Correcting mistakes in drafting
Monsolar v Woden Park (Court of Appeal) [2021]
Financial provisions within contracts are often a source of error and dispute. It is critically important to get them right as there are obvious direct financial consequences if they are not clear or if they are capable of different interpretations. The courts are more likely to intervene if the alleged error is a very extreme one .
Facts:
A lease was granted for a term of 25 years for use as a solar farm. The rent was to be reviewed annually using a rent review formula that operated by reference to the Retail Prices Index (RPI). It was common ground that, read literally, the formula required the rent to be increased year on year based on the aggregate increase in RPI throughout the whole term to that point. In other words, on the third anniversary (i.e. the start of year 4) the Revised Rent at that point would be further increased by the aggregate RPI increase over the first, second and third years of the term. Assuming an average RPI increase of 2.855% per year, the tenant calculated that the rent would increase from £15,000 to just over £76 million by the end of the term, as opposed to around £30,000 with non-cumulative RPI increases. Therefore, this was not a situation where there were competing possible interpretations but a situation where one of the parties was seeking to invoke the so called ‘Chartbrook principle’ under which the literal meaning of a provision can be corrected if it is clear both that a mistake has been made, and what the provision was intended to say.
The Court of Appeal was asked to review the Supreme Court decision from 2015 in the case of Arnold v Britton http://www.trglaw.com/news185.html, also involving a rent review clause. In that case the Supreme Court had decided that where the natural meaning of a contractual provision is clear, considerations of ‘commercial common sense’ are not relevant even if the consequences are commercially detrimental for one party. The court had said that there is “No principle of interpretation that a Court can rewrite a clause because an element which the parties catered for does not develop how they expected”. Although the natural meaning of the clause was extremely disadvantageous for the tenants, it was not within the Court’s power to give it a different meaning and save one party from a ‘bad bargain’.
Decision:
The High Court agreed with the tenant that the formula should be construed so that the rent was indexed in line with RPI on a non-cumulative basis. under the principle by which clear mistakes in the drafting of a document can be corrected as a matter of construction (Chartbrook Ltd v Persimmon Homes Ltd [2009]) http://www.trglaw.com/News47.html. Read literally the clause produced absurd, irrational and arbitrary results which could not have been intended.
The Court of Appeal upheld the High Court decision. The Court of Appeal said that “Arnold v Britton undoubtedly supports the proposition that the mere fact that a bargain is not one that a reasonable and properly informed tenant would enter into is not enough to enable the Court to re-write it. The Court cannot alter an unambiguous provision of a contract simply because it provides for one of the parties to pay a price for something which appears to be a high one. There may be any number of reasons why a party accepts such a term. Unless it is clear that there is a drafting mistake, [the court] cannot do any other than read the contract as providing what it unambiguously says”. However, it went on to say that “What enabled the Court in Chartbrook to conclude that a mistake had been made was that the result was not just imprudent but arbitrary and irrational”.
There is therefore [apparently] a distinction between a case which concerns a provision which seems merely imprudent and one which appears irrational. This was described as being a ‘fine dividing line’ between a case where the result appears only “commercially unattractive and even unreasonable” and a case where the result appears “nonsensical or absurd”.
The Court of Appeal was happy to find that it was ‘abundantly clear’ there had been a drafting error and was also happy that it was clear what the correction should be.
Points to Note:
- Consider the use of worked examples. These would presumably have highlighted the fundamental defects in the results generated by the formula.