1. I have had the privilege of reading in draft the opinion of my noble and learned friend, Lord Hoffmann. Like my noble and learned friend, Lord Walker of Gestingthorpe, whose opinion I have also had the privilege of reading, I agree with all his reasoning and I share Lord Walker’s admiration for the way it has been expressed. For the reasons they give I would allow the appeal.
2. I agree that Persimmon’s argument that the House should take account of the pre- contractual negotiations raises an important issue. Every so often the rule that prior negotiations are inadmissible comes under scrutiny. That is as it should be. One of the strengths of the common law is that it can take a fresh look at itself so that it can keep pace with changing circumstances. But for the reasons that have been set out by Lord Hoffmann I think that the arguments for retaining the rule have lost none of their force since Prenn v Simmonds  1 WLR 1381 demonstrated, as Lord Wilberforce put it at p 1384, the disadvantages and danger of departing from established doctrine.
3. In the Court of Appeal Lawrence Collins LJ said that the policy reasons for the rule have not been fully articulated:  EWCA Civ 183, para 106. I am not sure, with respect, that everyone would agree with him. Lord Gifford did his best to explain what they are in his dissenting opinion in Inglis v Buttery (1877) 5 R 58, 69-70. When that case came before this House Lord Blackburn said that they set out exactly what he himself thought: (1878) 3 App Cas 552, 577. As Lord Gifford explained, the very purpose of a formal contract is to put an end to the disputes which would inevitably arise if the matter were left upon what the parties said or wrote to each other during the period of their negotiations. It is the formal contract that records their bargain, however different it may be from what they may have stipulated for previously
4. Lord Blackburn clearly saw no conflict between the exclusionary rule and Lord Justice Clerk Moncreiff’s proposition that the Court was entitled to be put in the position that the parties stood before they signed: (1877) 5 R 58, 64. In River Wear Commissioners v Adamson (1877) 2 App Cas 743, 763 he had already acknowledged that the court should look beyond the language of the contract and see what the circumstances were with reference to which the words were used. As he put it, the meaning of words varies according to the circumstances with respect to which they are used. It was the reasons that Lord Gifford articulated in Inglis v Buttery (1877) 5 R 58, 69-70, that persuaded him that to admit evidence of prior negotiations would be a step too far. I think that what appealed to Lord Blackburn still holds true today. If more is needed, Lord Hoffmann’s analysis provides it. As he has indicated, it would only be if your Lordships were confident that the rule was impeding the proper development of the law or contrary to public policy that it would be right for it to be departed from. That this is so has not, as I see it, been demonstrated.
5. On 16 October 2001 Chartbrook Ltd (“Chartbrook”) entered into an agreement with Persimmon Homes Ltd (“Persimmon”), a well-known house-builder, for the development of a site in Wandsworth which Chartbrook had recently acquired. The structure of the agreement was that Persimmon would obtain planning permission and then, pursuant to a licence from Chartbrook, enter into possession, construct a mixed residential and commercial development (commercial premises below, flats above, parking in the basement) and sell the properties on long leases. Chartbrook would grant the leases at the direction of Persimmon, which would receive the proceeds for its own account and pay Chartbrook an agreed price for the land. Planning permission was duly granted and the development was built, but there is a dispute over the price which became payable.
6. Schedule 6 contained the relevant provisions. The price was defined as the aggregate of the Total Land Value and the Balancing Payment. The Total Land Value was made up of three parts: Total Residential Land Value, Total Commercial Land Value and Total Residential Cark Parking Land Value. Total Residential Land Value was to be £76.34 per square foot multiplied by the area for which planning permission for flats was granted. Total Commercial Land Value was £38.80 per square foot multiplied by the area for which planning permission for shops and other commercial uses was granted. And Total Residential Cark Parking Land Value was £3,024 multiplied by the number of spaces for which planning permission was granted. The Schedule set out the dates upon which the Total Land Value was to be paid. In principle, payment would fall due as each flat, shop or parking space was sold. But there was also a backstop provision for payment of specified percentages of the Total Land Value (so far as not already paid) by dates commencing about two and a half years after the grant of planning permission and ending about two years later, by which time the whole sum was due, whether the properties had been sold or not.
7. The provisions about Total Land Value are all quite straightforward and only require the insertion of the appropriate figures from the planning permission (which are not in dispute) into the formulae provided. The other element in the price is the Balancing Payment. For reasons concerned with its drafting history which need not be explored, the Schedule defines the Balancing Payment as the Additional Residential Payment (“ARP”) and then goes on to define the latter expression. So when I refer to the ARP, that means the Balancing Payment.
8. The definition of the ARP, over which the whole dispute turns, is outwardly uncomplicated:
“23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives.”
9. This contains three more defined concepts. Residential Unit means a flat. The Minimum Guaranteed Residential Unit Value (“MGRUV”) means the Total Residential Land Value divided by the number of flats. And Costs and Incentives (“C & I”) mean the additional expense which Persimmon might have to incur to induce someone to buy a flat; for example, by providing fittings better than specification or paying legal expenses. Such payments are economically equivalent to a reduction in the price achieved.
10. Chartbrook says that the meaning of the definition is perfectly simple. You take the price achieved, deduct the MGRUV and the C & I and calculate 23.4% of the result. That gives you a figure for an individual flat which, together the figures for similar calculations on all the other flats, makes up the ARP or Balancing Payment. That and the Total Land Value is the price. On the agreed figures, that produces a Total Land Value of £4,683,565 and an ARP of £4,484,862, making £9,168,427 in all. The judge (Briggs J)  EWHC 409 (Ch) and a majority of the Court of Appeal (Tuckey and Rimer LJJ)  EWCA Civ 183 agreed.
