDC's representatives always thought that Version 1 and the Valuation meant that DDH would pay the pension deficit to NCC, and that they were reinforced in that understanding when they received Mr Page's 5 October 2007 e-mail to Tribal Consulting confirming that position.

[58]The Judge also found ([115]), however, that none of DDH's representatives (with the exception of Mr Page) thought that Version 1 or the Valuation meant that DDH would have to pay £2.4 million to NCC towards the pension deficit. He was quite satisfied that DDH's board never intended that DDH would pay the pension deficit. It could not have done so without having arranged funding to make the payment and without it being included in its business plan. The Judge said that the position of Mr Roebuck, whose knowledge was acknowledged to be that of DDH, was however more complex.

[59]He found ([116]) that Mr Roebuck was fully aware from 20 September 2007, and anyway from 5 October 2007, that DDC understood Version 1 as requiring DDH actually to pay the pension deficit (just as Mr Page's e-mail told Tribal Consulting that it would). Mr Roebuck, nonetheless, proceeded to tell everyone on DDH's side the reverse, namely that DDC would pay the pension deficit. The Judge was of the view ([118]) that Mr Roebuck engineered a situation in which DDH's board and its solicitors were guided into thinking, from 10 October 2007 onwards, that the commercial deal agreed between the parties involved DDC, not DDH, paying the pension deficit. The Judge thought that Mr Roebuck, who had himself read Version 1 both ways when he first saw it on 20 September 2007, most probably thought that this interpretation of Version 1 and the Valuation was arguable or sustainable, even though he was fully aware of what others thought, and of the ambiguity.

[60]On the basis, as accepted in DDH’s amended Defence, that Mr Roebuck’s knowledge could be attributed to DDH, there was not a common intention that DDH would pay £2.4 million to NCC in respect of the pension deficit, because Mr Roebuck knew of the ambiguity and did not intend that DDH should pay it.

[61]The Judge then went on to consider, in accordance with Chartbrook, the objective position, that is to say what the 20 September proposal and the Valuation actually meant. Having repeated and set out the two possible ways of viewing the third proposal in Version 1, he concluded that DDC's construction required far less violence to the words used, and was the more natural construction.

[62]The Judge observed ([125]) that Mr Page's 5 October e-mail was valuable in showing what, objectively viewed, the parties intended by their bargain, since it crossed the line, and was never contradicted by Mr Roebuck or anyone on DDH's side. It confirmed the construction that the Judge had anyway arrived at.

[63]The Judge concluded ([128]), accordingly, that there was sufficiently convincing proof that, objectively viewed, the parties had a common intention that DDH would pay £2.4 million to NCC in respect of the pension deficit from the time when DDH accepted DDC's 20 September proposal, which occurred at the latest on 11 October 2007 when Ms Gregory and Ms Davies signed the Valuation. It would have been pretty obvious to an informed observer what Mr Bruno meant by Version 1 and the Valuation, and the only people who ever studied the offer reached that conclusion. Even Mr Roebuck did so at first. The opposite conclusion was only reached by those that had the document explained to them by Mr Roebuck after he had made up his mind that Version 1 could be construed the way he wanted to construe it.

[64]The Judge then turned to the question whether that common intention continued until execution of the Contract. He said ([132]) that the question under that issue was, in a nutshell, whether the exchange of e-mails concerning the introduction of (what became) clause 14.10.3 was enough to change the common intention of the parties that DDH was to pay the pension deficit.

[65]On that issue, he found in favour of DDH that there had been such a change. He said ([133]) that, objectively viewed, the exchange of e-mails made it perfectly clear that the parties had agreed that DDC, and not DDH, was to pay the pension deficit – not only at some stage – possibly from the VAT shelter, but within 5 days of the completion of the Transfer Contract. His reasoning, which is central to the issues on this appeal, was as follows: “133. … Mr Croxford [leading counsel for DDC]) may be right in saying that, subjectively, there was no reason to think that either of their intentions had changed – as I have described them above. The commercial negotiators were not involved directly in the debate, and the reason for the new clause was purely to give the funders comfort, and was not intended to effect a change in the deal. But the parties are bound by the actions of their properly authorised solicitors. They cannot be heard to say that they did not properly instruct them. Objectively viewed, once Cobbetts had approved clause 14.10.3, they had changed DDC's objectively viewed intentions, whatever DDC might itself have thought. I should say that I have no doubt that Mr Bruno and DDC's other representatives did not, subjectively, understand that DDC's intention had changed. They simply made a mistake in failing properly to read and understand the new provision. Mr Heath and Ms Hargreaves may have understood it, but it appears that DDC may have failed to get through to them the commercial deal as DDC understood it to be. Thus the normal safeguards that are in place in such a situation were defective, because DDC's solicitors were seemingly out of the commercial negotiation loop.134. It is true that DDH did not point out to DDC that the deal was changing, but for the purpose of ascertaining continuing common intention, that does not matter. Nobody looking objectively at the exchange of emails on 1st November 2007 could possibly reach any conclusion, other than that the parties had by their solicitors then agreed that DDC would be paying the pension deficit.

135. For this reason, in my judgment, the claim to rectify the Transfer Contract on the grounds of common mistake must fail, since the crucial ingredient is missing. The common intention of the parties did not continue beyond the 1st November 2007. By the date of the Transfer Contract, the parties are to be taken as having intended to include clause 14.10.3 which unambiguously provides that DDC should pay the pension deficit to NCC.

[66]The Judge then went on to express the view ([136] to [140]) that the provisions of clause 14.10.2 of the Contract were entirely at odds with clause 14.10.3 and DDC wished it to be rectified, so that rectification of clause 14.10.3 alone would not result in the Contract reflecting the prior objective agreement between the parties, even had he found the necessary continuing intention to justify rectification for common mistake.

[67]The Judge then turned to rectification for unilateral mistake. He posed what he described ([142]) as “the crucial issue in the case” as whether DDH knew that DDC believed and intended that DDH would make the deficit payment of £2.4 million such that it would be unconscionable to refuse rectification. On that point, the Judge’s conclusions were contained in the following passages in his judgment: “150. DDC says that none of the lawyers or anyone else understood that the agreement of clause 14.10.3 was a change in the bargain agreed between the parties. This is, of course, true. The solicitors on both sides always thought DDC was paying the deficit, because clause 14.10.2 so provided, and clause 14.10.3 was only introduced out of an abundance of caution by RBS. Mr Bruno and Ms Gregory never understood that there was a problem, and, surprisingly perhaps, did not see clause 14.10.3 as changing anything. Mr Roebuck may have seen RBS's proposal as his redemption, but DDH saw it as in line with the existing deal. As it seems to me, however, this misses the point. The question is whether DDH was aware of DDC's mistake, and failed to draw it to its attention. On any basis, the proposal of clause 14.10.3 must have drawn to DDC's attention that DDH wanted DDC to pay the deficit. Can it really be said that, after that, DDH knew that DDC was mistaken? The fact that the proposed clause was not seen as a change is a function of the underlying mistake and the failure by DDC's representatives properly to read the contractual provisions. But it seems to me that that is DDC's own fault. The proposal of clause 14.10.3 was a clear exposition of what DDH thought the Transfer Contract was to achieve, and DDC failed to understand that at its peril. 151. Secondly, DDC argues that the DDC negotiators (Ms Gregory and Mr Bruno) are to be regarded as separate from the solicitors (Mr Heath and Ms Hargreaves). It was not enough, says Mr Croxford, for DDH's solicitors to raise clause 14.10.3 with Cobbetts. Mr Roebuck had to ring Mr Bruno or Ms Gregory to alert them to the problem. This submission cannot, in my judgment, succeed. When commercial parties (a term I use in this context to include the Claimant Council) use commercial solicitors, they cannot ignore what they are told. The relationship between the solicitor and the client is a matter for the client, not for the counterparty to the transaction. Mr Roebuck was entitled to assume, unless he is shown to have known something different, that Cobbetts were properly instructed and properly informed their client. DDC did not establish that Mr Roebuck knew either that Cobbetts did not communicate properly with DDC, or that Mr Roebuck knew that Mr Bruno had not properly understood clause 14.10.3 as being contrary to his previous understanding. It is true that Mr Roebuck probably ought, for his own peace of his professional mind, to have picked up the telephone to Mr Bruno to make sure that this problem was brought to attention. But that is not the question with which I am here concerned. The difference between the commercial negotiators and the solicitors on DDC's side does not allow DDC to ignore what its solicitors had agreed on its behalf, and what its solicitors had been alerted to by the proposal of clause 14.10.3. Moreover, as appears later, I do not think that the failure to telephone Mr Bruno was unconscionable, when Mr Roebuck was entitled to rely on DDC's solicitors' agreement.153. For these reasons, I do not think that either of the 2nd and 3rd requirements of unilateral mistake are made out here. By the date of execution of the Transfer Contract, it cannot be said that Mr Roebuck knew that DDC was still mistaken as to what the Transfer Contract provided, or even that DDC still mistakenly thought that DDH would pay the pension deficit. In these circumstances, DDH cannot be held to have failed to correct that mistake.

154. The fifth requirement does not, in these circumstances, require resolution. But I will deal with it briefly nonetheless. In the circumstances I have described in detail above, Mr Roebuck undoubtedly behaved inappropriately between 20th September and 31st October 2007. It is, however, impossible, in the light of my previous findings to hold that Mr Roebuck behaved improperly after 1st November 2007, once he knew that DDC had agreed clause 14.10.3. It is true that he may have wondered whether DDC, in the light of all the history, really had agreed to give away the point. It is true that he must have regarded himself as extremely lucky. It is true, as Mr Croxford argues, that he still knew about Mr Page's 5th October emails, but it seems to me that the court cannot assume misconduct, and an ill motivation of the kind alleged needs to be fully proved, because it is always more likely that people will behave properly than improperly. On the evidence before the court, it seems to me that Mr Roebuck was entitled to assume that DDC knew what it was doing and that it had changed its mind. It would have been an honourable course if he had checked that out by making personal contact with Ms Gregory or Mr Bruno, but the court is not concerned with honour, but with the satisfaction of specific requirements for unilateral mistake rectification. Those requirements are not established in this case, and Mr Roebuck did not, after 1st November 2007, behave either inequitably or unconscionably.

[68]The Judge then turned to DDC’s alternative claim for damages for breach of duty of care. He concluded ([163]) that DDH owed no duty of care of the kind pleaded by DDC. As I have said, there is no appeal by DDC on that point.

[69]The only other finding of the Judge, to which it is necessary to refer, is his conclusion ([165]) that, had DDH been asked to agree the reverse of clause 14.10.3, that is to say if it was required to pay the pension deficit within 5 days of completion, it would not have agreed. DDH could not have agreed to pay the deficit without funding within its business plan. Although such funding could have been found if it had been necessary, DDH had not embarked on the process of seeking to do so, and RBS would not have agreed to fund the project at all on the basis that £2.4 million might be available from what was described as 'fat' in the business plan. The Judge concluded ([166]) that, accordingly, had the Contract reflected what DDC intended, DDH would not have signed it on the 5 November 2007 or probably at all. Instead, the parties would have been thrown back into a renegotiation of the commercial terms of the deal.

The appeal

[70]So far as concerns the Judge’s analysis and conclusions on rectification for mutual mistake, DDC does not criticise the Judge’s statement of the legal principles. The central point advanced by Mr Ian Croxford QC in support of the appeal was that the Judge was wrong to find that, following the agreement reached between them no later than 11 October 2007 (judgment ([129]), the parties reached a new accord by virtue of the communications between them between 1 November and 5 November 2007. Mr Croxford submitted that the Judge treated the agreement on 1 November of DDC’s solicitors to the draft clause 14.10.3 as an “irrebutable presumption” of a new accord between the parties rather than examining whether there had actually been a change in the parties’ positions: judgment [133] and [134]. In that connection, he emphasised the following points. The negotiations between the parties as to the commercial deal were hard, and the transfer price was keenly argued between them: judgment [15] and [16]. DDC naturally wanted to obtain the best price it could for the transfer. The parties’ solicitors were not involved in the commercial negotiations: judgment [20], [49], [133] and [151]. Once agreement was reached on the commercial terms, as was the case by no later than 11 October 2007, the parties as public bodies wanted co-operation in the documentation of the commercial deal: judgment [25] and [37]. Clause 14.10.3 originated with Addleshaws, the solicitors for RBS. It was not the result of further negotiations between the parties. Nor was it put forward as a requirement of DDH’s lender. The solicitors for the parties were, at that stage, merely engaged in the task of documenting the commercial deal. No solicitor engaged in such an exercise would have engaged in re-negotiating such a fundamental part of the commercial deal. Nor, in fact, did DDC or its solicitors or NCC or its solicitors intend to change the commercial deal previously agreed: judgment [133] and [148]. On the Judge’s approach, however, the effect of the proffering of the new clause was an immediate surrender, without demur, by DDC. It made no commercial sense for DDC to accept the change, which would leave it substantially worse off. If DDH did not make the £2.4 million payment to NCC, it would receive net £1.2 million of value from DDC for nothing.

[71]Moreover, only two days before, on 29 October, DDH (with Mr Roebuck participating) had sent a list of outstanding issues, which provided for the payment of interest by DDC, and so indicated that the basis on which the parties were then proceeding was that DDH would pay the pension fund deficit. Further, on 2 November DDH’s solicitors were told in terms by NCC that DDC expected that DDH would be paying the £2.4 million estimated deficit. In the circumstances, there was no proper basis for the Judge to conclude that DDC, through Cobbetts, consented to the change, or that Mr Roebuck was entitled to assume any such consent. Mr Croxford submitted that the Judge’s approach takes the objective approach to rectification as laid down in Chartbrook too far and leaves no ground for rectification for mistake where the document of which rectification is sought has been drafted by solicitors. The Judge ought to have held that, making an objective assessment, the inclusion of clause 14.10.3 did not show that DDC had changed its contractual intention, but rather that DDC mistakenly failed to notice that the new clause did not reflect its contractual intention.

