Rectification for mistake: the conflict between common law and equity

One can hardly believe such things could happen, but they do. In Daventry DC v Daventry and District Housing Ltd [2011] EWCA Civ 1153 a local district council, DDC, agreed in principle with a registered social landlord, DDH, to transfer the council housing stock and staff. The district council and the staff wanted the staff to remain in the county council pension fund, which would require the district council staff deficit of £2.4m to be paid to the county council.

The parties agreed, by non-binding prior accord, that the housing association would pay this deficit, which would be reflected in a reduction in the purchase price, and it would take some VAT payments in partial compensation. B was the principal negotiator for the district council and R was the principal negotiator for the housing association. B and the district council, assumed all along that the district council were not going to have to pay the deficit. R led the housing association to believe that it was going to have to pay the deficit but would receive the compensation under the prior accord. Both the district council and the housing association were content with what they understood the reality of the situation to be.

New clause

Solicitors were instructed to draft and complete the transaction. For some reason, apparently at the suggestion of the funding bank, at a very late stage a new clause appeared, expressly making the district council liable for the £2.4m. B apparently did not notice this very significant change. The district council continued to believe that the housing association would be paying. R, aware of the new clause, did not tell the housing association's board, who rightly continued to believe that they would be largely indemnified by the compensation. Weeks after the completion of the transaction the truth came to light. The district council, not surprisingly, sought rectification. They had never intended to pay.

The clause requiring the district council to pay was quite clear, but the council was clearly under a mistake. Its advisers and lawyers did not deserve much credit for competence and perspicacity, but they acted honestly if naively. The social housing association was clearly under a mistake, because of their agent R's disingenuousness, misleading conduct, and deception of everybody, including his own principal. R knew that everybody was under a misunderstanding or misapprehension. The terms of the completed contract were clearly beneficial to the housing association, a windfall, but clearly adverse for the district council. Was this a unilateral mistake? Or was it a common or mutual mistake? Or both? And was rectification, an equitable or conscience or fair dealing relief, available and appropriate?

Professional parties

Where a written contract, negotiated by professional people, expressly and clearly by its express terms requires one party to pay money to the other party, then both parties are presumed to have understood and agreed to what has been authenticated by their respective signatures, unless, because of a mistake by one or other or both, there is a case for judicial equitable rectification.

All along, B and the district council believed that the council was not going to have to pay the deficit, and that this was reflected and contained in the prior accord and in the completed contract. The housing association believed the same. Only R appreciated and knew that the completed contract contained an entirely new clause which fundamentally altered the terms of the prior accord and would mean a windfall benefit for the housing association.

The commercial unreality of B, a senior officer in the public sector, is a matter for regret. The lack of insight for the solicitors involved, even though they were 'only' drafters of the formal contract, is also a matter for regret.

Unclear scope

In an illuminating judgment, Lord Neuberger found a common mistake. Both the district council and the housing association believed that the contract as eventually signed gave effect in substance to the prior accord, and despite the clear words of the new clause any hypothetical reasonable informed objective outsider would have taken that view. Toulson LJ agreed. Etherton LJ disagreed. Lord Neuberger would also have found unilateral mistake if necessary.

The scope of the law of rectification remains unclear, reflecting something of the old conflict between common law and equity. At common law the parties to a contract are bound in the absence of deception by the express unambiguous terms, whatever one or both of the parties intended or thought or believed.

The test is objective. At equity there ?may be something about the language of the contract or the background circumstances to lead the court as a matter of conscience and justice and fairness to rectify the contract.

The test is subjective, though based on an objective appraisal of the evidence.