11. This construction is certainly in accordance with conventional syntax, at any rate, up to the point at which one decides when C & I should be deducted. As Briggs J said (at para 53) —
“ARP means 23.4% of something. To the question ‘23.4% of what?’ the clear answer is the excess of the price achieved for each Residential Unit over the MGRUV, less the Costs and Incentives.”
12. I do not think that the syntax helps one to decide whether C & I should be deducted before or after calculating the 23.4%, that is to say, whether there is a notional pause for breath after “MGRUV", represented in the passage I have quoted from the judgment by a comma which does not appear in the contract. That is a grammatical ambiguity which must be resolved by considering the business purpose of providing for a deduction of C & I. But the judge was clearly right about the effect of the syntax employed in the first part of the definition.
13. Persimmon, on the other hand, says that the purpose of dividing the price into Total Land Value and ARP was to give Chartbrook a minimum price for its land, calculated on current market assumptions, and to allow for the possibility of an increase if the market rose and the flats sold for more than expected. It is agreed that, at the time of the agreement, the parties expected that a 700 square foot flat would sell for about £200,000 or so, maybe slightly more. The MGRUV at £76.34 a square foot for such a flat was £53,438 or 26.7% of a price of £200,000. If the realised price was £228,000, it would represent 23.4%. The purpose of the ARP was to provide that if the flats sold for more than £228,000, Chartbrook would be entitled to the amount by which 23.4% of the higher price exceeded the £53,438 MGRUV. What the definition therefore means is that you deduct C & I from the realised price to arrive at the net price received by Persimmon, then calculate 23.4% of that price, and the ARP is the excess of that figure over MGRUV. On this calculation, ARP is £897,051, compared with Chartbrook’s claim for £4,484,862. In the Court of Appeal Lawrence Collins LJ, dissenting, held that Persimmon’s construction was correct.
14. There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, 912-913. They are well known and need not be repeated. It is agreed that the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. The House emphasised that “we do not easily accept that people have made linguistic mistakes, particularly in formal documents” (similar statements will be found in Bank of Credit and Commerce International SA v Ali  1 AC 251, 269, Kirin-Amgen Inc v Hoechst Marion Roussel Ltd  RPC 169, 186 and Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, 296) but said that in some cases the context and background drove a court to the conclusion that “something must have gone wrong with the language". In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.
15. It clearly requires a strong case to persuade the court that something must have gone wrong with the language and the judge and the majority of the Court of Appeal did not think that such a case had been made out. On the other hand, Lawrence Collins LJ ï¿¼ï¿¼ï¿¼ï¿¼ï¿¼thought it had. It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another: compare the Kirin-Amgen case  RPC 169 at pp. 189-190. Such a division of opinion occurred in the Investors Compensation Scheme case itself. The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appears to be an exceptional case in which the drafting was careless and no one noticed.
16. I agree with the dissenting opinion of Lawrence Collins LJ because I think that to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense. The term “Minimum Guaranteed Residential Unit Value", defined by reference to Total Residential Land Value, strongly suggests that this was to be a guaranteed minimum payment for the land value in respect of an individual flat. A guaranteed minimum payment connotes the possibility of a larger payment which, depending upon some contingency, may or may not fall due. Hence the term “Additional Residential Payment". The element of contingency is reinforced by paragraph 3.3 of the Sixth Schedule, which speaks of the “date of payment if any of the Balancing Payment.” (My emphasis).
17. The judge declined to regard the terms Total Land Value and Minimum Guaranteed Residential Unit Value as indicative of an intention that MGRUV was to be the minimum Chartbrook would receive as the land value of a flat because both terms were defined expressions. They might just as well have been algebraic symbols. Indeed they might, and I strongly suspect that if they had been, they would have made it clear that the parties were intending to give effect to Persimmon’s construction. But the contract does not use algebraic symbols. It uses labels. The words used as labels are seldom arbitrary. They are usually chosen as a distillation of the meaning or purpose of a concept intended to be more precisely stated in the definition. In such cases the language of the defined expression may help to elucidate ambiguities in the definition or other parts of the agreement: compare Birmingham City Council v Walker  2 AC 262, 268. I therefore consider that Lawrence Collins LJ was right to take into account the connotations of contingency to be derived from the defined terms.
18. On Chartbrook’s construction, there is virtually no element of contingency at all. ARP is payable in every case in which the flat sells for more than £53,438. Chartbrook submits that is still a contingency. Who could tell whether or not the market for flats in Wandsworth might not collapse? In the Court of Appeal, Rimer LJ accepted that submission. He said that the “relevant language", i.e. the language of contingency, was “strictly consistent also with Chartbrook’s construction.”
19. My Lords, I cannot believe that any rational parties who wished to make provision for such a catastrophic fall in the housing market (itself an unlikely assumption) would have adopted so precise a sum to represent their estimate of what might happen. Why £53,438? That was the agreed minimum figure for that part of the value of a flat attributable to the land which Chartbrook was selling. It was clearly based upon a careful and precise estimate of current market prices and building costs. But how could this figure have been appropriate as a minimum expected sale price of the entire flat at some future date? If the parties were wanting to guess at some extraordinary fall in the market against which Chartbrook was to be protected, why £53,438? Why not £50,000 or £60,000, or £100,000? A figure chosen to represent someone’s fears about a possible collapse in the market could only have been based upon wild speculation, not the kind of calculation which produces a figure like £53,438. That figure cannot have been meant to play the part in the calculation which Chartbrook’s construction assigns to it. It must have been intended to function as a minimum land value, not a minimum sale price. To compare it with the realised sale price would not be comparing like with like.