[72]So far as concerns unilateral mistake, DDC submits that the Judge made errors of both law and fact in reaching his conclusion that Mr Roebuck’s conduct and state of mind were not such as to entitle DDC to rectification. The Judge correctly found ([119]) that Mr Roebuck’s knowledge was that of DDH. The Judge did not, however, in considering Mr Roebuck’s knowledge, address the different states of mind capable of supporting a claim for rectification for unilateral mistake. They include the first three categories of knowledge described by Peter Gibson J in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA (Note)

[1993] 1 WLR 509

:(1) actual knowledge;

(2) wilfully shutting one’s eyes to the obvious; and

(3) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make. The Judge never specifically addressed categories (2) and (3) in relation to Mr Roebuck.

[73]DDC submits, moreover, that for the purposes of rectification for unilateral mistake the Judge wrongly approached the issue of knowledge on the basis of deemed or constructive knowledge, ascertained objectively, rather than actual knowledge, ascertained subjectively.

[74]Moreover, the Judge ’s conclusions in [151] and [154] of the judgment that Mr Roebuck was “entitled to rely on” DDC’s solicitors’ agreement to clause 14.10.3 and “entitled to assume … that Cobbetts were properly instructed and properly informed their client” and “entitled to assume that DDC knew what it was doing and that it had changed its mind” were plainly wrong because they were stated as principles of law, that is to say as an irrebuttable presumption, when the issue was one of fact, and because, as findings of fact, they were contrary to the evidence. The Judge himself found ([95]) Mr Roebuck to be an unsatisfactory witness; that his conduct in relation to the transaction fell short of proper professional standards; that ([154]) he acted inappropriately between 20 September 2007 and 31 October 2007; and that ([151] and [154]) Mr Roebuck “probably ought, for his own peace of his professional mind,” to have contacted Mr Bruno directly to draw his attention to the fact that that the proposed new clause was contrary to Mr Bruno’s previous understanding of the deal, and that Mr Roebuck “may have wondered whether DDC, in the light of all the history, really had agreed to give away the point”, and “he must have regarded himself as extremely lucky”.

[75]DDC submits that the Judge ought to have concluded that a change of mind by DDC about the payment of the £2.4 million, which had been distinctly negotiated and agreed, would have been so remarkable that good conscience required Mr. Roebuck to check with DDC that it had indeed changed its mind. DDC says that it was unconscionable merely to rely on the DDC’s lack of objection to the inclusion of the inconsistent clause 14.10.3. Far from being justified in assuming that DDC must have changed its mind, Mr. Roebuck must have assumed that DDC had failed to spot the true effect of clause 14.10.3 and was agreeing to it without understanding it. DDC maintains that, on any view, Mr Roebuck behaved unconscionably and the requirements of Baden categories (1) and (2) were satisfied.

[76]DDC also criticises the Judge’s statement ([150]) that DDC’s mistake was its own fault as a result of the failure of its representatives properly to read the contractual provisions. DDC submits that, in a claim for rectification based on mistake, it is irrelevant that the claimant ought not to have made the mistake.

[77]In respect of rectification for both mutual and unilateral mistake, DDC criticises the conclusion of the Judge ([140]) that rectification of clause 14.10.3 alone, leaving clause 14.10.2 as it stands, would not result in the Contract correctly reflecting DDC’s intention. DDC’s argument on this point is as follows. The context to the parties’ agreement, and the initial starting position, was that DDC had a liability to fund fully the deficit in the pension scheme, not immediately, but over time and according to whatever funding arrangements were put in place by NCC, the administrators of the scheme. As part of the agreement with DDH, it was agreed that the portion of the deficit referable to the transferring staff would be made good at the date of transfer. In order to fulfil this commitment to fund fully the benefits of transferring staff as at the transfer date, the deficit attributable to their benefits (i.e. the shortfall between the value of those liabilities and available assets) had to be quantified. That deficit was understood, following actuarial advice, to be estimated at £2.4 million. It was recognised, however, that any valuation of a pension scheme deficit is no more than an estimate since it cannot be conclusively calculated until benefits are fully paid or fully secured by the purchase of appropriate insurance policies, and until then the value of the liabilities and the underlying assets will be likely to fluctuate. The risk of any subsequent increase in the cost of funding the (pre-transfer) pension benefits of transferring staff remained with DDC: if it later transpired (whether as a result of poor investment performance or increased cost of annuities) that more than the initial £2.4 million was in fact required to fund fully the pre-transfer pension benefits of the transferring staff, DDC would have to satisfy that liability. The Judge was wrong, therefore, to equate the payment of £2.4 million under clause 14.10.3 with the sum necessary to fund fully pre-transfer pension liabilities under 14.10.2. The payment of £2.4 million under clause 14.10.3 was in effect a payment on account of the potentially greater, as yet unquantified and unquantifiable, liability in clause 14.10.2. The obligation in clause 14.10.3 to pay £2.4 million was expressly stated to be “without prejudice to”, that is to say to leave unaffected, the obligation to make such payments as may be necessary (after allowing for the payment of £2.4 million under clause 14.10.3) to fund fully the relevant benefits. Discussion Mutual mistake

Discussion

[78]Although the observations of Lord Hoffmann in Chartbrook about rectification (quoted in [54] above) were not essential for the decision in that case, they were delivered after full argument, were approved by the other members of the Appellate Committee, and set out established principles rather than seeking to change them. Both parties before us have rightly proceeded on the basis that they correctly state the existing law.

[79]Lord Hoffmann’s comments were about rectification for mutual mistake. He approved (at [48]) Peter Gibson LJ’s succinct summary of the requirements for rectification for mutual mistake in Swainland at [33] (quoted in [52] above).

[80]Lord Hoffmann’s clarification was that the required “common continuing intention” is not a mere subjective belief but rather what an objective observer would have thought the intention to be: see Chartbrook at [60]. In other words, the requirements of “an outward expression of accord” and “common continuing intention” are not separate conditions, but two sides of the same coin, since an uncommunicated inward intention is irrelevant. I suggest that Gibson LJ’s statement of the requirements for rectification for mutual mistake can be re-phrased as:(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2) which existed at the time of execution of the instrument sought to be rectified;

(3) such common continuing intention to be established objectively, that is to say by reference to what an objective observer would have thought the intentions of the parties to be; and

(4) by mistake, the instrument did not reflect that common intention.

[81]Three further points of principle should be noted. First, as Lord Hoffmann said (at [65]), evidence of a party’s subjective belief or understanding is not inadmissible. It may have some evidential value as to what was actually said and agreed, although, where the prior consensus is expressed entirely in writing, it is likely to carry very little weight.

[82]Secondly, and which is really an aspect of the same point, a party can always give evidence that the wording of the document was the result of a mistake. That is an essential part of the cause of action. Whether or not the mistake is such as to give rise to a right to rectification will, however, depend on the objective assessment of whether there was a common continuing intention to which the document failed to give effect.

[83]Thirdly, rectification is a discretionary remedy. In the case of unilateral mistake, the claimant’s conduct, such as its own carelessness, may preclude refusal of the remedy: see, for example, Agip S.p.A v Navigazione Alta Italia S.p.A [1984] 1 Loyd’s Rep 353. That consequence may simply be the result, as it was in that case, of the inability of the claimant to show that it was the defendant’s unconscionable conduct rather than the claimant’s own deficiencies, which caused the mistake: as Stuart-Smith LJ explained in Commission for the New Towns v Cooper (Great Britain) Ltd

[1995] Ch 259

atp.279:

“It is important to realise that in that case [viz. Agip] the defendants did not know of the plaintiffs’ mistake, and the mistake was not in any way attributable to the defendants’ conduct, but solely to the plaintiffs’ carelessness in not reading the charter carefully. In these circumstances, it is plain that it would be quite inequitable to foist upon the defendants a contract they did not intend to make.”

[84]It is difficult to see how or why, once the conditions for mutual mistake are satisfied, the defendant’s carelessness could justify refusal of rectification. As the facts of the present case show, however, the claimant’s carelessness may preclude relief, not on some general ground of discretion, but because the claimant cannot be allowed to rely on its own carelessness in failing to observe that the defendant objectively no longer, at the date of the instrument to be rectified, continued to adhere to the prior common intention. Agip is, in that very loose sense, a useful analogy.

[85]By way of reinforcement of those points, it may be helpful to consider the policy considerations justifying the intervention of equity by rectification for mutual mistake of a contract binding on the parties at common law. There are primarily four factual situations to consider. The first one is where the parties subjectively and objectively (that is to say in their communications passing between them – or “crossing the line”) are in agreement but the formal documentation as executed fails to give effect to that prior agreement. The documentation should be rectified to bring it into line (retrospectively) with their prior accord. Subject to such matters as delay and prejudice to any third party interests, there is no good reason not to do so.

[86]The second scenario is where the parties never subjectively had the same intention, but the communications crossing the line show that objectively there was a common continuing intention at all relevant times prior to the execution of the final documentation, and the formal documentation reflected those prior communications. In that situation, whether or not rectified, one or other of the parties will be bound by a contract which they did not subjectively intend to enter into. It is right that the claimant should not be entitled to rectification to bring the documentation into line with a subjective intention and belief that was never communicated to the defendant and to which the defendant never agreed.

[87]The third scenario is where there was objectively a prior accord, but one of the parties then subjectively changed their mind, but objectively did not bring that change of mind to the attention of the other party. It is right that, if the documentation gives effect to the objective prior accord, the formal documentation should not be rectified to reflect the changed but uncommunicated subjective intention; and if the documentation as executed reflects the changed but uncommunicated subjective intention, it should be rectified to give effect to the objective prior accord. To do otherwise would be to force on one of the parties a contract which they never intended to make on the basis of an uncommunicated intention and belief.

[88]The fourth scenario is where there was objectively a prior accord (whether or not a subjective common intention), and one of the parties then objectively changed their mind, that is to say objectively made apparent to the other party that they intended to enter into the transaction on different terms. Leaving aside rectification for unilateral mistake (the requirements for which are quite different), it is right that, if the documentation as executed gives effect to the objectively indicated change of mind, a claim for rectification to give effect to the earlier prior accord should be refused. Once again, to do otherwise would force on the defendant a contract which they never intended to make on the basis of the claimant’s uncommunicated subjective intention to enter into a contract on the basis of the original accord notwithstanding the defendant’s objectively communicated change of mind.

[89]That analysis shows why it is good policy to favour objective accord or objective change of accord over subjective belief and intention in cases of rectification for mutual mistake.

[90]Chartbrook was an example of the second scenario above. The prior objective consensus was based on a letter of 24 May 2001. The terms of that letter were accepted by Chartbrook, and no one gave evidence of any subsequent discussions crossing the line which might have suggested an intention by either party to depart from them. The relevant provision in the formal contract was in all material respects the same as it was in all the circulating drafts leading up to that contract.

[91]DDC contends that the present case is also an example of the second scenario. DDH submits, in substance, that the present case is an example of the fourth scenario. The point turns quite simply on whether objectively, prior to execution of the Contract, DDH communicated to DDC that it intended to contract in relation to the pension deficit on a different basis than the payment by DDH of the £2.4 million as provided in Version 1 and the Valuation. As Mr Nigel Jones QC, for DDH, acknowledged, the Judge went further than he needed to in concluding that an objective observer would have thought that, in consenting to clause 14.10.3, the parties had entered into a new common intention and accord. Much of Mr Croxford’s attack on the judgment misses the target for the same reason: instead of concentrating on whether or not objectively DDH indicated, prior to the execution of the Contract, that it did not accept that DDH was to be liable to pay the £2.4 million to NCC, Mr Croxford’s analysis was aimed at the issue whether a reasonable observer would have assumed that DDC consented to a term under which DDC was to pay that sum. That muddles the distinction between rectification for mutual mistake (on the ground of an objective common continuing intention) and unilateral mistake (on the ground that the defendant was aware or ought to have been aware that the claimant entered the formal contract under a mistake) and wrongly conflates elements of both (the defendant’s culpability being irrelevant for rectification for mutual mistake, but essential for rectification for unilateral mistake).

[92]It is implicit in the Judge’s analysis and conclusion that he found that DDH, prior to the Contract, objectively indicated to DDC its intention with regard to the payment of the £2.4 million which was different from the prior accord reflected in Version 1 and the Valuation. The Judge was entitled, and right, to make that finding. Prior to the conclusion of the Contract, clause 14.10.3 had been put forward, at the behest of DDH’s funder, for inclusion in the circulating draft contract. It provided for DDC to pay the pension deficit in unambiguous terms. There was no basis at all for DDC, or for that matter an independent observer, to think that DDH had plainly not intended to make DDC liable to make the payment. It was an important part of the deal. The fact that DDH’s funder had put forward the clause and that DDH was a shell company limited by guarantee would have given rise to the obvious inference that the assumption underlying clause 14.10.3 was a vital part of the funding arrangements. DDC or an observer might have thought that DDH or DDH’s funder had misunderstood the non-binding agreement reflected in Version 1 and the Valuation, and was seeking to contract for a different deal - which was, indeed, the case - but that is not the same as saying that DDC could simply ignore the wording of the clause as having no significance. On any footing, therefore, the objective observer would have thought that DDH was intentionally putting forward clause 14.10.3 in the terms in which it was drafted, and, if that did not reflect the earlier non-binding agreement, that DDH no longer adhered to that earlier agreement. That was, indeed, the reality.

[93]As the Judge forcefully observed, it was DDC’s oversight, rather than any equity arising from mutual mistake, which was the cause of its misfortune. True it may be, as Mr Croxford submitted, that there were objectively good commercial reasons why DDC would never have agreed to clause 14.10.3. It was sufficient, however, to defeat DDC’s claim for rectification for mutual mistake, that DDH was outwardly clearly indicating its own interpretation and intention, which were at variance with those of DDC, but DDC did not challenge the clause, and indeed, expressly assented to it. Had DDC raised an objection or even an enquiry, the disagreement between the parties would have become clear, and DDH would not have entered into a contract on the terms of the earlier non-binding agreement because it did not have the funding to do so. I cannot see any unconscionability in those circumstances in holding DDC to the Contract, rather than changing its terms so as to give effect to the uncommunicated subjective intention of DDC to adhere to the original objective provision for DDH to pay the £2.4 million notwithstanding the clear terms of the draft clause 14.10.3 to the contrary.

