Chartbrook Ltd v Persimmon Homes Ltd
House of Lords
Citations:  UKHL 38;  1 AC 1101;  3 WLR 267;  4 All ER 677;  1 All ER (Comm) 365;  Bus LR 1200;  BLR 551.
The claimant owned some land which they wished to develop. They hired the defendants as developers. The contract required the defendants to acquire planning permission for the development. Once they had done so, they would take possession of the land under a licence, construct mixed residential and commercial properties and sell them on long leases. The claimants would be the lessors, while the defendants would receive the proceeds and pay an agreed sum out of those proceeds from the claimant.
The defendant acquired the planning permission and completed the development. A dispute later broke out over a clause in the contract which provided for an ‘additional residential payment’. This term was defined in the contract, but the parties disagreed on how to interpret the definition. The claimant’s definition, which better accorded with the plain language of the term, led to a much higher payment that the defendant’s interpretation. The claimant sued the defendants for the unpaid balance of the additional residential payment.
To support their interpretation of the meaning of ‘additional residential payment’, the defendant sought to rely on documents which were part of the parties pre-contractual negotiations. In the alternative, they sought rectification of the contract to alter the definition to match the parties’ common intended meaning.
- Which of the parties’ interpretation of additional residential payment was correct?
- Were the defendants entitled to rectification?
- Was evidence of pre-contractual negotiations admissible evidence for the issue of interpretation?
The House of Lords held in favour of the defendants. The pre-contractual negotiations were not admissible evidence. However, it was apparent from the background and context of the contract that the parties had made a mistake of language in recording their intentions.
On its face, the clause made no commercial sense and could not bear the meaning contended for by the claimant. The true meaning of the contract was also objectively apparent. The Lords therefore agreed with the defendant on the true meaning of the clause.
Since the issue of interpretation fell in favour of the defendant, there was no need to consider rectification.
This Case is Authority For…
If the context and background of a contract indicate that something has gone wrong with the language of a contract, the courts are not obliged to attribute to the parties a meaning they plainly did not have. If both the mistake and the true intended meaning would be apparent to a reasonable person aware of all admissible background knowledge, the court may correct the mistake in the process of interpretation. This being the case, there is no need to rectify the contract.
Evidence of pre-contractual negotiations is inadmissible when interpreting a contract. This is for two reasons. The first is that such evidence is usually irrelevant to how a reasonable person would interpret the language of the contract. The second is that admitting such evidence would lead to considerable uncertainty and excessive litigation.
Lord Hoffman in this case stated, obiter, that when determining what the parties intend for the purposes of rectification, the court should take an objective approach. This contradicted previous authority: Britoil plc v Hunt Overseas Oil Inc  CLC 561. The Britoil approach was confirmed, and Lord Hoffman’s approach refuted, in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd  EWCA 1361.