20. It is of course true that the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says. The reasonable addressee of the instrument has not been privy to the negotiations and cannot tell whether a provision favourable to one side was not in exchange for some concession elsewhere or simply a bad bargain. But the striking feature of this case is not merely that the provisions as interpreted by the judge and the Court of Appeal are favourable to Chartbrook. It is that they make the structure and language of the various provisions of Schedule 6 appear arbitrary and irrational, when it is possible for the concepts employed by the parties (MGRUV, C & I etc) to be combined in a rational way.
21. I therefore think that Lawrence Collins LJ was right in saying that ARP must mean the amount by which 23.4% of the achieved price exceeds the MGRUV. I do not think that it is necessary to undertake the exercise of comparing this language with that of the definition in order to see how much use of red ink is involved. When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties (“12th January” instead of “13th January” in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd  AC 749; “any claim sounding in rescission (whether for undue influence or otherwise)” instead of “any claim (whether sounding in rescission for undue influence or otherwise)” in Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896) is no reason for not giving effect to what they appear to have meant.
22. In East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61 Brightman J stated the conditions for what he called “correction of mistakes by construction":
“Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”
23. Subject to two qualifications, both of which are explained by Carnwath LJ in his admirable judgment in KPMG LLP v Network Rail Infrastructure Ltd  Bus LR 1336, I would accept this statement, which is in my opinion no more than an expression of the common sense view that we do not readily accept that people have made mistakes in formal documents. The first qualification is that “correction of mistakes by construction” is not a separate branch of the law, a summary version of an action for rectification. As Carnwath LJ said (at p. 1351, para 50):
“Both in the judgment, and in the arguments before us, there was a tendency to deal separately with correction of mistakes and construing the paragraph ‘as it stands, as though they were distinct exercises. In my view, they are simply aspects of the single task of interpreting the agreement in its context, in order to get as close as possible to the meaning which the parties intended.”
24. The second qualification concerns the words “on the face of the instrument". I agree with Carnwath LJ (at pp 1350-1351) that in deciding whether there is a clear mistake, the court is not confined to reading the document without regard to its background or context. As the exercise is part of the single task of interpretation, the background and context must always be taken into consideration.
25. What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.
26. That leaves the question of the deduction of C & I, which the judge and the majority of the Court of Appeal regarded as an insuperable obstacle to Persimmon’s construction. I cannot see why this should be so. Everyone agrees that the only sum from which C & I can rationally be deducted is the headline price achieved on the sale, so as to arrive at the net amount received by Persimmon. That is accordingly what the parties must have meant. You deduct the C & I from the nominal price achieved and the ARP is the excess, if any, of 23.4% of that net sum over the MGRUV. Giving this meaning to the provision about C & I does not in any way weaken or affect the argument for interpreting the rest of the definition in a way which gives ARP a rational meaning. To say, as Rimer LJ said, that it requires “rewriting", or that it “distorts the meaning and arithmetic of the definition” is only to say that it requires one to conclude that something has gone wrong with the language - not, in this case, with the meanings of words, but with the syntactical arrangement of those words. If however the context drives one to the conclusion that this must have happened, it is no answer that the interpretation does not reflect what the words would conventionally have been understood to mean.
27. If your Lordships agree with this conclusion about the construction of the contract, the appeal must be allowed. There is no need to say anything more. But Persimmon advanced two alternative arguments of very considerable general importance and I think it is appropriate that your Lordships should deal with them. The first was that (contrary to the unanimous opinion of the judge and the Court of Appeal) the House should take into account the pre-contractual negotiations, which in the opinion of Lawrence Collins LJ (at paragraph 132), were determinative confirmation of Persimmon’s argument on construction. The second was that the judge and the Court of Appeal had misunderstood the principles upon which rectification may be decreed and that if Persimmon had failed on construction, the agreement should have been rectified.
28. The rule that pre-contractual negotiations are inadmissible was clearly reaffirmed by this House in Prenn v Simmonds  1 WLR 1381, where Lord Wilberforce said (at p. 1384) that earlier authorities “contain little to encourage, and much to discourage, evidence of negotiation or of the parties’ subjective intentions.” It is clear that the rule of inadmissibility has been established for a very long time. In Inglis v John Buttery & Co (1878) 3 App Cas 552, 577 Lord Blackburn said that Lord Justice Clerk Moncreiff (at (1877) 4 R 58, 64) had laid down a principle which was nearly accurate but not quite when he said that in all mercantile contracts “whether they be clear and distinct or the reverse, the Court is entitled to be placed in the position in which the parties stood before they signed". The only qualification Lord Blackburn made was to reject Lord Moncreiff’s view that the Court was entitled to look at the pre-contractual negotiations because unless one did so, one could not be fully in the position in which the parties had been.