Unilateral mistake

[94]Once again, subject to one point, there is no dispute that the Judge correctly set out the applicable legal principles (quoted in [56] above). The one reservation of DDC, and the heart of Mr Croxford’s attack on this part of the Judge’s judgment, is that the Judge did not properly address the law as to the necessary state of mind of the defendant for rectification for unilateral mistake. This is a fair criticism.

[95]It is now well established by authority, binding at the level of the Court of Appeal, that the defendant’s knowledge of the claimant’s mistake sufficient to satisfy the conditions for rectification for unilateral mistake is such knowledge as falls within any one of the first three categories described by Peter Gibson J in Baden,namely:(1) actual knowledge;

(2) wilfully shutting one’s eyes to the obvious; and

(3) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make: Commission for the New Towns v Cooper (Great Britain) Ltd

[1995] Ch 259

, 280, 292; and George Wimpey UK Ltd v V.I. Construction Ltd

[2005] EWCA Civ 77

[96]DDC acknowledges that the Judge rightly identified the knowledge of Mr Roebuck as attributable to DDH and as the critical knowledge for the purpose of rectification for unilateral mistake. It rightly submits that the Judge, however, never specifically addressed Baden categories (2) and (3) in relation to Mr Roebuck.

[97]That failure of the Judge is of no consequence. Those categories, like Baden category (1), reflect dishonesty, the critical broad distinction being between honesty and dishonesty: Commission for the New Towns at 280E-281B, George Wimpey at [45]. Indeed, DDC’s case in relation to Mr Roebuck was advanced before the Judge as one of dishonesty. The Judge, although highly critical of Mr Roebuck’s behaviour in several respects, expressly found that DDC had not proved dishonesty on his part.

[98]I do not accept Mr Croxford’s submission that the Judge expressed as a matter of law, that is to say as an irrebuttable presumption, that Mr Roebuck was entitled to assume that DDC knew what it was doing in agreeing clause 14.10.3 because it was acting by solicitors. The Judge had formed the view ([118]) that from the time of the DDH board meeting on 20 September 2007 Mr Roebuck had persuaded himself that his reading of Version 1 was sustainable or even correct. In the light of Mr Roebuck’s witness statement, which gave an account of his knowledge of the approval by DDC of clause 14.10.3 and his belief that DDC had agreed to pay the £2.4 million, and Mr Roebuck’s cross-examination over one and a half days, the Judge concluded that DDC had failed to prove that Mr Roebuck knew that DDC was mistaken as to what the Contract provided, and in particular, that DDC still mistakenly believed that DDH would pay the pension deficit. The Judge’s comments as to what Mr Roebuck and DDH were entitled to assume must be seen in that context. The Judge expressly acquitted Mr Roebuck of acting, after 1 November 2007, either inequitably or unconscionably: judgment [154].

[99]It cannot be said that the conclusion of the Judge on those factual matters was plainly wrong. That is sufficient to dispose of the appeal in relation to rectification for unilateral mistake.

[100]I would add, in so far as the Judge makes the point in [150] of the judgment, and DDC criticises it, that the Judge was entitled to take the view that DDC’s mistake was due to the fault of its representatives properly to read the contractual provisions rather than DDH’s conduct. As I have said in [83] above, that is a legitimate observation in a case of rectification for unilateral mistake. It was a finding of fact which the Judge was entitled to make.

Clause 14.10.2

[101]In the light of my conclusions set out above, it is not necessary to address DDC’s criticism of the Judge’s conclusion that rectification of clause 14.10.3 alone, leaving clause 14.10.2 as it stands, would not result in the Contract correctly reflecting DDC’s intention. Without going into the point in detail, my view is that, had all the requirements for rectification for mutual or unilateral mistake otherwise been satisfied, I would not have regarded clause 14.10.2 as an insuperable impediment to rectification of clause 14.10.3. Although the clause was drafted and agreed by the solicitors for all parties on the assumption that DDC was to pay the £2.4 million, I consider that, for the reasons submitted by DDC, clause 14.10.2 as presently worded could just about be read coherently with clause 14.10.3 (if and) as rectified, even though the end product would certainly not be the most elegant of drafting. Conclusion

[102]For all those reasons, I would dismiss this appeal.

Postscript

[103]Since writing the above I have seen the valuable and illuminating judgments of the Master of the Rolls and Toulson LJ, to which I readily pay tribute. They disclose, not merely a different view of the facts from that of the Judge, but in material respects significant differences of principle in approach from my own. Those differences almost certainly reflect a different instinctive view of the underlying merits of each side’s case, reflected in the extent to which the Master of the Rolls and Toulson LJ highlight Mr Roebuck’s blameworthy conduct, whereas the Judge and I focus on the gross carelessness of DDC, by Mr Bruno and (possibly) its solicitors, in failing to appreciate and to object to the clear and unambiguous terms of what became clause 14.10.3. It is, therefore, particularly important to identify the proper steps in the legal analysis, and at which points, and why, a different view of legal principle or legal policy or, indeed, of the facts, has been taken by each of us.

[104]The Master of the Rolls, Toulson LJ and I are all agreed that this court should apply the analysis of Lord Hoffmann in Chartbrook, although Toulson LJ, in particular, has some serious misgivings about it. For the reasons I have given earlier, I do not share his misgivings about the objective approach in cases of rectification for mutual mistake. What is clear, however, as the present case shows, is that the objective test requires refinement as different and more complex factual situations present themselves for adjudication. Our different judgments and conclusions in the present case reflect significant differences of view about the way the objective test should be applied on the facts of this case.

[105]The critical question posed by Toulson LJ, in the context of rectification for mutual mistake, is different to mine, as the Master of the Rolls has pointed out ([204]). Toulson LJ asks ([160]) “whether on a fair view there was a renegotiation of an earlier non-binding agreement”; ([160]) “whether a reasonable person would have understood himself to be involved in the negotiation of a different deal from the one originally agreed”; ([169]) whether “Mr Bruno [was] consciously agreeing to a renegotiation of the agreement on 1 November 2007 so that DDC would pay the pension deficit to NCC”; and ([170]) whether the “exchange of emails on 1 November 2007 should be regarded a showing an intention to vary the earlier non-binding agreement”. That way of putting the objective test reflects the grounds of appeal and the way that DDC argued the appeal, focusing in large part on whether the objective observer would have thought that DDC, by agreeing the inclusion of the new clause, had changed its mind. For all the reasons I have given in [91] above, I do not consider that is the right question on the objective test for rectification for mutual mistake.

[106]At the heart of the Master of the Rolls’ analysis of the application of the facts to the law is his view ([213]) that “the hypothetical observer would not have concluded that DDH was signalling a departure from the prior accord: the observer would have believed that DDH was making a mistake”. I would respectfully suggest that that statement also reflects an incorrect application of the objective test, even if, which I doubt, it is an appropriate assumption to make on the appeal in any event. As to the latter point, it is to be noted that the conclusion that an objective observer would have believed that DDH was (subjectively) making a mistake in putting forward what became clause 14.10.3 was not raised or argued before the Judge or before us, and did not feature in DDC’s grounds of appeal or skeleton argument. As I have said, DDC’s case was not that DDH had made a mistake in putting forward clause 14.10.3, but rather that the Judge should not have concluded that the objective observer would have thought that DDC had agreed to it in the course of a renegotiation. Neither we, nor the Judge, therefore, had the benefit of any submissions as to the relevance or correctness of any inference, assumption or hypothesis as to the reasonable objective observer’s conclusion that the clause had been put forward in error.

[107]The Master of the Rolls makes an assumption, on the objective test, of a subjective mistake by DDH rather than an indication or possible indication of a different view of the original accord, or a change of mind about the original accord, but he does not elaborate on the precise nature of the assumed mistake. This is a point to which I shall refer later when addressing points of principle on the application of the objective test, but it is relevant here as to the legitimacy of the finding of an assumed mistake. There could be no objective basis whatever for an assumption that, when referring to “the Council” in what became clause 14.10.3, DDH, RBS or their respective advisers intended to refer to DDH. There would be no point whatever in DDH or its funders not merely volunteering, but insisting, that a clause be inserted in the draft to impose on DDH itself an express obligation, in favour of DDC, to pay the deficit within 5 business days of completion. There is no ground for supposing, and certainly no evidence whatever to suggest, nor has any submission been made at any stage in these proceedings, that DDC had any interest in imposing such a contractual obligation on DDH. Moreover, the ruling out of any possible indication (in the eyes of the objective observer) that DDH had a different view of the prior accord or that it had a change of heart, does not sit easily with the Judge’s conclusion that Version 1 could be read in two different ways (judgment [43] and [45]); that even DDC’s solicitors never came to understand that DDC intended that DDH was to pay the deficit (judgment [49] and [150]); and that clause 14.10.2 was itself more consistent with DDH’s view than Mr Bruno’s (judgment [48], [136] to [140] and [150]).

[108]Furthermore, I am not at all certain that the (objective) inference, assumption or hypothesis as to DDH’s (subjective) mistake can be treated as akin to a pure point of law unaffected by oral evidence as to what, in this case, Mr Bruno’s own reaction would have been if he or his solicitors had appreciated (as they should have done) what the clause said. I would have thought such evidence would have been relevant to the point. We were not taken to the transcript of Mr Bruno’s evidence, but I assume the question was never asked of him because DDC never ran a case based upon an inference, assumption or hypothesis that the objective observer would have thought that DDH had (subjectively) made a mistake in putting forward what became clause 14.10.3.

[109]I turn from the legitimacy of the finding of an inference, assumption or hypothesis as to the objective observer’s conclusion that DDH made a subjective mistake to questions of principle as to the relevance of any such mistake on the application of the objective test. There are two different types of mistake which need to be considered when conducting the objective assessment for the purposes of the second, third and fourth scenarios in [86] to [88] above. One situation, the relevance of which is obvious and conventional, would be if the provisions of what became clause 14.10.3 were in such unclear terms that DDC might reasonably read it as, or rather an objective observer would understand its wording to be, consistent with the prior (objective) accord. That is the type of situation within the second and third scenarios mentioned earlier. That is not the situation here. It is common ground that the wording was completely clear and undoubtedly inconsistent with the prior accord.

[110]In a case like the present (that is, outside the first scenario mentioned earlier), where the communication from the defendant is unambiguously inconsistent with the prior (objective) accord and the documentation as executed reflects that unambiguous communication, I consider that the objective test requires the refusal of rectification. As I have said, the Master of the Rolls does not agree on the facts of the present case because he postulates that DDC (if it had not been careless), or rather an objective observer, would in the particular circumstances have thought DDH had (subjectively) made a mistake. There are several reasons, both of principle and on the facts of this case, why I respectfully consider that approach to be incorrect. Firstly, I am very doubtful that (outside the first scenario) the objective test can properly involve speculation as to the motives or the competencies of the parties. That is certainly no function of the objective test for the purpose of interpreting an agreement. The Master of the Rolls refers to George Cohen & Co Ltd v Docks and Inland Waterways Executive

[1950] 84 Lloyd’s Rep 97

for a different view. I shall address that case in more detail below, but it is sufficient for present purposes to say that, on its facts as found, it fell within the first scenario described in [85] above.

[111]Secondly, if, contrary to my view, the objective test for rectification for mutual mistake (outside the first scenario) does embrace the possibility of the objective observer concluding that that the defendant was subjectively mistaken, there is no principled basis for treating the inference, assumption or hypothesis of mistake as the end of the enquiry. The question which inevitably arises is what the objective observer might reasonably have expected to follow from the awareness that a mistake had subjectively been made by the defendant. That then raises the question of the nature of the assumed mistake. Would the objective observer have thought that the mistake was merely the incorrect execution of a subjective intention by the defendant to state the objective prior accord? Would the objective observer have thought that the mistake was as to the defendant’s subjective understanding of the objective prior accord? Might the objective observer have thought there was a possibility of the latter, or, even if unlikely, that there had been a change of mind by the defendant? How clear and certain would the objective observer be about those possibilities? Leaving aside that all of this seems hardly consistent with an objective test giving certainty in legal transactions, the objective observer would inevitably think, in the case of an unambiguous inconsistency between the original objective accord and the defendant’s subsequent communication, that the point should be or should have been raised with the defendant and clarified. If it had been, and it would have become apparent that there was a difference of subjective intentions about the original accord or that the defendant had a change of heart, the (extended) objective test should lead to the refusal of rectification.

[112]Accordingly, if there is an extended objective test as suggested by the Master of the Rolls, the third and fourth scenarios, as I have described them in [86] and [87] above, should be amended so as refer to the defendant making apparent, or failing to make apparent (as appropriate), an intention to enter into the transaction on different terms from the objective prior accord or putting the claimant on enquiry that the defendant might have that intention.

[113]Another way of putting the same point is to view the issue as one of causation. In a case (outside the first scenario) where the defendant has put forward a provision which clearly and unambiguously deviates from the objective prior accord, and, had the claimant acted with due care, it would have appreciated that, clarified it with the defendant and learned that the defendant did intend to commit to the transaction on the terms as finally executed, including that provision, rectification for mutual mistake should be refused because the effective or operative cause of the claimant’s mistake in agreeing to the transaction was not a mutual mistake but the claimant’s own carelessness: comp. Stuart-Smith LJ in Commission for the New Towns at p. 279 (quoted above). It is precisely the position here, where, but for what the Master of the Rolls has called ([219]) DDC’s “crass oversight”, it would have become apparent that DDH did indeed intend to enter into the transaction on the basis of what became clause 14.10.3.

[114]In the judgments of the Master of the Rolls and Toulson LJ Mr Roebuck’s conduct is subject to considerable criticism. Indeed, Toulson LJ appears to take the view ([178]) that Mr Roebuck was, contrary to the finding of the Judge, dishonest. The Master of the Rolls, in particular, views Mr Roebuck’s conduct as a special feature which affects the analysis and merits of the claim to rectification for mutual mistake. For the reasons I have given in [91], I respectfully disagree with that approach, which cuts across the distinction between rectification for mutual mistake and for unilateral mistake. If, however, the culpability of that conduct has, contrary to my view, any relevance at all to rectification for mutual mistake, it seems to me that it has properly to be analysed in terms of causation. Even if Mr Roebuck’s conduct provided the factual setting for the mistake which arose, it was not, in my view, the effective or operative cause of DDC’s mistake in entering into the Contract on terms which included clause 14.10.3. The effective and operative cause was DDC’s own gross carelessness.

