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Court of Appeal makes rare order for rectification, with interesting consequences…

28 June 2019. Published by Alan Williams, Partner and Rebecca Birkby, Senior Associate

The Court of Appeal has ordered rectification resulting in one party being in breach of warranty and liable pay damages. In Persimmon Homes Limited v Hillier and Creed(1), the dispute centred on whether all plots of land required to create a development site were intended by both parties to be included in a sale, when in fact two plots out of six were not included.

Facts

 

Persimmon, the Buyer, is a house building company. It entered into discussions with the Sellers, Mr Creed and Mr Hillier, who were business partners operating a house building business through a number of companies with the name "Hillreed".  Those companies held interests in various plots of land that together comprised a single development site. 

 

The Buyer entered into two share purchase agreements (SPA) to purchase all of the shares in two of the Sellers' companies which purportedly held the interests in the six plots of land that made  up the development site and agreed to purchase from a third company a freehold office building which was Hillreed's group head office.  Despite the parties' intentions the Buyer only acquired four plots of land, not that six that were required to make up the development site. 

 

What is rectification?

 

Rectification is a remedy where there has been a common or unilateral mistake.  For common mistake a party must show that the agreement as drafted does not reflect the common intentions of the parties at the time the contract was made and the agreement as rectified will reflect their intentions.

 

The claim for rectification

 

The Buyer brought proceedings to rectify the SPA so as to include within the scope of the warranties provided by the Sellers in the SPA that one of the Sellers' companies did own the two relevant plots of land (that meant that the Sellers were in breach of warranty as the company did not in fact own the two plots of land, it was owned by a third company of the Sellers) and also to rectify the disclosure letter to omit those two plots from the disclosures concerning the ownership. This meant that the Sellers' liability for breach of warranty was not disclaimed by the disclosure letter. 

 

The claim was successful and the Buyer was therefore entitled to damages representing the difference at the date of the SPA between the value of the acquired company as warranted (i.e. the whole development site) and its actual value. 

 

The Sellers appealed on two grounds:

  • the first instance judge was wrong, on the evidence before him, to order rectification of the SPA and disclosure letter; and
  • in any event, the disclosure letter was incapable of rectification as a matter of law. 

Decision of the Court of Appeal

 

The Court of Appeal looked at the evidence before the first instance judge and found that, objectively construed, the evidence suggested that the Sellers had held out that the entire development site was to be included in the purchase and that both parties had proceeded with the SPA on the common understanding that it included all six plots of land.  In particular, the Sellers had sent the Buyer a data package which often referred to the whole site as belonging to "Hillreed", without referring to any particular company and it clearly suggested that if the Buyer was to purchase  the relevant entities  it would acquire the entire site regardless of which "Hillreed" entity owned it.  There was also nothing in the correspondence between the parties that suggested that the Sellers had intended to remove the two plots from the deal and both the Seller and the Buyer proceeded on the basis that they were included.  

 

Further, the Court of Appeal found that the common intention of the parties had been that one of the entities would be the corporate vehicle for the sale of the "strategic landholdings" (i.e. the two plots) and the Sellers could have ensured that ownership issues would have been resolved by completion without difficulty.  The Court of Appeal therefore upheld rectification of the SPA as it did not accurately record the terms agreed between the parties and the requirements for rectification had therefore been met.

 

The Court of Appeal also upheld the rectification of the disclosure letter.  The Sellers argued that it was incapable of rectification as it was a unilateral notification of particular facts that existed at the time and the court could not re-write history and delete a correct statement of fact.  The Court of Appeal found that the same mistake informed both the SPA and the disclosure letter and found there was no difficulty in principle about rectifying both contractual documents to give effect to the common intention.  Nothing turned on the fact that the document was unilateral; unilateral documents may be rectified if they do not give effect to the intention of the maker.  The rectification of the disclosure letter did not "re-write history" but instead gave effect to the parties' common intention that there should be warranties in the SPA that the Seller entities owned the two plots of land.

 

Comment

 

It is rare for the court to order rectification as it is often difficult to satisfy the test to do so.  This case serves as a welcome reminder that the Court is willing to order rectification to prevent one party from seeking to take advantage of a situation when a mistake is discovered.   It is also a cautionary tale to practitioners to look closely at the relevant contractual documentation to make sure that it accurately reflects the parties' agreement.  Often the devil is in the detail which can be overlooked in complex negotiations.

 

(1) [2019] EWCA Civ 800.