29. Instead, Lord Blackburn preferred (at p. 577) the opinion of Lord Gifford ((1877) 4 R 58, 69-70):
“Now, I think it is quite fixed - and no more wholesome or salutary rule relative to written contracts can be devised - that where parties agree to embody, and do actually embody, their contract in a formal written deed, then in determining what the contract really was and really meant, a Court must look to the formal deed and to that deed alone. This is only carrying out the will of the parties. The only meaning of adjusting a formal contract is, that the formal contract shall supersede all loose and preliminary negotiations - that there shall be no room for misunderstandings which may often arise, and which do constantly arise, in the course of long, and it may be desultory conversations, or in the course of correspondence or negotiations during which the parties are often widely at issue as to what they will insist on and what they will concede. The very purpose of a formal contract is to put an end to the disputes which would inevitably arise if the matter were left upon verbal negotiations or upon mixed communings partly consisting of letters and partly of conversations. The written contract is that which is to be appealed to by both parties, however different it may be from their previous demands or stipulations, whether contained in letters or in verbal conversation. There can be no doubt that this is the general rule, and I think the general rule, strictly and with peculiar appropriateness applies to the present case.”
30. To allow evidence of pre-contractual negotiations to be used in aid of construction would therefore require the House to depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged: see Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, 665 (“well-established and salutary", per Lord President Rodger; Alexiou v Campbell  UKPC 11 (“vouched by... compelling authorities", per Lord Bingham of Cornhill.) The House is nevertheless invited to do so, on the ground that the rule is illogical and prevents a court from, as the Lord Justice Clerk in Inglis v John Buttery & Co (1878) 3 App Cas 552 said, putting itself in the position of the parties and ascertaining their true intent.
31. In Prenn v Simmonds  1 WLR 1381, 1384 Lord Wilberforce said by way of justification of the rule:
“The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is it to admit evidence of one party’s objective - even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.”32. Critics of the rule, such as Thomas J in New Zealand (Yoshimoto v Canterbury Golf International Ltd  1 NZLR 523, 538-549) Professor David McLauchlan (“Contract Interpretation: What is it About?” (2009) 31:5 Sydney Law Review 5-51) and Lord Nicholls of Birkenhead (“My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 577-591) point out that although all this may usually be true, in some cases it will not. Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement. Why should court deny itself the assistance of this material in deciding what the parties must be taken to have meant? Mr Christopher Nugee QC, who appeared for Persimmon, went so far as to say that in saying that such evidence was unhelpful, Lord Wilberforce was not only providing a justification for the rule but delimiting its extent. It should apply only in cases in which the pre-contractual negotiations are actually irrelevant. If they do assist a court in deciding what an objective observer would have construed the contract to mean, they should be admitted. I cannot accept this submission. It is clear from what Lord Wilberforce said and the authorities upon which he relied that the exclusionary rule is not qualified in this way. There is no need for a special rule to exclude irrelevant evidence.
“Charterers to have the option to redeliver the vessel after 12 months’ trading subject to giving three months’ notice".44. The issue was whether “after 12 months’ trading” meant that the break clause could be operated only at the end of the first year or at any time during the second year. The judge said that he was entitled to look at telexes by which the fixture was negotiated in which the parties discussed various lengths of break clauses and were clearly using the word “after” to mean “on the expiry of” rather than “at any time after the expiry of". He justified the admissibility of this evidence on the following principle (p 712):
“If a contract contains words which, in their context, are fairly capable of bearing more than one meaning, and if it is alleged that the parties have in effect negotiated on an agreed basis that the words bore only one of the two possible meanings, then it is permissible for the court to examine the extrinsic evidence relied upon to see whether the parties have in fact used the words in question in one sense only, so that they have in effect given their own dictionary meaning to the words as the result of their common intention. Such cases would not support a claim for rectification of the contract, because the choice of words in the contract did not result from any mistake. The words used in the contract would ex hypothesi reflect the meaning which both parties intended.”45. In his judgment in this case, Lawrence Collins LJ said of this principle (in paragraph 121) that he doubted whether it differed in any material respect from admitting evidence of prior negotiations in construing a contract. Indeed, the case is frequently cited as an example of an exception which undermines the rule: see for example Professor McLauchlan, “Contract Interpretation: What is It About?” (2009) 31:5 Sydney Law Review 5-51. It is true that evidence may always be adduced that the parties habitually used words in an unconventional sense in order to support an argument that words in a contract should bear a similar unconventional meaning. This is the “private dictionary” principle, which is akin to the principle by which a linguistic usage in a trade or among a religious sect may be proved: compare Shore v Wilson (1842) 9 Cl & F 355. For this purpose it does not matter whether the evidence of usage by the parties was in the course of negotiations or on any other occasion. It is simply evidence of the linguistic usage which they had in common. But the telexes in the Karen Oltmann did not evidence any unconventional usage. There was no private dictionary. The case involved a choice between two perfectly conventional meanings of the word “after” in a particular context. In my opinion Lawrence Collins LJ was right in saying that the admission of the evidence infringed the exclusionary rule. It is perhaps significant that the evidence merely confirmed the meaning which Kerr J, as an experienced commercial judge, would in any case have given to the clause.
ï¿¼“The party seeking rectification must show that:
(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
(2) there was an outward expression of accord;
(3) the intention continued at the time of the execution of the instrument sought to be rectified;
(4) by mistake, the instrument did not reflect that common intention.”
