Must you mention that misunderstanding in negotiations?

24 January 2013

The Facts

The contract in this case related to the purchase of council housing by Daventry & District Housing (DDH) from Daventry District Council. As part of the agreement certain employees and their pensions would also be transferred to DDH. The matter at issue involved how the parties would deal with a pension fund deficit of £2.4 million. The parties agreed commercial terms in principle, agreeing that the deficit would be met by DDH. It was the understanding of DDC that these terms would be reflected in the final written agreement, however this was not the case. Rather, the contract was ambiguous and included terms that actually seemed to suggest that DDC would be obliged to pay the deficit. The only person who understood the difference between the commercial terms and the final contract was the chief negotiator of DDH, who remained silent on the issue and allowed both parties to sign the contract. DDC, upon subsequently realising that they were required by the contract to pay the deficit, sought rectification for the mistake.

The Decision

The original claim in the High Court failed, it was held that it was not possible to say that both parties, objectively judged, had a continuing common intention that DDH would fund the deficit. Further, the fact that the council had viewed the written contract on numerous occasions before signing it, led the court to the conclusion that DDH had not dishonestly mislead DDC and relied on their error to their own benefit. DDC was granted leave to appeal to the Court of Appeal.

The Court of Appeal overturned the decision of the High Court and ordered that the agreement be rectified to more accurately reflect the commercial intentions of the parties, namely that DDH would fund the pension deficit. The ruling was made largely on the basis of the behaviour of DDH’s chief negotiator, which the court criticised. The fact that he relied on the mistake and informed neither DDC or his own colleagues meant that both parties had entered into the contract wrongly believing that it reflected their shared intentions at signing. There were therefore sufficient grounds for common mistake. It is likely that had DDH been unaware of the mistake and not sought to rely upon it then the Court of Appeal would have denied the appeal.

The Impact

It can be suggested that DDC were incredibly fortunate to have the agreement rectified in this case, as it is arguable that DDH, when they signed the contract, never intended to contract on the rectified terms. The importance of checking the finalised contract draft and ensuring that you understand the consequences of signing should therefore be emphasised. Rectification is a discretionary remedy of correcting mistakes and therefore there is no guarantee that such a decision will always fall in the favour of the party that has simply failed to check the draft properly before signing. Each party should take the time to make sure that the final agreement reached accurately reflects their commercial intentions. Legal advice should be sought in good time prior to the signing of a contract to make sure that the terms are properly understood.

One thing that seems to have been established in this case is that the court does expect one party to point out to the other any misunderstanding as to terms that arise during the negotiations. Even though in this case the grounds for common mistake were established, the references by the judges to the “unconscionability” of the actions of the negotiator seems to suggest that parties who act in a similar manner will run the risk of a later unilateral rectification argument succeeding. It is dangerous in relying on terms of an agreement that you know has been interpreted differently by the other side.

 For additional information please contact Justin Emerson of Gepp & Sons on 01245 228113 or

The above is not legal advice; it is intended to provide information of general interest about current legal issues.