[115]The Master of the Rolls cites George Cohen in support of the proposition ([211]) that “it is self-evidently insufficient for a defendant to defeat a rectification claim simply by establishing that the terms of the provision which he put forward clearly departed from the prior accord.” I respectfully suggest that the case is not inconsistent with my analysis above in relation to rectification for mutual mistake. That case was not relied upon by any of the parties before us, and indeed was not referred to by them or by the Judge. It is in many ways a difficult and unsatisfactory case. Although its facts bear a superficial similarity with the present case, on analysis its facts are, like Chartbrook, materially different from those of the present case and illustrate the extent to which rectification cases are highly fact specific. It is not necessary or appropriate to set out the facts in full here. Sir Raymond Evershed MR gave a long and somewhat diffuse leading judgment in which he gave alternative reasons for his decision that Vaisey J at first instance had been right to order rectification. His primary ground for dismissing the appeal was that there was a subjective common mistake. Asquith LJ and Jenkins LJ gave judgments which concurred in the result, but not for the same reasons. On the facts as found, George Cohen differs from both the present case and Chartbrook in that it fell within the first scenario described in [85] above. In George Cohen both parties made the same mistake, whereas in the present case the parties were both mistaken but for different reasons. Consistently with that analysis of George Cohen, it is a clear inference from the finding of subjective mutual mistake that, if the error had been pointed out to the defendant, it would have agreed to amend the new draft lease so as to bring it in line with the parties’ prior non-binding agreement. In any event, it was also a case where, on the facts, it was objectively impossible to spell out of the correspondence between the parties a communication by the defendants of a subjectively different (objectively incorrect) interpretation of the prior non-binding accord and an invitation to the other party to agree to it. The fact that the defendant was legally represented whereas the plaintiffs were acting without legal advice or representation, the complex and confusing form of the repair obligations in the 1924 lease, and the communications passing between the parties led the court firmly to that conclusion. In all of these respects, George Cohen differs from the present case.

[116]Both the Master of the Rolls and Toulson LJ are of the view that, if rectification for mutual mistake was not available, then they might have permitted DDC’s appeal on the ground of unilateral mistake. For the reasons I have given earlier, I do not agree. It is sufficient for me to add only this. The Judge’s conclusion of fact that Mr Roebuck’s conduct was not dishonest cannot properly be challenged on this appeal as plainly wrong. As the law binding on this court presently stands, nothing short of dishonesty is sufficient to found a claim for rectification for unilateral mistake. Toulson LJ suggests that in principle that may be too rigorous a requirement. That is not a matter which was explored before us since DDC pleaded its case for rectification for unilateral mistake, and argued it before the Judge, on the basis of dishonesty. Without expressing any concluded view about the point in principle, I would merely observe that our jurisprudence has tended to shy away from the notion that unconscionable conduct is, of itself, sufficient to give rise to equitable relief. In any event, for the reasons I have given earlier, whatever degree of culpability might be sufficient to found a claim for rectification for unilateral mistake, I consider that such a claim fails on causation since the operative or effective cause of DDC’s misfortune was its own gross carelessness and not any unconscionable conduct of Mr Roebuck. Lord Justice Toulson

[117]The judge in his very thorough judgment said that the law on common mistake and unilateral mistake was “not much in dispute” and that this was a case about the application of the law to the facts, rather than a case in which finer points of legal principle had been argued. The facts were complex and unusual, particularly in relation to Mr Roebuck, who was the principal negotiator on behalf of DDH. A peculiarity of the case is that he was disingenuous on an important matter in his dealings not only with Mr Bruno, his opposite number as principal negotiator on behalf of DDC, but also with the DDH board, DDH’s lawyers and RBS’s lawyers. The judge’s findings of fact led to a focusing of the parties’ arguments in this court in a way which exposed significant differences between them as to the law, particularly the effect of Lord Hoffmann’s judgment in Chartbrook Ltd v Persimmon Homes Limited

[2009] UKHL 38

[2009] 1 AC 1101

. The case highlights what seem to me to be some real difficulties in the present state of the law about rectification. Ultimately I have reached a different conclusion from that of Etherton LJ.

Facts

[118]I am grateful to Etherton LJ for his detailed account, but at the risk of repetition I will set out what seem to me to be the important points of the narrative.

[119]A critical part of the commercial negotiations between DDC and DDH concerned the deficit of £2.4 million in the pension scheme, administered by NCC, in relation to the staff who would be transferring from DDC to DDH.

[120]On 20 September 2007 Mr Bruno on behalf of DDC produced the proposal referred to as Version 1. Among other things, it proposed that DDH should pay the pension fund deficit by a reduction in the purchase price, that the anticipated “VAT shelter” (which Etherton LJ has explained) should be shared, but that a top slice equal to the pension deficit of £2.4 million should go to DDC. The judge found that (a) Mr Bruno intended his proposal to be understood as meaning that the pension deficit was being deducted from the valuation, that the £2.4 million would be paid by DDH to NCC and the top £2.4 million of the VAT shelter (which would otherwise have been shared) should go to DDC, with the result that the pension deficit liability would effectively be shared; and (b) Mr Roebuck realised that this was how Mr Bruno intended the proposal to be understood.

[121]On the same day there was a meeting of the DDH board, attended by 10 directors and 10 advisors, including the partner in DDH’s solicitors who was in charge of its legal team and a senior member of DDH’s financial advisors, Mr Page. At the meeting Mr Roebuck deliberately chose to present Version 1 as meaning that DDH would not have to pay the pension deficit.

[122]On 21 September 2007 an assistant of Mr Roebuck told Mr Bruno that Mr Roebuck thought that DDH might be able to agree Version 1, subject to some adjustment on set-up costs. The judge found that, from that moment on, Mr Bruno proceeded on the basis that an agreement in principle had been reached and that his proposal had been agreed. The judge further found that Mr Bruno was right to do so, since Mr Roebuck decided not to press for his minor adjustment to the figure for set-up costs.

[123]It was accepted in DDH’s defence that Mr Roebuck’s status was such that his knowledge could be attributed to DDH.

[124]The drafting of the Transfer Contract took place in parallel with the negotiation of the commercial terms, but those responsible for the former were generally only peripherally involved with the latter and vice versa. The task of the lawyers was to produce a contract which gave effect to what they understood to be agreed as a commercial transaction.

[125]On 3 October 2007 there was a meeting of the parties’ lawyers and other advisors to go through the latest draft of the contract. The meeting was attended by Mr Bruno. By this time solicitors for RBS, who were to provide DDH with funds for the acquisition, had suggested that clause 14.11.2 (which ultimately became clause 14.10.2 of the Transfer Contract) should provide explicitly that DDC should make payments to NCC as necessary to ensure that the pension fund was fully funded at the date of completion. A provision to that effect was discussed at the meeting. The judge said that, having heard Mr Bruno give evidence, he formed the clear view that Mr Bruno did not understand that this provision was inconsistent with his understanding of Version 1.

[126]On the same day DDC’s solicitors emailed to Mr Bruno the latest draft of the contract, which included the term proposed by RBS’s solicitors. Mr Bruno did not make any adverse comment.

[127]The clause included the following:

“In relation to the Transferring Employees…[DDC] shall make payments to [NCC] as are necessary to ensure that all liabilities in respect of the benefits accrued by [relevant employees] up to the Completion Date are fully funded based upon the actuarial assumptions used for the 2007 actuarial valuation… For the avoidance of doubt, this means funded to the extent necessary to ensure that there shall be no liability on [DDH] to make any contributions …in relation to the period of time up to the Completion Date…and until such payments are made by [DDC, DDC] shall indemnify [DDH] against all costs…and …liabilities…in respect of the …said accrued benefits.”

[128]Notwithstanding the way in which Mr Roebuck had presented Version 1 to DDH’s board on 20 September 2007, on 5 October 2007 Mr Page (DDH’s senior financial advisor) sent an email to DDC’s financial consultants which made it plain that he too understood Version 1 as envisaging that DDH would pay the £2.4 million pension deficit. The email was copied both to Mr Roebuck and to Mr Bruno. The judge found that it was clear that Mr Roebuck should from 5 October 2007 onwards have known that his own advisor thought that the Version 1 proposal was that DDH would pay the pension deficit. The judge also found that DDC’s financial consultants and Mr Bruno were, from that point forward, justified in thinking that Mr Page, as DDH’s consultant, shared their belief that DDH was to pay the pension deficit.

[129]On 10 October 2007 Mr Page endeavoured to explain the transaction to DDH’s board with slides which had been approved by Mr Roebuck. However, the judge observed that the slides left it unclear who was actually paying the deficit and that they highlighted what he described as the problem that arose throughout the run up to the conclusion of the Transfer Contract.

[130]As the judge explained, the problem was this:(i) The DDH team (except Mr Roebuck) thought that, because the entire £2.4 million top slice from the VAT shelter was going to DDC, that would fully compensate DDC for paying the £2.4 million pension deficit. Mr Roebuck appreciated that this would not be so.

(ii) Mr Bruno and the DDC team knew that the valuation had been reduced by £2.4 million in respect of the pension deficit and understood that DDH would use the reduction to pay the deficit to NCC. The top slice from the VAT shelter would not indemnify DDC, since it had been agreed from the outset that the VAT shelter should prima facie be split 50/50. The top slicing of £2.4 million to DDC only gave a net benefit to DDC of £1.2 million, but in that way the pension deficit liability would be split.

[131]On 11 October 2007 both parties signed a further version of the 20 September proposal (Version 1). It was referred to as the “Valuation”. It was on a single sheet of joint notepaper of DDC and DDH. It contained the tables and figures from Version 1 with an introduction and conclusion which Etherton LJ has set out. The judge found that this document was the culmination of Mr Roebuck’s request that his solicitor should obtain evidence that the 20 September proposal had been agreed. Notwithstanding that by this time the draft Transfer Contract contained the forerunner to 14.10.3, the parties were still signing up to the tables and figures from Version 1. On the same day (11 October 2007) the DDH board formally approved the Valuation.

[132]On 29 October 2007 DDC’s solicitors sent Mr Bruno a further draft of clause 14 of the Transfer Contract, showing substantially the same provisions as on 3 October 2007 and asking for confirmation that the clauses were satisfactory. The judge found that again Mr Bruno did not seem to have understood that the clause was inconsistent with Version 1 and the Valuation as understood by him (and as Mr Roebuck knew to be understood by him).

[133]On 31 October 2007 RBS’s solicitors suggested the insertion of a new clause requiring DDC to make the deficit payment to NCC on completion. On 1 November 2007 the clause was emailed to the parties’ solicitors. DDC’s solicitors emailed it to Mr Bruno, asking whether the amendments were acceptable. Mr Bruno replied promptly, saying that “it looks OK to me”. DDC’s solicitors returned the draft contract with the clause included. The judge found that Mr Bruno simply misunderstood what the clause was about. This clause became the vital clause 14.10.3, which Etherton LJ has set out (paragraph 42).

[134]Meanwhile, also on 31 October 2007 NCC emailed Mr Bruno asking how the pension deficit of £2.4 million was to be paid. He replied that it was to be paid by DDH and suggested that DDH’s solicitors should be able to provide NCC with further information.

[135]On 2 November 2007 NCC sent an email to DDH’s solicitors, copied to Mr Bruno, saying that NCC had been advised by DDC that any under funding at the time of the commencement of the contract would be paid by DDH. The judge observed that on that date DDH’s solicitors seem to have known that NCC was still saying it had been told by DDC that DDH was to pay the pension deficit, but that the draft contract which had been approved by DDC provided for DDC to pay the defcit.

[136]The transfer contract was completed on 5 November 2007. It provided that DDC was to pay the £2.4 million representing the pension fund deficit to NCC.

Construction

[137]As to the objective meaning of the commercial agreement struck between the parties, the judge found that the date on which DDH accepted the Version 1 offer was not precisely clear, but at the latest it was 11 October 2007, when the parties signed the Valuation. He held that Version 1 was capable of being read in two ways. It could be construed as saying:(i) DDC proposes that DDH pays the pension fund deficit to NCC, utilising a reduction in the purchase price of £2.4 million, and DDH’s half share of the deficit is then refunded to DDC as a top slice from the VAT shelter (DDC’s construction), or

(ii) DDC proposes that there is a reduction in the purchase price of £2.4 million and that DDC will pay the pension fund deficit to NCC which is then refunded to DDC as a top slice from the VAT shelter (DDH’s construction). He concluded that DDC’s construction required less violence to the words used and was the more natural construction. The judge rejected an argument advanced by DDH that at 11 October 2007 the objective meaning of the agreement was that DDC should pay the pension deficit, since that was the clear effect of the draft clause which had been discussed at the page turning meeting on 3 October 2007 at which Mr Bruno was present. The judge rejected the argument because he found that Mr Bruno’s understanding of contractual matters was so obviously limited and because the email sent by Mr Page to DDC’s financial consultants on 5 October 2007 entirely confirmed DDC’s construction of Version 1.

[138]However, the judge found that objectively the position changed on 1 November 2007, when DDC’s solicitors returned to DDH’s solicitors the draft contract including the final version of clause 14. The judge held:

“It is true that DDH did not point out to DDC that the deal was changing, but for the purpose of ascertaining continuing common intention, that does not matter. Nobody looking objectively at the exchange of emails on 1 November 2007 could possibly reach any conclusion, other than that the parties had by their solicitors then agreed that DDC would be paying the pension deficit.”

Actual understanding and intention of the parties

[139]As to the actual understanding of the various people involved, the judge reminded himself that the board members, councillors and negotiators concerned were mostly public servants operating in the public or charitable sector. They were advised by commercial consultants and solicitors, but they were not commercial men and women who had anything to gain from commercial shenanigans or sharp dealings. It was to be expected that they would be fair and honest in their negotiations, having no reason to be otherwise.