“we would be prepared to pay you 29.8% of the net sales proceeds generated from the private sale residential element of the scheme and a further 45% of the net sales revenue generated from the disposal of the commercial element of the site. We would pay you this proportion of the income regardless of the development costs incurred by my Company and the quantum of accommodation that we ultimately obtain planning permission for...By tying your land value to a percentage of the income, you will also automatically share in any sales uplift that we experience.”50. This offer of a straightforward sharing of the proceeds was modified in a letter dated 6 February 2001 by the addition of what were described as “guaranteed backstop dates and minimum payments":
“Upon receipt of the purchase monies, the revenue will be apportioned to Chartbrook on the basis of 29.8% of the net revenue achieved from the disposal of the private sale residential units and 45% of the net revenue from the disposal of the commercial units. In addition, we are prepared to provide you with guaranteed backstop dates and minimum payments that will be made regardless of the actual performance of the project both in terms of timescales and costs. I set out on the attached schedule our proposals concerning this element of the deal.
Based on the current scheme for 80 units, and 9020 sq ft of commercial floor space, the minimum land value we are prepared to pay to Chartbrook on the disposal of each residential unit is £67,000, together with a further minimum payment of £400,000 on the disposal of the commercial unit. If as a result of improvements in the market, Chartbrook are entitled to more than the minimum payments I suggest an equalisation calculation takes place following the disposal of the last unit...
Within the contract, I...suggest that a formula is included whereby the land value is calculated using the following inputs:
Private Sale Residential Accommodation.....94.96/sq ft...
Once the total land value has been calculated, a simple formula can then be applied to divide the land values by the number of units, in order for us to calculate the guaranteed payments that you will receive on the sale of each plot...”51. On 12 February there was a further modification to make separate provision for the sales of car parking spaces, but the overall offer for land value remained the same. The judge found (paragraph 110) that Chartbrook accepted this offer in principle and Persimmon’s solicitors were instructed to draft an agreement. Their draft was attached to an e-mail dated 1 March 2001 and contained essentially the same formulae for calculating the price as those in the final agreement. The definition of “Additional Residential Payment” was (save for the percentage figure) in precisely the same words as those of the final agreement.
“the minimum guaranteed land values that you will receive for the respective elements of the scheme, together with the percentage of sales revenue that you will also be entitled to if the project performs better than is currently anticipated”53. The figures in the table were 23.4% for “percentage of sales revenue” and £53,333 for “minimum value per plot.” The judge found that this offer was also accepted in principle and the new figures were inserted into the final contract. The words of the definition of ARP in the final draft remained (subject to the change in the percentage figure) exactly the same as in the first draft.
“Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties - into their intentions - any more than you do in the formation of any other contract. You look at their outward acts, that is, at what they said or wrote to one another in coming to their agreement, and then compare it with the document which they have signed. If you can predicate with certainty what their contract was, and that it is, by a common mistake, wrongly expressed in the document, then you rectify the document; but nothing less will suffice.”61. Likewise in the Olympic Pride (Etablissements Georges et Paul Levy v Adderley Navigation Co Panama SA 2 Lloyd’s Rep 67, 72, Mustill J said:
“The prior transaction may consist either of a concluded agreement or of a continuing common intention. In the latter event, the intention must have been objectively manifested. It is the words and acts of the parties demonstrating their intention, not the inward thoughts of the parties, which matter.”62. An example of the application of this objective ascertainment of the terms of the prior transaction is George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive(1950) 84 Lloyd’s Rep 97 in which a landlord negotiating a new lease proposed to the tenant that “the terms and conditions contained in the present lease to be embodied in the new lease where applicable.” The tenant accepted this offer, but the new lease as executed made the tenant liable for repairs which under the old lease had been the responsibility of the landlord. In answer to a claim for rectification, the landlord said that the new lease was in accordance with what he had understood to be the effect of his offer. The Court of Appeal said that this was irrelevant. What mattered was the objective meaning of what the landlord had written. Sir Raymond Evershed MR said, at p 107:
“If the defendants...did misconstrue [the letter] that is unfortunate for them, but at least they cannot be heard to say that their letter was intended to mean anything other than that which the words convey to the reader as a piece of ordinary English.”63. As against these authorities, there are two cases upon which Mr Miles relied. The first is Britoil plc v Hunt Overseas Oil Inc  CLC 561, in which the Court of Appeal by a majority (Glidewell and Hobhouse LJJ, Hoffmann LJ dissenting) refused to rectify an agreement which was alleged not to be in accordance with what had previously been agreed in summary heads of agreement. Hobhouse LJ, who gave the majority judgment, affirmed the decision of Saville J, who said that the defendants had failed to establish that there was a prior common agreement or intention in terms that the court could ascertain or (which is probably another way of saying the same thing) that the definitive agreement failed to reflect that prior agreement. In other words, the language of the heads of agreement was too uncertain to satisfy the requirement stated by Denning LJ in Rose’s case that one should be able to “predicate with certainty what their contract was". Hobhouse LJ noted that Saville J “did not base himself upon any consideration of the evidence as to the actual state of mind of the parties” and in my opinion the case lends no support to the view that a party must be mistaken as to whether the document reflects what he subjectively believes the agreement to have been.
“The evidence of a party as to what terms he understood to have been agreed is some evidence tending to show that those terms, in an objective sense, were agreed. Of course the tribunal may reject such evidence and conclude that the party misunderstood the effect of what was being said and done.”65. In a case in which the prior consensus was based wholly or in part on oral exchanges or conduct, such evidence may be significant. A party may have had a clear understanding of what was agreed without necessarily being able to remember the precise conversation or action which gave rise to that belief. Evidence of subsequent conduct may also have some evidential value. On the other hand, where the prior consensus is expressed entirely in writing, (as in George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive (1950) 84 Lloyd’s Rep 97) such evidence is likely to carry very little weight. But I do not think that it is inadmissible.
