Don't be absurd: Challenging a contract

On Wednesday 1 July, Lord Hoffman handed down his final judgment in the House of Lords on the case of Chartbrook vs Persimmon Homes, and the directors of the latter breathed a collective sigh of relief.

The case is relevant to anyone who might have to resolve an ambiguity in a contract or other document, particularly if one interpretation leads to an absurdity or an irrational result. The case revolved around a provision in a development agreement that defined how the payment due to Chartbrook should be calculated. The court was asked to rule on the meaning of the clause in question.

The trial judge and the Court of Appeal favoured Chartbrook’s interpretation, which would have resulted in Persimmon paying, in addition to an agreed minimum land value, 23.4% of the net sales price of every dwelling, or about £3.5m more than would be due if Persimmon’s interpretation were correct .

Fortunately for Persimmon, Lord Hoffman decided Chartbrook’s interpretation of the clause made “no commercial sense” and allowed Persimmon’s appeal.

The decision provides a lesson for developers and their lawyers alike. It reminds us it is imperative to ensure that contracts are clear and unambiguous. When it comes to payment, as the lords agreed, formulae are often clearer than words. To put matters of interpretation beyond doubt, it is wise to include worked examples of payment calculations within contracts. Also, the potential for confusion is increased when a definition is built up on a number of other defined terms.

The decision is also relevant to parties to building contracts, especially since modern forms, such as PPC2000, rely on parties filling in numerous spaces with substantive drafting to get them to think about risk allocation and responsibility. What happens, for example, if the price framework in PPC2000 is not properly tied into the contract, or if in the NEC form, one of the blanks in the contract is filled in so as to make it nonsensical?

This judgment examined the circumstances in which the court can determine the meaning of a clause, if one meaning gives an arbitrary and irrational result. Another of the law lords, Lord Walker, said the result of Chartbrook’s interpretation of the clause was “not merely surprising but totally incredible”.

Lord Walker said Chartbrook’s interpretation was ‘not merely surprising but totally incredible’

Lord Hoffman commented that what was striking about the Chartbrook interpretation was that its result made a nonsense of the language and the structure of the rest of schedule six of the agreement, in which the disputed clause sat. He said it was “possible for the concepts employed by the parties to be combined in a rational way”.

He went on to state that for the court to “correct mistakes by construction”, two conditions should be satisfied. First, there should be a clear mistake in the document. Second, it should be clear what correction ought to be made to correct the mistake. If those conditions were satisfied, then the court could make the correction.

Lord Hoffman explained that there were two qualifications to this. One was that the “correction of mistakes by construction” is distinct from rectification. Second, he said that when deciding whether there was a mistake, the court should take into account the background and context of the document because that was intrinsic to interpreting it.

That said, the court was clear that this did not mean referring to pre-contract negotiations. It was very much against this. Rather, it was looking at other provisions in the contract, in this case, those in schedule six.

Lord Hoffman reiterated that all that was required was that it should be clear that something had gone wrong with the language of the document “and that it should be clear what a reasonable person would have understood the parties to have meant”. He found that in this case, both of these requirements had been satisfied.

He went onto consider two other arguments advanced by Persimmon, concerning the taking into account of pre-contractual negotiations, and the rectification of the contract. However, the case was not decided on these grounds.