[140]These observations obviously applied to Mr Bruno. The judge described him as a careful witness, who did not exaggerate or prevaricate. His evidence, which the judge seems to have accepted, was that it was very clear in Mr Bruno’s head what the agreement reached with DDH was. They had signed the Valuation on 11 October. There was no further communication from DDH to suggest that they were not happy with it. It simply did not occur to him as a non-lawyer that the Transfer Contract was changing it. The judge found that in approving clause 14.10.3, Mr Bruno made a mistake.

[141]The judge found that although Mr Page, who did not give evidence, understood that Version 1 required DDH to pay the pension deficit, he was a consultant to DDH and his knowledge and intention was not that of DDH. The board of DDH always understood Version 1 and the Valuation as meaning that DDC was to pay the pension deficit. (This was how Mr Roebuck had presented it.) The board of DDH never intended, either when it approved the Valuation or at the time when the Transfer Contract was concluded, that DDH should pay the pension deficit.

[142]The judge described the position of Mr Roebuck as “more complex” than that of the DDH board. Mr Roebuck knew very well what Mr Bruno intended to convey by Version 1, namely that DDH would pay the pension deficit, but he proceeded to tell everyone on DDH’s side the reverse, namely that DDC would pay the pension deficit. He did not himself intend that DDH should pay it. The judge said that:

“Mr Roebuck engineered a situation in which DDH’s board and its solicitors were guided into thinking, from 10 October 2007 onwards, that the commercial deal agreed between the parties involved DDC, not DDH, paying the pension deficit.”

[143]The judge added that Mr Roebuck himself probably thought that this interpretation of Version 1 and the Valuation was arguable or sustainable, even though he was fully aware that it was not what DDC intended.

[144]As to the exchange of emails on 1 November 2007, by which the clause proposed by RBS was inserted into the contract, the judge said that Mr Roebuck may have seen RBS’s proposal as his redemption, but DDH saw it as in line with the existing deal. As to Mr Roebuck’s state of mind at that stage the judge said:

“Mr Roebuck was entitled to assume, unless he is shown to have known something different, that [DDC’s solicitors] were properly instructed and properly informed their client. DDC did not establish that Mr Roebuck either knew that [DDC’s solicitors] did not communicate properly with DDC, or that Mr Roebuck knew that Mr Bruno had not properly understood clause 14.10.3 as being contrary to his previous understanding. It is true that Mr Roebuck probably ought, for his own peace of his professional mind, to have picked up the telephone to Mr Bruno to make sure that this problem was brought to attention. But that is not the question with which I am here concerned. ”

The judge also said:

“It is, however, impossible in the light of my previous findings to hold that Mr Roebuck behaved improperly after 1 November 2007, once he knew that DDC had agreed clause 14.10.3. It is true that he may have wondered whether DDC, in the light of all the history, really had agreed to give away the point. It is true that he must have regarded himself as extremely lucky…On the evidence before the court, it seems to me that Mr Roebuck was entitled to assume that DDC knew what it was doing and that it had changed its mind. It would have been an honourable course if he had checked that out by making personal contact with [Mr Bruno’s assistant] or Mr Bruno, but the court is not concerned with honour, but with the satisfaction of specific requirements for unilateral mistake rectification. Those requirements are not established in this case, and Mr Roebuck did not, after 1 November 2007, behave either inequitably or unconscionably.”

[146]In summary:(1) Mr Bruno (whose intention and belief were that of DDC) always intended that DDH would pay the pension deficit.

(2) From 21 September 2007 when Mr Roebuck responded favourably to Version 1 (and, of course, from 11 October 2007 when the Valuation was signed) Mr Bruno believed that this was agreed.

(3) Mr Bruno did not realise that the Transfer Contract provided differently.

(4) The DDH board always intended that DDC would pay the pension deficit.

(5) The DDH board always believed that this was the effect of Version 1 and the Valuation.

(6) DDH rightly understood that this was the effect of the Transfer Contract.

Was there a relevant shared mistaken belief?

[147]DDH did not share DDC’s mistaken belief that under the Transfer Contract the pension deficit would be paid by DDH. However, DDC and the DDH board did share a mistaken belief that the Transfer Contract accorded with their prior commercial agreement embodied in Version1 and the signed Valuation. Their reasons for sharing that mistaken belief were diametrically opposite. DDC believed (rightly) that the commercial agreement embodied in Version 1 and the Valuation was that DDH should pay the pension deficit, and believed (wrongly) that the legal contract was that DDH should pay the pension deficit. The DDH board believed (wrongly) that the commercial agreement embodied in Version 1 and the Valuation was that DDC should pay the pension deficit, and believed (rightly) that the legal contract was that DDC should pay the pension. Their shared mistaken belief as to the conformity of the Transfer Contract with Version 1 and the Valuation existed at the time of the execution of the legal contract.

[148]A critical question is whether in law this shared mistaken belief entitles DDC to have the Transfer Contract rectified so as to conform with the agreement embodied in Version 1 and the Valuation.

Law

[149]In Chartbrook Lord Hoffmann (whose observations about the law of rectification were supported by all the other members of the Appellate Committee of the House of Lords) said at paragraph [48] that the requirements for rectification were succinctly summarised by Peter Gibson LJ in Swainland Builders Limited v Freehold Proprieties Limited [2002] ECLR 71, 74:

“The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention.”

[150]In the present case Vos J held that a crucial ingredient was missing in that on an objective view the common intention that DDH should pay the pension deficit, as provided by Version 1 and the Valuation, did not continue after the exchange of emails on 1 November 2007. He held that on an objective analysis the exchange of emails changed the common intention of the parties that DDH was to pay the pension deficit.

[151]In Chartbrook the claimants entered into an agreement with a house-builder for the development of a site which the claimants had recently acquired. The structure of the agreement was that the developer would obtain planning permission and, under licence from the owner, would construct a mixed residential and commercial development and sell the properties on long leases. The payment which the owner was to receive was set out in schedule 6 to the agreement. A dispute arose as to the proper construction of part of the schedule. The facts are set out most fully in the judgment at first instance of Briggs J

[2007] EWHC 409 (Ch)

. In a nutshell, the developer’s case was that, in respect of the residential part of the development, the owner was entitled to whichever was the greater of a fixed percentage (23.4%) of the net residential sales price and a guaranteed minimum of £76.34 per square foot of residential net internal area. By contrast, the owner’s case was that it was entitled to the whole of the first £76.34 per square foot in any event, plus 23.4% of the surplus.

[152]A syntactical reading of schedule 6 supported the owner. It was a complicated contract negotiated over 8 months. At that beginning of that period there was correspondence which on objective analysis showed a consensus that the payment should be as the developer argued, but the judge found that the meaning of schedule 6 was as the owner argued. The judge also found that the owner’s representatives honestly believed that the developer’s original offer accorded with the meaning which the judge gave to the contract. He found that there was therefore no common mistake entitling the developer to rectification.

[153]The House of Lords held that the developer was right on the construction issue, because the linguistic argument in favour of the owner’s construction was outweighed by its commercial irrationality. It was therefore unnecessary for the House of Lords to consider the rectification issue but it did so. It held that if the developer had failed on the construction issue, it would have been entitled to rectification of the contract.

[154]On the hypothesis on which the rectification issue was being considered, the position (as in the present case) was that one party (the developer) was right about the construction of the pre-contractual consensus but wrong about the construction of the written contract; the other party (the owner) was wrong about the construction of the pre-contractual consensus but right about the construction of the written contract; and both were wrong in believing that the written contract conformed with the pre-contractual consensus.

[155]Lord Hoffmann said that it did not matter that the judge had found that the owner’s representatives honestly believed that the terms of the prior consensus accorded with the meaning of schedule 6. He accepted the proposition (at paragraphs 57 and 59) that rectification required a mistake about whether the written instrument conformed with the prior consensus, not whether it conformed with what the party in question believed that consensus to have been.

[156]On that principle, the parties’ shared mistaken belief in this case as to the conformity of the legal contact with the prior commercial agreement was a mistake of the kind identified by Lord Hoffmann as affording grounds for rectification of the contract (subject to any other objection) so as to conform with the prior commercial agreement.

[157]I have referred to the fact that the decision in Chartbrook on the rectification issue was obiter. There is, with respect, a question mark whether the principle adopted in this part of the decision was right, and there is an associated question whether this court ought to follow it in any event. Before addressing those questions in any greater detail, it is necessary to look further at Peter Gibson LJ’s third requirement, namely that the intention continued at the time of the execution of the instrument sought to be rectified, to see whether in the present case that requirement would in any event lead to the appeal failing, in which case it would be unnecessary to address those other questions.

[158]There is here a potential conundrum. For mutual mistake rectification, there has to have been a prior outward accord followed by a mutual mistake in executing a legal contract at variance with the prior outward accord. If a fully formed contract is later varied, a court which is called on to enforce the contract will obviously enforce the contract in its varied form. Similarly, if a deal agreed in principle is varied by another agreement or is abrogated by one party evincing to the other an intention that the deal should be different, one can readily see the force of the rule that the court should not grant rectification of a subsequent written contract so as to make it conform with the original agreement. But one must be careful not to (mis)apply this principle in such a way that it would undermine the very purpose of rectification, which exists for the correction of mistakes. In order to be able to decide whether there has been a relevant mistake, evidence of the parties’ actual understanding and intention is admissible. In most cases it would be impossible for a court to know whether the execution of the written contract involved a mistake on the part of one or both parties without such evidence. (In Chartbrook the trial judge duly made findings about the understanding of the various participants, and his findings formed part of the basis on which the House of Lords held that a plea of rectification should have succeeded if the developer had failed on the construction issue.)

[159]It would be rare for a written agreement to be executed without some approval of its form at some point in time (whether by a matter of weeks, days, hours or minutes) before the moment of execution. The need for rectification will only arise if on objective analysis the form of the written contract differs from the effect of the previous non-binding agreement. If the approval of that form prior to its execution is in itself to be taken as, from an objective viewpoint, a variation of the previous non-binding agreement, ex hypothesi any rectification plea must fail, notwithstanding that the approval of the form and execution of the contract were affected by one and the same mistake. Hence the conundrum.

[160]In deciding whether on a fair view there was a renegotiation or a mistake in the drafting of the contract, it is necessary to look at all the circumstances. Have the parties behaved in such a way that they would reasonably understand one another to be involved in a process of seeking to negotiate a different deal from the one originally agreed or as involved in a process of drafting an agreement intended to accord with the deal originally agreed? Where it is suggested that there has been a change in the parties’ position prior to the execution of a written contract, it is necessary to look carefully at all the facts to see whether a reasonable person would have understood himself to be involved in the negotiation of a different deal from the one originally agreed or merely seen himself as involved in a process of drafting an agreement intended to conform with the original deal. If the latter is the case, and if the approval and execution of the written contract are affected by a relevant mistake, rectification should be available. It is, of course, for the party claiming rectification to show that in that process a mistake occurred.

[161]If that is the correct approach, the facts of the present case contain some striking features. At this point some repetition is unavoidable.

[162]The question of the repayment of the pension deficit was directly negotiated between the parties’ principal negotiators, Mr Bruno and Mr Roebuck. It was settled by the acceptance of Version 1 and confirmed by the Valuation. At no time did Mr Roebuck seek to revisit with Mr Bruno the question who should pay the pension deficit.

[163]As noted, the negotiation of commercial terms and the drafting of the Transfer Contract were carried out in parallel but were separate exercises. The function of the lawyers was not commercial negotiation or renegotiation but drafting.

[164]As the judge recognised, Mr Bruno was a public servant operating in the public sector. It would doubtless never have occurred to him in a matter of the present kind that DDH would seek to go back on the agreement that DDH should pay the pension deficit without raising it with him directly.

[165]It is relevant to look at the history of what became clause 14.10. Clause 14.10.3 (which the judge found to be fatal to the rectification claim) did not in fact change the effect of the existing draft contract on the question whether the pension deficit was to be paid by DDC or DDH. Indeed, an additional ground on which the judge said that the rectification claim would have failed was that the rectified version of clause 14.10.3 for which DDC contended was at odds with clause 14.10.2. He quoted the parts of clause 14.10.2 set out in paragraph 12 above, which provided for DDC, not DDH, to pay the pension deficit. Significantly, clause 14.10.2 (in the final version) had been part of the draft contract from 3 October 2007, as explained in paragraphs 126 and 127, but on 11 October the parties went on to sign the Valuation, thereby agreeing that their position remained as per Version 1. The signature of the valuation was solicited by Mr Roebuck. The Valuation was inconsistent with clause 14.10.2, which had by now been accepted, but the explanation was simple. Mr Bruno made a mistake. Although he was present at the discussion of the draft on 3 October 2007, the judge said that “Mr Bruno’s understanding of contractual matters must have been so obviously limited”. The episode was indeed a demonstration of that. So it was that although clause 14.10.2 was part of the agreed draft from 3 October 2007, the judge found that it did not affect the non-binding agreement which the parties had entered in September 2007 and which subsisted until 1 November 2007.

[166]Such was the background to the introduction of clause 14.10.3, four days before the execution of the transfer agreement, by the emails of 1 November 2007 which the judge found to be critical.

[167]The introduction of clause 14.10.3 was plainly not an attempt by DDH to renegotiate what had been agreed between DDH and DDC, for the proposal for the insertion of clause 14.10.3 did not come from DDH. It came from RBS’s solicitors and, as the judge found, it was “only introduced out of an abundance of caution by RBS”. It was, however, induced in a real sense by Mr Roebuck’s misrepresentation to RBS’s solicitors, because the judge found that he had told them that the payment of the deficit payment was to be made by DDC (although he well knew that DDC’s proposal was the opposite). History then repeated itself in that Mr Bruno failed to appreciate its effect, as he had failed for the same reason to appreciate the legal effect of clause 14.10.2. As far as he was concerned there was, in his words, “a very clear agreement between the parties about what the deal was”, and it did not cross his mind that this clause was intended to change it.

[168]On the day after the exchange of emails on 1 November 2007 (and three days before the execution of the transfer contract), NCC sent an email to DDH’s solicitors continuing to state that DDC was saying that DDH would pay the deficit, and the email was copied to Mr Bruno. There was no response from DDH’s solicitors to say that this was wrong and that DDC would be paying it.