“My Lords, all the previous correspondence I lay entirely out of the case, because I cannot conceive that any thing can be more dangerous than the construing deeds by the effect of letters and correspondence previous to the execution of them.”Subsequently, at p 319, he described the possibility of looking at the effect of the correspondence as “a very singular thing". Some sixty years later, with rather more deliberation, the House affirmed that approach in Inglis v John Buttery (1873) 3 App Cas 552 and, a century after that, reaffirmed it in Prenn v Simmonds  1 WLR 1381. The rule could scarcely be more firmly embedded in our law.
“23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value ['MGRUV'] less the [C&I]”The amount of the C&I is agreed to have been relatively trivial - a little less than £250,000 for all 100 flats - and I put it aside for the moment, while recognising that it plays an important part in the technicalities of the argument on construction. If this item is disregarded for the moment the disputed text can be set out in a simplified form, using “RP” (for residential price) where the judge and the Court of Appeal referred to Unit Price:
“23.4% of the RP in excess of the MGRUV".
81. The MGRUV was defined as meaning:
“for each Residential Unit [ie each flat] the [TRLV] divided by the number of Residential Units for which Planning Permission is granted".
Under the planning permission eventually granted on 23 August 2002 there were to be exactly 100 flats, which simplifies the arithmetic. Nevertheless it may be unfortunate that the draftsman chose to define the ARP by a formula referring to the MGRUV rather than by referring directly to the TRLV (to which the MGRUV is directly linked, being, as events turned out, one per cent of it). The use of the two linked formulae rather than one, and the fact that the formulae are not set out in mathematical notation, make it harder to keep clearly in mind the structure of the arrangements contained in schedule 6.
82. Briggs J expressed the issue in paras 20 and 21 of his judgment:
“Leaving aside for the moment the point at which the C&I are deducted, the broad commercial effect of each of the parties’ rival submissions may be summarised as follows. Chartbrook’s case was that it was entitled to a 23.4% share of the net proceeds of sale of each Residential Unit in excess of a minimum guaranteed amount (being the unitised Total Residential Land Value of £76.34 per square foot of Residential Net Internal Area). Put another way, its stake in the residential part of the development was to be the whole of the first £76.34 per square foot of net sales value, and 23.4% of the surplus.
By contrast, Persimmon’s case was that Chartbrook was to receive an additional payment only if 23.4% of the net sales price amounted to more than the Minimum Guaranteed Residential Unit Value. Put more broadly, Chartbrook’s stake in the residential part of the development was whichever was the greater of :
(i) 23.4% of the net residential sales price; and,
(ii) the guaranteed minimum of £76.34 per square foot of Residential Net Internal Area.”
83. That is, with great respect to the judge, a confusing way of putting it, because it fails to distinguish between the two elements of the price for the residential development and to make clear whether it is addressing both elements, or only the ARP. The owner was to get the TRLV in any event, as the most important component of the TLV (a point that may be reflected in the expression “in excess of” in the definition of the ARP). Indeed paras 20 and 21 of the judgment are to my mind two ways of describing the same result, unless the judge intended para 20 to state the owner’s view of the ARP alone, and para 21 to state the developer’s view of the TRLV and the ARP operating in conjunction.
84. In his brief judgment Rimer LJ quoted the definition of the ARP and observed in para 183:
“There is nothing unclear, uncertain or ambiguous about that. It is clear, certain and unambiguous and its arithmetic is straightforward".
Tuckey LJ agreed. With profound respect to both of them, I totally disagree. The definition is obviously defective as a piece of drafting. To start with defects that can be spotted and remedied fairly easily, the draftsman could not decide whether he was dealing with the flats (“each Residential Unit”) collectively or individually. The MGRUV was one-hundredth of the TRLV, but the C&I was plainly defined as a single aggregate figure.
85. Much more significantly and problematically, the draftsman has failed to notice the ambiguity of the formula “x per cent of the RP in excess of the MGRUV less the C&I". The ambiguity could be resolved by the use of mathematical notation, as the judge observed in paras 18 and 19 of his judgment (though he did not mention that there was also a choice to be made as to putting another set of brackets round MGRUV - C&I, so producing four possibilities rather than two).
86. Treated acontextually, the formula “x per cent of A in excess of B” is undoubtedly ambiguous. It can mean (x/100 x A)-B or x/100(A-B). If required to guess I would opt for the latter meaning, because the expression “in excess of” has been used rather than “less", and to my mind “in excess of” suggests a focus on B as an integer and distances it from the percentage. But I readily accept that this would be little more than guesswork.
87. In a contract negotiated between businessmen there always is a commercial context. If a contracting party agrees to pay the whole of some budgeted cost (B, say £100,000) and also agrees to pay 25% of the eventual actual cost (A, say £140,000) in excess of the budgeted costs, he would expect to pay a total of £110,000. Both elements of the obligation are, as it were, in the same currency, that is, cost, and the wording of the second element naturally translates into the formula
1⁄4 (A-B), as (1⁄4A)-B would be commercial nonsense. The owner can therefore give plausible examples in which 1⁄4(A-B) would obviously be the right answer. But the present appeal is not such a case.
