PLC Public Sector reports:
The recent decision of the High Court in Daventry District Council v Daventry & District Housing Limited is a reminder for parties of the importance of ensuring that contract terms properly reflect their understanding of what has been agreed.
The facts of Daventry were that, after many months of negotiation, the District Council entered into a contract on 5 November 2007 to transfer its council housing stock to Daventry & District Housing Ltd (DDH), a specially formed Registered Social Landlord (RSL). In addition to the transfer of its housing stock, the District Council also agreed to transfer its housing department staff, who were members of the section of the Local Government Pension Scheme, administered by Northamptonshire County Council. It was part of the arrangement between the District Council and DDH that staff would remain members of the LGPS and DDH would become a participating employer of the scheme. However, because the part of the pension scheme referable to the transferring employees was at that time under-funded by £2.4 million, there was a clause in the transfer contract stating that the District Council would make a payment of £2.4m within five business days of the completion date.
The District Council did not deny that its solicitors and lead negotiator had consented, in an exchange of emails on 1 November 2007, to the inclusion of that particular clause but claimed that it was mistaken in giving that consent and that both parties intended the clause to provide that DDH, and not the District Council, would make the deficit reduction payment. It argued that DDH had agreed to pay £2.4m less for the transfer of the housing stock on the basis that it would cover the deficit. The District Council therefore issued an application in the High Court for rectification on the grounds of mutual, alternatively unilateral, mistake.
Given that the law on both common mistake and unilateral mistake is not in dispute, the case therefore was about the application of the law to the particular facts. Both sides accepted that for rectification to be appropriate, there had to be convincing proof that the concluded instrument did not represent the common intention of the parties.
The Judge considered that nobody looking objectively at the exchange of e-mails on 1 November 2007 could reach any conclusion other than that the parties had by their solicitors agreed that the District Council would be paying the £2.4m pension deficit within five days and therefore held that the District Council’s claim to rectify the Transfer Agreement on the grounds of common mistake failed. In relation to the District Council’s case on unilateral mistake, the judge considered that it was hard to see how the District Council could actually show that it erroneously believed the Transfer Contract provided for DDH to pay the pension deficit, when it had agreed through its solicitors to the inclusion of the clause which provided precisely the opposite. In the Judge’s view, the clause was fairly raised and approved in the negotiations between the parties and, in the absence of proof that DDH still knew after the clause had been approved that the District Council was mistaken, was sufficient to deprive the District Council of a case in unilateral mistake.
What is apparent from a reading of the judgment is that despite the fact that the witnesses in the case were mostly public servants operating in the public or charitable sector rather than a commercial environment, the negotiations were conducted on an arm’s length basis in what the judge described as a climate of mistrust. The Judge’s view was that this environment, which meant that the negotiators were not able to pick up the telephone to resolve issues as they arose, had some bearing on what eventually occurred between the parties. However, the key problem arose because of the ambiguous drafting of the initial proposal leading up to the Transfer Contract and the failure by the proposal’s draftsman to include words which he thought were obvious, namely that DDH would pay the pension deficit, which resulted in the Transfer Contract providing that the District Council would pay the deficit.
There are several steps that any organisation, but particularly a public body responsible for public money, should take prior to signing off any significant agreement:
- Any documents setting out the commercial position should be peer-reviewed to check that they are clear, unambiguous and make sense to everyone and not just the person that drafted them.
- The key commercial issues should be finalised as far as possible prior to any formal contract being drafted.
- Any request for the inclusion of a contract term during the course of negotiations should be referred back to those responsible for the “commercial deal” to check that they accord with what is agreed.
- All contracts must be thoroughly checked prior to execution. Ideally a report should be prepared for those responsible for executing the agreement setting out the key liabilities included in the agreement.
For more information see our practice notes on making an application for rectification and the effect on a contract of common law mistake.