[169]A further striking factor is the commercial unreality of Mr Bruno consciously agreeing to a renegotiation of the agreement on 1 November 2007 so that DDC would pay the pension deficit to NCC. The net effect of the commercial agreement previously reached between the parties was that they would share the pension deficit. This would happen by a combination of three steps - the amount of the deficit would be deducted from the purchase price; the deficit would be paid by DDH to NCC; and DDC would receive back one half of the amount of the deficit payment which it had funded by receiving the top sliced £2.4 million from the VAT shelter (which would otherwise have been shared between the parties). As executed, the effect of the contract was very different. It meant that DDC would be paying the amount of the deficit twice – first by deducting it from the purchase price and then by paying it to NCC. DDC would therefore be worse off by £4.8 million (by deducting £2.4 million from the price and also paying £2.4 million to NCC), of which it would recoup £1.2 million net, leaving a shortfall much greater than if it had paid off the entire pension deficit and made no deduction from the purchase price. Nobody who understood the finances of the transaction could possibly have imagined that Mr Bruno would knowingly agree to such a change on the eve of the execution of the contract. There would have been no conceivable reason for him to do so. It would have been pure windfall for DDH amounting to £2.4 million. The only rational explanation for his conduct was that he failed to appreciate the significance of the clause.

[170]When these factors are taken into account, I do not consider that exchange of emails on 1 November 2007 should be regarded as showing an intention to vary the earlier non-binding agreement. There is no suggestion that the DDH board was conscious at anytime of an attempt to renegotiate the agreement approved on 11 October 2007. (The board, of course, had been told erroneously that the effect of that agreement was the DDC should pay the pension deficit). DDC patently did not consider that the payment of the pension deficit had been renegotiated. NCC’s email to DDHs’ solicitors on 2 November 2007 reflected DDC’s continued understanding that the pension deficit was to be paid by DDH.

[171]The judge’s finding that what happened on 1 November 2007 was a variation of the previous non-binding agreement did not take these factors into account. His reasoning (set out in paragraph 138) was confined to the terms of the emails. He concluded that nobody looking objectively at the exchange of emails on that day could possibly reach any other conclusion than that DDC by its solicitors had agreed that it would pay the pension deficit. If one looks only at the terms of the emails, I agree. On that approach any claim for rectification of a contract which a party had read before signing would fail. The judge was led to take that narrow approach by his reading of Chartbrook and his interpretation of the requirement that a party seeking rectification must show that the prior agreement or common intention continued at the time of the execution of the written contract. I understand and respect his reasoning, but I disagree with it.

[172]I return to the questions raised at paragraph 157. Having concluded that what happened on 1 November 2007 did not constitute a variation of the prior commercial agreement, the issue is whether the parties’ mistaken belief as to the conformity of the legal contract with the prior commercial agreement entitles DDC to rectification. According to the principle laid down in Chartbrook, it does. If that is right, DDC’s appeal should succeed, subject to the formal point raised by the judge that rectification merely of clause 14.10.3 would be wrong because the rectified version would clash with clause 14.10.2. That point is correct but it would go to the form of rectification needed. It would not be a reason for refusing rectification.

[173]There has been much recent academic writing about rectification and the rules of construction. On the issues in the present case I have found particular help from two articles by Professor David McLaughlan – The “Drastic” Remedy of Rectification for Unilateral Mistake (2008) 124 LQR 608 and Commonsense Principles of Interpretation and Rectification? (2010) 126 LQR 8. In the first article, written after the decision of the Court of Appeal in Chartbrook, Professor McLaughlan suggested a basis on which the developer’s rectification claim should succeed, but it was different from the basis adopted by the House of Lords. In his second article, written after the decision of the House of Lords, Professor McLaughlan commented (at page 13):

“This ruling [the ruling on rectification] is also likely to prove contentious. It is important to remember that rectification had been denied in the lower courts on the basis of two main findings of fact that the House refused to disturb. First, Chartbrook’s intention was exactly what, we must assume for the purposes of this issue, the contract provided for. This meant that rectification was not available on the usual ground of common mistake in recording the terms of the contract. Secondly, Chartbrook did not know of, and had not in bad faith sought to take advantage of, Persimmon’s mistake. Consequently, the latter could not satisfy what were thought to be the requirements for ordering rectification where there is mere unilateral mistake. In view of these undisturbed findings of fact it is difficult to accept that Chartbrook was mistaken, at least in any usual sense of that word. The company intended the contract to provide the benefits that (we assume) it did provide for. The only principled basis for allowing rectification is the one I suggested earlier in this review ((2008) 124 LQR 608 at 636). Chartbrook ought to have been aware from the offers that preceded the drafting of the written contract that Persimmon did not intend to offer the pricing formula Chartbrook intended, and, as a result of the various communications between the parties, including Chartbrook’s agreement in principle to the offers made by Persimmon, the latter were led reasonably to believe that the price they intended to offer was assented to.”

[174]With the utmost respect, I see much force in this criticism. The factual context of the decision in Chartbrook was that the “syntactical arrangement” of the words of schedule 6, if literally applied, would produce results which Lord Hoffmann described as “arbitrary and irrational”. Professor McLaughlan argued that although the judge found that the owner was not dishonest, and genuinely understood the contract to mean what it claimed, it should have been aware that the developer did not intend to offer “super overage” and that through the course of negotiations, the owner was led reasonably to believe that its version of the price formula was accepted. In support of this approach Professor McLaughlan cited the classical statement of Blackburn J in Smith v Hughes (1871) LR 6 QB 597, 607 on the formation and construction of a contract:

“If whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.”

[175]Professor McLaughlan argues that the same principle should apply when considering rectification of a written contract. He is critical of the courts for having developed the law in a formulaic way instead of concentrating on what he sees as a broader underlying principle.

[176]Notwithstanding the immense respect due to Lord Hoffmann and other members of the House of Lords, I have difficulty in accepting it as a general principle that a mistake by both parties as to whether a written contract conformed with a prior non-binding agreement, objectively construed, gives rise to a claim for rectification. Take a simple example. A and B reach what they understand to be an agreement in principle. They confirm it by an exchange of letters. A believes that the correspondence means x. B believes that it means y. Neither is aware that the other’s understanding is different and there is no question of either behaving in such a way as to mislead the other. They then enter into a written contract which both believe gives effect to the agreement. They are both wrong. Objectively construed, the non-binding agreement meant x but the written contract means y. On the Chartbrook principle, A is entitled to have the contract rectified to conform with the correspondence. I share Professor McLaughlan’s difficulty in seeing why it should be right to hold B to a contract which he never intended to make and never misled A into believing that he intended to make.

[177]In such a case it is hard to see why the written contract should not prevail. Rectification complements the rules of construction of contracts and serves a similar purpose. In general terms, the purpose is that the contract should give effect to what the parties intended should be the contractual bargain or, in some cases, what the party claiming rectification was led or encouraged by the other party to believe was to be the contractual bargain. Rectification in the example given above would not achieve that purpose. Rather, it would bind a blameless party to a re-formed contract which he did not intend.

[178]However, the present case has special features. Mr Roebuck well knew what terms Mr Bruno was meaning to offer. Smith v Hughes is authority that where one party knows the terms which the other party is meaning to put forward, he cannot hold the other party to a different interpretation, even if it were otherwise objectively the correct interpretation. Mr Roebuck caused DDH’s lawyers to enter into the process of contract drafting on a false understanding of what had been agreed. He similarly misled RBS’s lawyers, who put forward clause 14.10.3. If Mr Roebuck had been honest in his dealings with the lawyers, things would have proceeded differently. Mr Bruno, not dreaming that Mr Roebuck would try to alter their agreement without reference to him, failed to realise that this was the effect of the drafting of the contract. In short, Mr Roebuck led Mr Bruno to believe that it was agreed that DDH should pay the pension deficit; he led DDH’s lawyers and RBS’s lawyers to draw up a contract providing the opposite; he never indicated to Mr Bruno that DDH was dissatisfied with what had been agreed; and although Mr Bruno was careless in approving the draft contract, Mr Roebuck could not reasonably in all the circumstances have supposed that Mr Bruno really intended at the eleventh hour that the agreement should be varied to DDC’s considerable detriment for no intelligible commercial reason.

Conclusion

[179]Despite my concern about the correctness of the principle of the decision in Chartbrook on the rectification issue, this court ought in my view to follow it in the present case for a combination of reasons.

[180]First, although the decision on the point was obiter, it was the considered unanimous opinion of the House of Lords on a point which had been argued. It would be a bold course for this court not to follow it.

[181]Secondly, we did not ourselves hear argument on this point. There was argument about whether the fact that both parties were mistaken, albeit for different reasons, in believing that the Transfer Contract conformed with the prior commercial agreement embodied in Version 1 and the Valuation was sufficient for rectification, but there was no argument about the correctness of the reasoning in Chartbrook. Both parties agreed that it was correct, but disagreed about its effect. It seems unlikely that Chartbrook will be the last word on rectification. Sir Richard Buxton has suggested in an article “Construction” and Rectification afterChartbrook [20-10] CLJ 253, at 261, that much is left in the air, not only with regard to the relationship between construction and rectification, but also within the jurisprudence of rectification itself. There are undoubtedly in my view some difficult questions, and it would be unsatisfactory to express a firm conclusion about them without full argument.

[182]Thirdly, I have no qualms about the justice of the result which will be reached by applying what I understand to be the reasoning in Chartbrook on the facts which I have highlighted. I would hold that DDC is entitled to rectification for mutual mistake as to whether the Transfer Contract conformed with the prior commercial agreement. DDC and the board of DDH believed that it did, but they were both wrong. It was argued on behalf of DDH that it would not have entered into the Transfer Contract if the provision for payment of the pension deficit had been as per Version 1 and the Valuation. That may be so, but it is no defence, nor is it unfair in circumstances where DDH’s misunderstanding of Version 1 and the Valuation which it approved was brought about by its own principal negotiator. (It was not argued that rectification should be refused on the ground that it would cause unfair prejudice to RBS.) I agree therefore with the Master of the Rolls, whose judgment I have had the benefit of reading, that this would not be a case for refusal of rectification on discretionary grounds.

[183]My conclusion that DDC is entitled to succeed on the principle in Chartbrook makes it unnecessary to decide whether, if there was no common mistake, DDC should have succeeded in its rectification claim on the ground of unilateral mistake. That issue also gives rise to potentially difficult questions. Mr Roebuck knew that DDC’s offer was made on the basis that DDH would pay the pension deficit, and he led Mr Bruno reasonably to believe that this was agreed. He told RBS’s solicitors and DDH’s solicitors that the deficit was to be paid by DDC, and thereby led RBS’s solicitors (believing this to have been agreed) to propose that the Transfer Contract should include an express provision to that effect, although it was contrary to the deal which he had led Mr Bruno to believe had been agreed. For the reasons already discussed, nobody with a proper understanding of the finances of the transaction would have seen any intelligible reason for Mr Bruno consciously to agree on the eve of the execution of the Transfer Contract to a variation giving DDH what would amount to a windfall of £2.4 million. In such circumstances it seems to me strongly arguable that Mr Roebuck could not in good conscience stand by silently hoping that clause 14.10.3 would pass. I disagree with the judge’s view that Mr Roebuck was entitled in those circumstances to assume that Mr Bruno understood that the clause contradicted their earlier agreement.

[184]I am conscious that there is authority that the test for unilateral mistake rectification is one of honesty, and that nothing less than knowledge in the sense of one of Peter Gibson J’s first three categories in Baden

[1993] 1 WLR 509

will be sufficient. The judge found that Mr Roebuck did not have such knowledge. But I am not sure that the legal principle is or should be so rigid. Professor Andrew Burrows in his chapter on Construction and Rectification in Contract Terms (edited by Burrows and Peel), Oxford University Press 2007, has tentatively suggested that the modern law of construction and rectification may be moving to what he terms “promisee objectivity”, by which he means an approach which would include as part of the context not only the common intention of the parties but also the meaning of the contract which the promisor knows orought to know that the promisee is adopting. This is close to the thinking of Professor McLaughlan. In George Wimpy UL Limited v V I Construction Limited

[2005] EWCA Civ 77

[2005] ELR 135

Sedley LJ (at paragraphs 56-57) suggested that a test of “honourable and reasonable conduct” would be preferable. In the present case the trial judge said that it would have been honourable for Mr Roebuck to check out the position with Mr Bruno, but that the court was not concerned with honour. Words like “honourable and reasonable” are imprecise, but I am inclined to agree with Sedley LJ’s observation (at paragraph 65) that “sharp practice has no defined boundary”. It may be easier to judge than to define. These matters were not debated in the argument before us, and in view of the conclusion which I have reached on the prior issue it is unnecessary to explore them further.

[185]In summary, therefore, I would allow the appeal on the ground of common mistake, because the mistake of both parties (albeit for opposite reasons) about the conformity of their prior non-binding agreement with the written contract was a relevant mistake under the Chartbrook principle and subsisted at the time of execution of the contract. That analysis is independent of what I have referred to in paragraph 178 as special features of the present case. I have expressed my anxieties about this aspect of Chartbrook for the reasons set out in paragraphs 172-177 but have concluded that the court ought nevertheless to follow the principle. In so concluding I have said that I do not consider the result to be unjust in this particular case in view of the special features referred to in paragraph 178. I would add that I am of the same opinion as the Master of the Rolls in thinking that, but for Lord Hoffmann's analysis, it may well have been right to allow the appeal on the basis of unilateral mistake. That would to my mind be a more satisfactory basis. The outcome is that I would order rectification of the Transfer Contract. The appropriate form of wording would need to be the subject of further argument if the parties are unable to agree about it.

The Master of the Rolls

[186]I have had the great benefit of reading in draft the judgment of Etherton LJ, who would dismiss this appeal and refuse rectification of the contract the subject of these proceedings (“the Transfer Contract”), and the judgment of Toulson LJ, who would allow this appeal and grant rectification of the Transfer Contract as sought by Daventry District Council (“DDC”).