88. In this case the very significant difference between the results produced by the competing formulae is demonstrated in the figures set out in para 14 of the judgment of Lawrence Collins LJ in the Court of Appeal. The difference between the two bottom lines (£5,580,616 and £9,168,427) is £3,587,811. That difference figure is 76.6% of the TRLV (£4,683,565). On the owner’s case it gets one hundred times the MGRUV as the TRLV, but in effect has to give credit for only 23.4% of it in the calculation of the ARP. That seems to be a fairly surprising bargain for commercial men to make. It becomes not merely surprising but totally incredible if one takes account of the fact that although schedule 6 does not in terms state that the ARP is to have no value unless the actual receipts from sales of flats exceed the TRLV, that is implicit in its structure. On the owner’s construction any such limitation is contradicted, and the ARP has a substantial value even if the sales do not reach the “trigger point” of £20.015m (23.4% of which is £4.684m).
89. This can be illustrated by considering the effect of the competing formulae (set out in paras 18 and 19 of the judge’s judgment, but continuing to exclude C&I for the present) for assumed residential sale price totals (RP) of £18m, £20m, £20.015m (the trigger point), £22m and £23.849m (the actual result):
Owner’s Developer’s Construction Construction 23.4%(RP-MG) = RP 18.000 23.4%(18.000-4.684) = 20.000 23.4% (20.000-4.684) = 20.015 23.4%(20.015-4.684) = Trigger Point 22.000 23.4%(22.000-4.684) = 23.849 23.4%(23.849-4.684) = Actual Result ARP 3.116 3.584 3.587 4.052 4.485 (23.4%RP)-MG = (23.4% x 18.000)-4.684 = (23.4% x 20.000)-4.684 = (23.4%x 20.015)-4.684 = (23.4% x 22.000)-4.684 = (23.4% x 23.849)- 4.684 = ARP Negative Negative Zero 0.464 0.897 RP = Total actual receipts from residential sales MG = Total Residential Land Value (100 x MGRUV) All amounts in £m The figures are, on the owner’s construction, commercial nonsense. They would bring the owner a total of £7.8m for the residential development (£4.684m + £3.116m) even if sales of flats were disastrously low at £18m. The idea of the TRLV (linked as it is to the MGRUV) as a guaranteed minimum would be totally subverted.
90. The judge accepted that there was some force in the developer’s reliance on the words “if any” which occur in para 3.3 of schedule 6 with reference to the Balancing Payment (alias the ARP). He saw less force in the submission that he should give weight to the natural meaning of the expressions “minimum", “guaranteed” and “additional” in the definitions of the MGRUV and the ARP, on the ground that by the use of a special definition “[t]he word or phrase is stripped of its natural meaning"(para 61). In preferring the owner’s submissions the judge attached particular weight to the difficulty (for the developer) of explaining the words “less the C&I". The judge observed (paras 55-57):
“An equally serious problem with Persimmon’s construction is what to do with the subtraction of the C&I. It is common ground that the Costs and Incentives have a linear relationship with the amount of the price achieved for each Residential Unit. For example, Persimmon may agree the sale of a flat for £250,000 after incurring Costs and Incentives of say £50,000 or, with the same commercial consequence, sell the same flat for £200,000 but incur no Costs and Incentives. Typical Incentives would include payment of the purchaser’s legal fees or stamp duty, or the installation of special features such as wooden floors, over and above the standard fit-out specification.
One would expect Chartbrook’s profit share to be unaffected, one way or the other, by the decision of Persimmon to sell a particular flat by one or other of those methods (high price plus Incentives or low price without Incentives). Chartbrook’s construction, under which the Costs and Incentives are deducted from the price achieved for each Residential Unit before the application of the 23.4% share, fulfils precisely that expectation.
By contrast, Persimmon’s construction deducts the C&I from the 23.4% of the price achieved for the Residential Unit before the net amount is compared with the MGRUV, to ascertain whether there is any excess. By comparison with Chartbrook’s construction, that calculation magnifies the negative effect of C&I by a factor of more than 3 in comparison with the positive effect of the increase in the Residential Unit Price attributable to the C&I.”
91. Lawrence Collins LJ took a different view, and I unhesitatingly prefer his view. His reasons are set out clearly in paras 90 to 94 of his judgment, and I cannot usefully add much to them. But I would make a few further comments.
92. The first is as to the perceived problem about C&I. It is true that from the developer’s point of view it made little or no difference (except perhaps for timing and tax) whether or not, in relation to a particular flat, it spent an extra £2,000 on parquet flooring or granite worktops and managed to sell the flat for £2,000 more as a result. But it did make a marginal difference to the owner, as its ARP was calculated (in some way or other, on any view) by reference to the total achieved by residential sales: that is, by reference to the developer’s turnover and not by reference to the developer’s profit (the judge’s reference to “Chartbrook’s profit share” was not therefore entirely apposite). So (to adopt the expression used in the courts below) C&I had a linear relationship for the developer, but not for the owner. It would therefore have made sense for the parties to have agreed that C&I expenditure and allowances should be deducted from the total obtained for residential sales for the purposes of these computations (rather as the section 106 money and the rights of light money were to be disregarded in computing the TRLV). But it would not make sense to deduct the whole of the C&I from 23.4 per cent of the total obtained for residential sales.
93. Rimer LJ gave an example (para 185) to reinforce his view about the C&I. His example produces very odd results but that is partly because the figures taken are unrealistic. If one takes more realistic figures (such as a normal average sale price of £200,000 with C&I of £2,500 and an MGRUV of £47,500) the result is much less surprising. But it is still anomalous and makes no commercial sense, as Lawrence Collins LJ observed. An ARP of (23.4% of [RP less C&I]) less MGRUV does make commercial sense, and in my opinion it is well within the principles in Antaios Cia Naviera v Salen Rederiana AB  AC 191, 201 and Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, 912-913, to read the agreement in that way.
