Daventry DC v Daventry and District Housing Ltd
Court of Appeal
Citations:  EWCA Civ 1153;  1 WLR 1333;  2 All ER (Comm) 142;  Bus LR 485;  1 P & CR 5;  CLY 626.
The claimant was a local housing authority. The defendant was a registered social landlord. The parties negotiated for the sale of the claimant’s housing stock and staff. One matter to be decided was who would pay a deficit in the local government pension scheme. The claimant offered a discount on the stock if the defendant took on the deficit. This proposal was based on a non-binding agreement the parties had signed earlier.
The defendant’s agent told the defendant’s board of directors that the deal (and the earlier non-binding agreement) involved the claimant paying the deficit. As a result, the defendant agreed and the parties signed a contract. The written contract (which the claimant did not read properly) stated that the claimant was responsible for paying the deficit.
A short while later, the claimant noticed the mistake. They brought an action for rectification of the contract for mutual or unilateral mistake. The defendant responded that:
- They had no knowledge of the claimant’s error. This meant that the requirements for unilateral mistake were not established.
- The parties never shared a continuing common intention that the defendant would pay the deficit. This meant that the requirements for mutual mistake were not established.
- Could the contract be rectified to reflect the claimant’s understanding of what was intended?
The Court of Appeal held in the claimant’s favour and rectified the contract on the grounds of mutual mistake. The reasonable observer, looking at the circumstances, would conclude that the defendant had made a mistake in drawing up the contract. They would not think that the defendant intended to depart from the prior objective accord which the parties had reached. As such, there was no need to consider the case for unilateral mistake.
This Case is Authority For…
To obtain rectification for mutual mistake, a party to a contract must show that:
- The parties had a common and continuing intention in respect to a particular matter;
- There was an outward expression of that agreement;
- Due to a mistake, the eventual contractual instrument did not reflect that intention; and
- It is not otherwise inequitable to rectify the contract.
The Court of Appeal in this case argued that these elements are assessed objectively, from the perspective of the reasonable observer. However, Lord Neuberger noted that:
‘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.’
The idea that these elements are assessed objectively was disputed and departed from in the later Court of Appeal decision in FSHC Group Holdings Ltd v GLAS Trust Corp Ltd  EWCA Civ 1361.
The judges in this case disagreed as to what exactly the claimant had to show for the third requirement. Etherton LJ and Lord Neuberger thought that the claimant only needed to show that the reasonable person would not conclude that the defendant intended to depart from the prior accord when they presented the final contract. Toulson LJ thought that the claimant additionally had to prove that a reasonable person would not think that, by signing the contract, the claimant was agreeing to vary the prior accord.
Toulson LJ commented that that there is contention as to the requirements of rectification for unilateral mistake. There is authority for the proposition that the defendant must know the claimant is mistaken. However, Toulson LJ did not think that the test was so stringent. Instead, he thought it may be enough that the defendant ‘ought to have known’ that the claimant was mistaken, or had conducted themselves dishonourably or unreasonably in not investigating the matter.
Lord Neuberger seemed to agree, arguing that rectification for unilateral mistake might have been granted in this case since the representative had acted ‘disreputably’ and his state of mind was to be attributed to the defendant.
Etherton LJ dissented. He thought that it was objectively apparent from the final draft of the contract that the defendant no longer intended to contract on the basis of the prior agreement. Since the claimant had been careless in not realising this, relief should be denied. He characterised their error as purely subjective, whereas rectification is solely concerned with objectivity. He thought the majority were wrong to assume that a reasonable person would look at the situation and think that the defendant had made a mistake.