[187]As may be apparent to anyone reading these judgments, we have effectively been conducting a dialogue through the exchange and consequent refining of successive drafts of our respective judgments. Provided that this is, as I hope and believe that it has been in this case, a constructive, amicable and time-limited process, it should help sharpen the focus on the relevant principles and their application to the facts of the case, and on identifying any differences between us in relation to such issues.

[188]In summary terms, the appeal raises the issue whether DDC is entitled to rectify the Transfer Contract, and in particular clause 14.10.3, so that, instead of providing that DDC should pay a substantial pension deficit, it stipulates that Daventry & District Housing Limited (“DDH”) should effectively be liable for it.

[189]The facts which give rise to these proceedings have been compendiously and clearly recounted in the judgment of Vos J at first instance,

[2010] EWHC 1935 (Ch)

, paras 2-81 , and they are helpfully summarised by Etherton LJ at paras 2-43 above, and concisely encapsulated by Toulson LJ at paras [118]-[136] above. Accordingly, I shall confine myself to identifying the basic facts as they unfolded between June and November 2007.

[190]DDC’s claim for rectification of the Transfer Contract is to be assessed against the following basic history: a) The negotiations between DDC and DDH for the transfer of DDC’s housing stock and staff (“the staff”) to DDH started in June, and were conducted by very senior personnel (primarily Mr Bruno for DDC and Mr Roebuck for DDH) and their respective external solicitors and financial advisers; b) The negotiations had to address the question of the £2.4 million deficit (“the deficit”) in respect of the staff pension scheme; c) From 20 September, the negotiations were based on a document proffered by DDC to DDH, known as “Version 1”; d) The negotiations resulted in a formal signed agreement in principle (“the prior accord”) on 11 October, and this reflected Version 1, and was contained in a signed “Valuation”; e) It could just about be argued that the prior accord required DDC to pay the deficit, but the interpretation which involved it being met by DDH “requires far less violence … and is the more natural construction”, and made much better commercial sense, as the Judge said –

[2010] EWHC 1935 (Ch)

, para 124; f) Mr Roebuck, DDH’s principal negotiator, knew DDC believed this was the effect of the prior accord, and he knew that DDH’s financial adviser had made it clear to DDC’s consultants that that was the effect of the prior accord; but Mr Roebuck did not suggest to DDC that its understanding might be wrong; g) However, the board of DDH believed that DDC would be paying off the deficit, and Mr Roebuck never disabused the board of this belief; h) The parties’ respective solicitors had been drafting the contract from June, and continued to do so after the prior accord; i) The draft contract had always included clause 14.10.2, which suggested that DDC was to fund the deficit, and it remained in the contract; j) On 1 November, RBS, who were DDH’s funders, suggested to the solicitors including a new clause 14.10.3 in the contract, which clearly provided that DDC would pay the deficit; k) DDC and DDH, through their respective solicitors, agreed to the inclusion of clause 14.10.3, and the Transfer Contract was executed on 5 November with clauses 14.10.2 and 14.10.3.

[191]For a combination of four reasons, the background against which the claim has to be judged is unusual and potentially confusing. First, there are the curiously conflicting and symmetrical beliefs of DDC and the DDH board as to the effect of (i) the prior accord and (ii) the Transfer Agreement, as elegantly summarised by Toulson LJ in para [147] above. Secondly, there is the notable difference of appreciation, between the DDH board and DDH’s agent, Mr Roebuck, as to the effect, and what DDC believed to be the effect, of the prior accord, as clearly explained by Etherton LJ at para 59 above. Thirdly, it was only because of the proposal from RBS, DDH’s funders, whose understanding appears to have been based on what Mr Roebuck told them, that clause 14.10.3 was included in the Transfer Contract, as a result of which the contract conflicted with the prior accord, but complied with what the DDH board had wrongly believed to have been the effect of the prior accord. Fourthly, the Transfer Contract already contained, and had always contained, clause 14.10.2, which was inconsistent with the prior accord in the same way, although perhaps not as starkly, as clause 14.10.3.

[192]In wider commercial terms, the rectification claim also raises a difficult conflict. If the claim for rectification fails, then the ultimate financial analysis would be very unsatisfactory, even capricious, as it would effectively involve DDC paying 150% of the pension deficit, and, conversely, DDH actually profiting from the pension deficit by receiving 50% of it as a windfall – see para [169] of Toulson LJ’s judgment. On the other hand, as Etherton LJ points out in para 69, if rectification is granted, it could fairly be said to be unfair on the DDH board, as it would be landed with a contract, not merely different from that which it thought, in good faith, it had agreed, but one into which it would never have agreed to enter.

[193]In terms of culpability, using that word in a broad sense, each party also has a substantial case. Given what they intended, it involved an astonishing degree of casualness or ineptitude on the part of DDC personnel (or those advising them) to have agreed to clause 14.10.3 being included in the Transfer Contract, a point clearly articulated by Etherton LJ in para 93 above. On the other hand, there is no doubt that if one person can be said to be to blame for the problem arising in the first place, it is DDH’s principal agent in the negotiations, Mr Roebuck, as Toulson LJ explains in paras [128]-[130] and [142]-[144] above. (It is only fair to add that Mr Roebuck was acquitted by the Judge of any impropriety once DDC had agreed to the inclusion of clause 14.10.3 in the Transfer Contract – see para [145] above).

[194]These conflicting and complicating factors serve to emphasise the importance of adhering to the fundamental principles applicable to a rectification claim when considering the competing arguments in this case. Rectification is an equitable remedy, which means that its origins lie in conscience and fair dealing, but those origins cannot be invoked to justify an unprincipled approach: far from it. Particularly as rectification is normally invoked in a contractual context, it seems to me that its principles should reflect the approach of the law to contracts, in particular to the formation and interpretation of contracts. Similarly, as rectification most commonly arises in a commercial context, it is plainly right that the applicable principles should be as clear and predictable in their application as possible.

[195]At any rate in relation to rectification claims based on common mistake, those principles have been recently analysed in Lord Hoffmann’s characteristically elegant and perceptive speech in Chartbrook Ltd v Persimmon Homes Ltd

[2009] UKHL 38

[2009] 1 AC 1101

, paras 57-66, which has been discussed and quoted from by both Etherton LJ and Toulson LJ at paras 54, 78-81 and [151]-[155]. As Toulson LJ points out, this analysis was technically obiter, and, as he goes on to explain in paras [173]-[177], the analysis is not without its difficulties and has not met with universal approval in learned articles, and may have to be reconsidered or at least refined.

[196]However, like both Toulson and Etherton LJ, I think that it is right to proceed on the basis of Lord Hoffmann’s analysis on this appeal, even if it could otherwise be appropriate for this court to depart from that analysis (as to which I express no view). It would be wrong to depart from the analysis on this appeal for two reasons. First, any qualification of, or variation to, that analysis which has been raised in any article to which we have been referred would not affect the outcome of this appeal; secondly, the appeal was argued, and the case below was argued and decided, on the basis of Lord Hoffmann’s analysis.

[197]Lord Hoffmann’s analysis, in summary terms, proceeds as follows. When it comes to deciding whether there is a contractual relationship between two parties, and, if there is, what the terms of the contract are, such questions are normally to be assessed by what a hypothetical reasonable objective observer, aware of all the relevant facts known to both parties, and what has been communicated between the parties, would have concluded to be their intention. Exceptions to that general principle exist, such as (i) the exclusion of the antecedent negotiation when it comes to the interpretation of a written contract, and (ii) the subjective intention or understanding of the parties, which is inadmissible in relation to the interpretation of written contracts, although it is admissible when it comes to oral, or partly oral, contracts. Accordingly, where rectification of the terms of a contract is sought on the basis of alleged common mistake, while there will be some exceptions, the general rule is that the court should judge the question by reference to what a hypothetical reasonable objective observer, aware of all the relevant facts known to both parties, would conclude.

[198]However, the court will, inevitably, not adopt precisely the same approach to a rectification claim as it adopts to an interpretation issue. Three differences are relevant for present purposes. First, in a rectification claim, the antecedent negotiations are admissible: indeed they are normally of central relevance. Secondly, even in relation to written contracts, some subjective evidence of intention or understanding is not merely admissible, but is normally required in a rectification claim: the party seeking rectification must show that he indeed made the relevant mistake when he entered into the contract. Thirdly, as Etherton LJ points out in para 83 above, rectification is an equitable remedy and therefore is subject to somewhat different rules from interpretation.

[199]Turning to this appeal, there appears to be a substantial degree of common ground between Toulson and Etherton LJ (and indeed Vos J), with all of which I agree. In very summary and slightly oversimplified terms, the common ground is as follows. First, a formal (if non-binding) written prior accord was reached between DDC and DDH on 11 October 2007, and was contained in Version 1 and the Valuation. Secondly, that prior accord, interpreted as a matter of ordinary language, embodied an arrangement under which liability to meet the deficit was to rest with DDH, and not DDC. Thirdly, that was what DDC understood to be the effect of the prior accord. Fourthly, while DDH’s agent, Mr Roebuck, appreciated that DDC had that understanding, it was not how the DDH board understood the effect of the prior accord. Fifthly, DDC and DDH thereafter each instructed their respective solicitors to draw up a contract which reflected the prior accord. Sixthly, those solicitors then negotiated the terms of that proposed contract, taking instructions all the while from their respective clients, and this resulted in the Transfer Agreement, which was duly executed on 5 November 2007 by the parties. Seventhly, primarily through clause 14.10.3, the Transfer Agreement, as drafted and executed, imposed the liability to make good the deficit on DDC, not DDH.

[200]If this had been an accurate and complete summary of all the relevant evidence, then, once DDC had established that they had assumed that the Transfer Agreement reflected the prior accord, it appears to me that the reasoning in Chartbrook

[2009] 1 AC 1101

would lead to the conclusion that that agreement should be rectified to reflect the prior accord. The requirements of a rectification claim, based on common mistake, would be satisfied, as the eventual contract, the Transfer Agreement, which, as the parties had communicated to each other, was intended to reflect the prior accord, did not in fact do so, as it allocated the obligation to make good the deficit on DDC rather than DDH.

[201]The fact that DDH board had misunderstood the effect of the prior accord would not assist DDH in avoiding rectification, as (a) the prior accord should be interpreted in accordance with normal objective principles of construction, (b) the parties subsequent actions and statements should be judged objectively, not subjectively, (c) DDC had no reason to believe that the DDH board had misunderstood the effect of the prior accord, and (d) Mr Roebuck, DDH’s agent, was well aware how DDC understood the prior accord (and he knew that DDH’s financial adviser, had confirmed that understanding to DDC’s consultants), but he said nothing to DDC to suggest that DDH understood it otherwise, or that it had a different meaning.

[202]In a rectification claim grounded on common mistake, point (d) would, I think, make no difference, save that it could help defeat any equitable defence which DDH might otherwise raise to the rectification claim. Although the DDH board believed in good faith that the prior accord involved DDC paying the deficit, DDC would have been able to rely on the fact that DDH’s principal negotiator, Mr Roebuck, well knew that DDC understood and intended otherwise, and did nothing to disabuse DDC of that understanding. As Toulson LJ points out in paras 174 and 178 above, this would normally justify DDC succeeding in their claim (at least in the absence of any other relevant facts): see per Blackburn J in Smith v Hughes (1871) LR 6 QB 597, 607.

[203]The factor which causes Etherton LJ (and indeed caused Vos J) to take a different view from that identified in the three preceding paragraphs, and to hold that rectification should not be accorded to DDC, is, of course, the way in which clause 14.10.3 came to be included in the Transfer Agreement, in the telephone and email exchanges on 1 and 2 November 2007. The relevant train of events is set out in paras 28-42, as supplemented by paras [133]-[136], above. On the basis of those exchanges, Etherton LJ considers that DDC’s claim for rectification should be rejected, whereas Toulson LJ would nonetheless accede to it.

[204]In that connection, Etherton LJ expresses the issue in para 92 above as being whether, a result of the telephone and email exchanges, DDH had “objectively indicated to DDC its intention with regard to the payment of the £2.4 million which was different from the prior accord”. Toulson LJ, in paras [160] and [170], suggests the issue raises the question: “Have the parties behaved in such a way that they would reasonably understand one another to be involved in a process of seeking to negotiate a different deal from the one originally agreed or as involved in a process of drafting an agreement intended to accord with the deal originally agreed?”, and also expresses the issue as being whether “the exchange of emails should be regarded as showing an intention to vary the earlier [prior accord]”.

[205]In so far as there is a difference between the two approaches, it is that the former concentrates solely on the question whether DDH indicated an intention to resile from an aspect of the prior accord (namely who should be liable for the deficit), whereas the latter formulation also focuses on DDC’s reaction to DDH’s indication. At first sight, it might appear that there is unlikely to be any difference in the effect of these two formulations on the facts of the present case, because, if, in the proposal in its emails, DDH did “indicate … its intention” to depart from the prior accord, then DDC’s agreement, in its emails, to those proposals could fairly be said to give rise to an outward manifestation of a common “intention to vary the earlier [prior accord]”.

[206]However, closer consideration of the two formulations suggests that there could be a real difference between their respective effects. If Etherton LJ’s formulation is correct, one asks oneself whether, on an objective assessment as at 5 November 2007, in the light of the email and telephone exchanges of 1 and 2 November, viewed in their context, DDH had made it clear that it intended to depart from the prior accord. That simply requires one to assess whether the hypothetical reasonable observer would have concluded that DDH was resiling from the prior accord to the extent of contending that DDC, rather than DDH, was to meet the liability to fund the pension deficit. If Toulson LJ’s formulation is correct, and the question is whether there was an intention to vary the prior accord, then the reasonable observer would also have to consider whether DDC’s reaction amounted to agreeing to DDH’s change to the prior accord. In other words, in addition to the assessment required by Etherton LJ’s formulation, Toulson LJ’s formulation requires one to assess DDC’s reaction to DDH’s alleged resiling from the prior accord, and in particular whether the reasonable observer would have thought that DDC was agreeing to what DDH proposed (as reflected in para [169] of Toulson LJ’s judgment).