94. I am sure that Lawrence Collins LJ was right to give a lot of weight to the terms “minimum", “guaranteed” and “additional” in the relevant definitions. There is a good deal of authority, if authority is needed, to give weight to the natural meaning of words in a definition. In relation to statutory definitions there are the observations of my noble and learned friend, Lord Hoffmann, in Macdonald v Dextra Accessories Ltd  4 All ER 107, para 18 and Birmingham City Council v Walker  2AC 262, para 11 and Lord Scott of Foscote in Oxfordshire County Council v Oxford City Council  2 AC 674, paras 82-83. I would apply the same principle to a definition in a commercial contract.
95. That brings me back to what I said earlier about the need, in the midst of a thicket of rather confusing definitions, to keep in mind the general structure of the bargain. As part of the TLV the owner was to receive the TRLV, the total residential land value, representing the estimated value attributable to land which would (on the agreement becoming unconditional) have the benefit of a favourable planning permission for residential development (but on which development had not yet taken place). The developer was to bear all the costs of the development. The owner was also to have the prospect of an additional payment, the ARP. As regards the residential development the bargain could have been expressed between businessmen as “a guaranteed minimum of the first £76.34 per square foot of residential internal area from the total proceeds of the flats, and 23.4% of the excess” (indeed the judge, in para 20 of his judgment, summarised the owner’s case in very similar terms, except that he used “surplus” rather than “excess”). If one approaches it in that way, the developer’s case as to the meaning of the definition is not merely linguistically possible, but is linguistically (as well as commercially) compelling. The owner’s case becomes plausible only if one concentrates on the ARP, forgetting the TRLV (to which the MGRUV is directly linked). Lawrence Collins LJ dealt with this point quite briefly, in paras 81 and 93 of his judgment. He must have thought it unnecessary to spell it out more fully. But as he ended in the minority I have dealt with the point more fully.
96. Since preparing this opinion I have had the privilege of reading in draft the opinion of my noble and learned friend, Lord Hoffmann. In paras 1 to 22 of his opinion Lord Hoffmann reaches precisely the same conclusion as I have reached in regard to the correct construction, by traditional methods, of the agreement. I agree with all his reasoning, which is essentially the same as my own, but more trenchantly expressed. I have however thought it worthwhile setting out my own more pedestrian route to the conclusion that this House should, without having to depart from established principles of construction, allow the appeal and dismiss Chartbrook’s claim.
97. I have also read with interest and admiration Lord Hoffmann’s observations, in the remaining part of his opinion, on the important questions that we do not have to decide. I would not differ from any of these views. In particular, I agree that Karen Oltmann is a questionable application of the “private dictionary” principle, since the meaning of the English word “after” can hardly be equated to the use of a technical or trade term.
98. I too have had the privilege of reading in draft the opinions of my noble and learned friends, Lord Hoffmann and Lord Walker of Gestingthorpe. For the reasons they give, together with those of Lawrence Collins LJ in the Court of Appeal, I agree that Persimmon’s construction of this contract is correct and that this appeal should be allowed.
99. But I have to confess that I would not have found it quite so easy to reach this conclusion had we not been made aware of the agreement which the parties had reached on this aspect of their bargain during the negotiations which led up to the formal contract. On any objective view, that made the matter crystal clear. This, to me, increased the attractions of accepting counsel’s eloquent invitation to reconsider the rule in Prenn v Simmonds  1 WLR 1381, the pot so gently but effectively stirred by Lord Nicholls of Birkenhead in his Chancery Bar Association lecture of 2005 ( 121 LQR 577). My experience at the Law Commission has shown me how difficult it is to achieve flexible and nuanced reform to a rule of the common law by way of legislation. In the end abolition may be the only workable legislative solution, as eventually happened with the hearsay rule (Law Com No 216 (1993), BAILII:  EWLC 216), The Hearsay Rule in Civil Proceedings). Even that can prove difficult if, on analysis, the view is taken that the rule has no real content, as with the parol evidence rule (Law Com No 154 (1986, BAILII:  EWLC 154), The Parol Evidence Rule). The courts, on the other hand, are able to achieve step-by-step changes which can distinguish cases in which such evidence is “helpful” from cases in which it is not.
100. However, the approach to rectification adopted by Lord Hoffmann would go a long way towards providing a solution. If the test of the parties’ continuing common intentions is an objective one, then the court is looking to see whether there was such a prior consensus and if so what it was. Negotiations where there was no such consensus are indeed “unhelpful". But negotiations where consensus was reached are very helpful indeed. If the language in the eventual contract does not reflect that consensus, then unless there has been a later variation of it, the formal contract should be rectified to reflect it. It makes little sense if the test for construing their prior consensus is different from the objective test for construing their eventual contract. This situation is, and should be, quite different from the situation where one party is mistaken as to its meaning and the other party knows this - the latter should not be permitted to take advantage of the former.
101. For those reasons, I would respectfully associate myself, as does Lord Walker, with the views of Lord Hoffmann on the issues which we do not have to decide. In particular, I would like to express my admiration for the skill and charm with which both issues were argued by counsel on each side. It is perhaps surprising that questions of such practical and theoretical importance in the law of contract should still be open to debate and development. But that is also the great strength of the common law.