[207]In my opinion, to the extent that there is a difference between these two formulations, that of Etherton LJ is to be preferred. As is true in most rectification cases, there is no question of the prior accord in this case having been legally binding, so there was no need for DDC to agree to DDH’s resiling from the prior accord, before that resiling could be effective. And, if DDH made it clear, according to the normal objective test, that it was so resiling before the Transfer Agreement was entered into, then it is hard to see how the “common continuing intention” (as objectively assessed) could be said to have “continued [up to] the time of the execution of the instrument sought to be rectified” to quote from a passage in the judgment of Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd

[2002] 2 EGLR 71

, 74, para 33, approved in Chartbrook

[2009] 1 AC 1101

, para 48. Further, if what DDH said or did would have signalled to a hypothetical observer that it intended to resile from the prior accord, it would seem to be unreasonable to hold DDH to that accord, even if DDC did not appreciate that that was what DDH was signalling.

[208]So I turn to consider whether, in the light of the exchanges on the telephone and by email on 1 and 2 November 2007, viewed objectively and in their context, DDH signalled a departure on its part from the prior accord, so that it no longer was intending to fund the deficit.

[209]The fact that the trial judge concluded that, from an objective viewpoint, DDH did communicate a change of intention, is of limited persuasive value of itself, as his conclusion did not really rest on his evaluation of the oral evidence he heard; nor did it amount to a finding of fact. It was an inference which essentially depended on an objective assessment of the effect of the emails and conversations between the parties (or their respective representatives) on 1 and 2 November 2007. The oral evidence could, a least in theory, have been of some arguable assistance, in the sense of bringing the context to life, but, as Toulson LJ says at para [171] above, Vos J does not appear to have rested his conclusion, at least expressly, on anything other than the telephone conversations and emails which passed between the solicitors on 1 and 2 November. Accordingly, it seems to me that it is open to us in this court to consider the issue on its merits as we see them, rather than confining ourselves to a review of the trial judge’s conclusion.

[210]The notion that the hypothetical observer would have thought that DDH was making it clear that it was resiling from the prior accord is by no means fanciful. Clause 14.10.3 was put forward openly to DDC’s solicitors as a new provision whose terms were entirely clear, and it spelt out that DDC was to pay the deficit within five days of completion of the Transfer Agreement. The clause was discussed in advance of being drafted, and was agreed in emails between the solicitors to DDC, DDH and RBS on 1 November, it was emailed by RBS’s solicitors to the solicitors to DDC and the solicitors to DDH, and approved by them, and it was incorporated into the draft contract, by DDC’s solicitors all on the same day; and it was amended by agreement the following day. It can therefore be said with some force that it was being made clear by DDH and RBS that they were including a term whose effect was that DDC would pay the pension deficit, and, indeed, that this was consistent with clause 14.10.2, which had been included in the draft contract almost from the beginning

[211]On the other hand, it is self-evidently insufficient for a defendant to defeat a rectification claim simply by establishing that the terms of the provision which he put forward clearly departed from the prior accord. Rectification is often sought, and granted, in relation to contractual terms which are perfectly clear. Decisions such as George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive

(1950) 84 Lloyd’s Rep 97

(see at 106, column 1), cited with approval in Chartbrook

[2009] 1 AC 1101

, para 62, make that proposition good. Many, possibly most, rectification claims involve the claimant seeking to rectify a provision in an agreement whose terms are clear (although it is true that rectification is quite often sought as a fall-back if the party concerned fails on interpretation - as in Chartbrook

[2009] AC 1101

itself). By the same token, if, as in this case, the provision is proposed by the defendant for inclusion in a well-developed draft of the final agreement, the fact that the terms of the provision clearly depart from the prior accord cannot, of itself be enough to enable the defendant to contend that its acceptance by the claimant defeats any subsequent claim for rectification. Thus, in George Cohen 84 Lloyd’s Rep 97, 110, column 1, the draft lease with the clear provision, which was subsequently rectified, was submitted by the defendant to the claimant, who signed it.

[212]Inevitably, the question whether the proposal of such a provision should be treated as a resiling from the prior accord will depend on all the circumstances of the particular case. As with virtually any issue involving the effect of the contents of a document, the question has to be assessed not merely by reference to the words of the document, but also to the factual and commercial context in which the document is produced. Having said that, I would accept that the more clear the terms of the provision the easier it is to contend that it signals such a resiling.

[213]Despite the clear terms of the proffered clause 14.10.3 on 1 November, I am of the view that the hypothetical observer would not have concluded that DDH was signalling a departure from the prior accord: the observer would have believed that DDH was making a mistake. The contractual terms had been fully negotiated between the parties themselves and their respective advisers on about 11 October, when they reached the prior accord. The financial implications of those terms were well known to Mr Roebuck to have been agreed by DDC on the basis that DDH, not DDC, was to meet the deficit - and that was recorded in at least one email passing between the parties’ representatives, as Mr Roebuck knew.

[214]The carriage of the matter was then given over to the parties’ respective solicitors (who were already in negotiation) on the basis that they would sort out the drafting of a contract which reflected those negotiated terms. Accordingly, a proposal between those solicitors, a couple of days before execution of the contract, to include a new clause in the contract would, at least on the face of it, have been unlikely to have been intended to represent a variation of those terms, or a re-opening of the negotiations, unless, of course, such an intention was explained in clear terms in an accompanying letter or email.

[215]Further, the actual proposal came from RBS, DDH’s funders, who had not been involved in the negotiations leading up to the prior accord. And, as the Judge put it, “the reason for the new clause was purely to give the funders comfort and was not intended to effect a change in the deal” –

[2010] EWHC 1935 (Ch)

, para 133: if clause 14.10.3 did effect such a change, it therefore must have been a mistake. I think that it is also relevant to the assessment of the notional observer that the terms of the prior accord as to who should pay the deficit were tolerably clear, although I accept that there was a weakly arguable case to the contrary. In addition, as already mentioned, it seems to me to have been particularly unlikely that the proposal would have been intended to have the curious, even capricious, effect of rendering DDC liable for 150% of the pension deficit, and to give DDH a windfall of a sum equivalent to 50% of the deficit.

[216]The fact that the draft contract already contained a provision inconsistent with the prior accord, namely clause 14.10.2, may appear at first sight to assist DDH’s case. However, on reflection, I think that it is quite consistent with DDC’s argument. The inclusion of clause 14.10.2 from the early days of the draft, well before the prior accord had been reached, would, in my view, have been regarded as a plain mistake by the hypothetical objective observer. It envisaged that the pension deficit would be paid by DDC, whereas the wording of the prior accord and commercial common sense pretty plainly envisaged that it would be funded by DDH. There appears to be no explanation, other than some sort of oversight on the part of DDC’s and DDH’s respective solicitors, as to why clause 14.10.2 was ever included in the contract in the terms in which it was expressed. It seems to have been attributable to some failure on their part in understanding the prior accord, or to appreciate the need to amend the clause after the prior accord was reached: it may well have been based on confusion between the pension deficit and the VAT shelter. I can see no reason why the clause would not have been rectified if it had been the only provision of the Transfer Contract which conflicted with the prior accord. In the light of that, it seems to me that the hypothetical observer, who had seen a similar sort of error, would have found it relatively unsurprising that the error would be perpetrated again through the medium of a different, if more egregious, mistake namely including clause 14.10.3.

[217]Etherton LJ tellingly raises the question as to the nature of the mistake made by DDH when clause 14.10.3 was proffered or agreed on their behalf. Where someone makes a mistake it is often difficult, or even impossible, to explain the mistake or expand on its nature, beyond identifying it as such. Misreading, muddle, carelessness, failure to engage, confusion are all possible explanations, but they do not take matters much further forward. As, for instance, with an act of negligence, one knows it when one sees it (at least sometimes), but it is often impossible to explain or expand on it. Often, the mistake or negligent act is almost by definition inexplicable, even by the person guilty of the negligent act or mistake - consider the familiar statement after the event along the lines “I simply cannot understand how I could have done/ not done/ thought/ not thought that”.

[218]For the reasons already mentioned in para [216] above, I do not consider that clause 14.10.2 should stand in the way of rectification, as Vos J seemed to think. If clause 14.10.3 can be rectified to reflect the prior accord, I do not see why clause 14.10.2 cannot similarly be rectified.

[219]If, as I consider, the Transfer Contract should otherwise be rectified as DDC contends, there remains the concern, briefly noted above, that rectification would result in a contract to whose terms DDH would never have signed up. At any rate at first sight, it might seem to many people to be unfair that DDH, whose board believed in good faith throughout that DDC would pay the deficit, should, as a result of an order for rectification, be bound by a contract which results in DDH having to fund the deficit, especially if DDH would never have entered into a contract in those terms the first place, and where the contract would never have been made if it had not been for DDC’s rather crass oversight: if DDC had spotted the departure from the prior accord, it would have brought the issue to a head, and, it would seem, there would quite probably have been no contract. It therefore appears to me that there is a further point that must be addressed, namely that, even though DDC has made out its case for rectification on the grounds of common mistake, it would be inequitable to grant such relief.

[220]Having said that, I consider that any concern about unfairness to DDH in this connection should be dispelled by the fact that Mr Roebuck, DDH’s agent, for whom DDH must clearly accept responsibility as against DDC, carried a great deal of blame for the misunderstanding that had arisen. He, and, as he appreciated, DDH’s financial advisers, knew perfectly well from an early stage in the negotiations that DDC believed that the effect of the prior accord was that DDH would be liable for the deficit, and he knew that those financial advisers made it clear to DDC that they thought that the prior accord had that effect. He never suggested to DDC that the prior accord had a different meaning, but he nonetheless let the board of DDH believe that it was to be DDC who would pay off the deficit.

[221]The Judge said that, on 20 September 2007 “or thereafter”, Mr Roebuck “should …. have raised the matter” with DDC, but instead “intend[ed] to take advantage of the drafting mistake which he knew [DDC] had made”, and he also said that “Mr Roebuck undoubtedly behaved inappropriately between 20 September and 31 October 2007” –

[2010] EWHC 1935 (Ch)

, paras 95 and 154. Further, despite knowing that DDC believed that DDH would be paying off the deficit, it was Mr Roebuck who appears to have been responsible for RBS’s proffering of clause 14.10.3, as he told RBS that DDC would be paying off the deficit.

[222]It is true that the Judge found (albeit essentially by reference to the standard of proof – “an ill motivation of the kind alleged needs to be fully proved as it is always more likely that people will behave properly rather than improperly”) that, after 1 November 2007, Mr Roebuck was entitled to believe that DDC had accepted that it would pay the deficit because it had agreed to the inclusion of clause 14.10.3 in the contract - see at

[2010] EWHC 1935 (Ch)

, para 154, quoted at para 67 above. However, that does not retrospectively exonerate his unconscionable behaviour during the earlier six weeks.

[223]In some cases, it would be right to hold that discretionary considerations justify refusing rectification, even where, on the basis of Lord Hoffmann’s analysis of the law in Chartbrook

[2009] 1 AC 1101

, a claimant establishes a right in principle to rectification on the ground of common mistake. In this case, the fact that the DDH believed in good faith that the Transfer Contract was intended to mean what it stated in clause 14.10.3 and implied in clause 14.10.2, and that the inclusion of those clauses in their actual terms was ineptly approved by DDC and/or their advisers, undoubtedly represents a promising basis for refusing rectification.

[224]However, in my view that is more than outweighed by the fact that Mr Roebuck’s knowledge and actions must be attributed to DDH, as they have always accepted, and his disreputable conduct throughout October, as found by the Judge, was responsible for the problem arising. So far as funding the deficit is concerned, he should have told DDH what he knew DDC intended and what the prior accord meant, and he should have told DDC what DDH intended. Effectively, as the only person with the necessary knowledge and information, he wrongly permitted both parties to be misled, and to enter into a contract, where they were at cross-purposes, and which was different from what at least one of them intended. It is true that, on the Judge’s finding (not challenged on this appeal), he was, in a sense, saved by the deus ex machina of the acceptance of RBS’s proposed clause 14.10.3. However, the RBS proposal was prompted by his telling them of the effect of the contract, at a time when he knew that DDC believed and intended that it should have a different effect, and that they had been told by DDH’s financial advisersthat DDH intended it to have that different effect. In effect, I do not consider that the events of 1 and 2 November discharge Mr Roebuck’s, and therefore DDH’s, culpability for the misunderstanding about the deficit persisting.

[225]In these circumstances, I consider that DDC is entitled to rectification of the Transfer Contract on the grounds of common mistake. It may appear counter-intuitive to describe the parties as having signed the contract under a common mistake, as the board of DDH, and even (by the time the contract was signed) Mr Roebuck, intended to agree what it provides; accordingly any claim for rectification by DDC might appear to the uninitiated to be more appropriately based on unilateral mistake. However, as has been explained in all three judgments on this appeal, Lord Hoffmann’s speech in Chartbrook

[2009] AC 1101

establishes that the issue as to whether there was a common mistake must be judged objectively.

[226]It is therefore unnecessary to consider whether rectification should also be granted on the ground of unilateral mistake. But, at least as it appears to me at the moment, (i) there is much to be said for the view that many rectification claims which might previously have been regarded as based on unilateral mistake may now be better treated as being based on common mistake, and (ii) if we were deciding this appeal without the benefit of Lord Hoffmann’s analysis, I might not have thought it right to allow the appeal on the ground of common mistake, although I may have done so on the ground of unilateral mistake.

[227]In his clear and careful judgment, in which he decided a number of other issues which have rightly not been challenged on this appeal, Vos J concluded that DDC was not entitled to rectification. That conclusion was endorsed by Etherton LJ, whose reasoning deserves great respect. Indeed, I agree with his clear and helpful analysis of the law in paras 80-90 above. However, not without hesitation, and in common with Toulson LJ, I have come to the contrary conclusion, not because of a significantly different view of the law, but because of a different assessment of the application of the law to the unusual facts of this case. In effect, Toulson LJ and I consider that this is a case falling within the third scenario of Etherton LJ (para 87 above), whereas he, like Vos J, is of the view that it is within the fourth (para 88).

[228]Accordingly, DDC’s appeal is allowed.

Cited in 31 later judgments

and 22 more of the most senior