Historically, the grounds for modifying a contract or for claiming damages because of a ‘mistake' have been quite narrow:

• mutual mistake - where the parties have failed accurately to express in writing what they all intended to be the case;
• unilateral mistake - where one party, who is aware of the other party's mistake, has conducted themselves in such a manner that they should be prevented from denying that the contract was made on mistaken terms; and
• deceit - where one party has knowingly or recklessly misrepresented something to the other party, on which that other party has relied to its detriment.

The recent case of Connolly v Bellway Homes [2007] indicates the courts' increased willingness to intercede where a deal has been made based on a ‘fact' represented by one party to the other as part of the bargaining process, which the other party has decided not to check.

The line between, on the one hand, a party agreeing terms that ultimately turn out to be unfavourable to it and, on the other hand, being deliberately misled can be very fine and, not unsurprisingly, this is an area into which the courts have previously been wary of being drawn. The question arises: is there a general duty of good faith to be implied into the bargaining process which, if ignored, may lead to rectification and/or damages?

The courts have always shown a willingness to remedy simple clerical errors in documentation, as demonstrated in cases such as Wilson v Wilson [1854]. Rectification is often, in reality, achieved by construction of the document rather than a pure ‘rectification'. The factors giving rise to a successful claim are well tested:

• the mistake must be mutual - if the parties differ in their beliefs, then there will be no reversible mistake;

• the mistake must be clear on the face of the instrument; and

• the correction required must be clear to the court, which has no authority to recast the bargain made.

In construing what was actually intended by the parties, the court is not restricted to the actual instrument itself and is free to examine the surrounding evidence. For example, in KPMG v Network Rail Infrastructure [2007] the Court of Appeal considered the draft form of lease attached to the agreement for lease, in order to establish not only the wording missing from the final document, but also the intent of such wording. It should be noted that both unilateral and mutual mistake arguments were run by the landlord to support a rectification claim; however, the Court of Appeal chose instead to uphold the landlord's claim on constructional principles.

While alive to the fact that changes are often made between draft and final form documents to account for changing circumstances, the court held that in the present case there was no such change. The court noted that KPMG had been alerted by its solicitor to the omission of the wording at issue before completion of the lease and that a decision was made not to alert the other side to this, in the belief that the error enhanced its ability to exercise a break clause to terminate the lease. Confirming that leases were to be treated no differently than other contractual documents (see Thomas Bates Ltd v Wyndhams (Lingerie) Ltd [1981]), the court ruled that the lease was to be construed as if the wording set out within the agreement for lease draft had been included.

Where a mistake lacks the essential element of mutuality, a further element of fault needs to be brought into the equation to justify varying the written form of a contract. That the mistaken party may have simply struck a bad bargain, which the other side is aware of, is not sufficient. In Thomas Bates Ltd the court set out a four-fold test to be satisfied:

• one party (A) erroneously believes that the document sought to be rectified contained a particular term or provision;
• the other party (B) was aware of the omission and that this was due to a mistake on the part of A;

• B omitted to draw the mistake to the notice of A; and
• the mistake was calculated to benefit B.

Where these four grounds are satisfied, it is open to the court to regard it as inequitable to allow B to resist the rectification requested by A. There is therefore an important distinction to be drawn between a party having made a bad bargain, for which no recourse is available, and other instances where the court may be willing to intervene. Littman v Aspen Oil (Broking) Ltd [2005] provides a practical example of the application of the test referred to above. The parties were negotiating to settle various lease disputes by the grant of a replacement lease, during the negotiations for which various forms of mutual break rights were inserted. The final form of lease contained a number of pre-conditions to the availability of the break to the tenant which were, mistakenly, also included as pre-conditions to the landlord's break option (eg payment of rents). This was clearly a nonsense, as it effectively rendered the landlord's break option inoperable. Although aware of this error, the tenant's solicitor did not seek to remedy the problem (on the basis that this would work to the advantage of the tenant), rather than flagging the error and seeking to negotiate further concessions for the tenant from the restrictive pre-conditions of the break right.

The Court of Appeal held that the tenant had acted inequitably in failing to draw the obvious drafting error to the attention of the landlord and that, therefore, the landlord was entitled to rectification of the lease.

What, if anything, can be done where a term is not included by mistake, but where its effect is ultimately found to be different to that which was expected by (and is materially disadvantageous to) the mistaken party? As already indicated, the mere fact that a party has made an error of judgement will not allow the bargain to be redrawn. However, as noted by the Court of Appeal in George Wimpey UK Ltd v VIC Construction Ltd [2005], there is a distinction to be drawn between:

... a literal misunderstanding of some fact material to the proposed contract [and] an error of judgment in entering into the contract.

This distinction has recently been considered by the High Court in the Connolly v Bellway Homes case. Here, Bellway Homes Ltd was the successful bidder in a competitive tender to buy a piece of development land from the owner, Connolly. The deal envisaged an initial sum being paid for the property, with a further sum to become due on sale of the first units based upon the increased value of the proposed residential units (to be built between the date of the original sale agreement and the disposal of the units), adjusted to allow for increased construction costs.

Various permutations of the formulae for calculating this increased value were discussed in negotiation, but ultimately the final agreed formula used in the sale contract contained two fundamental errors:

• the formula did not work if the increase in building costs exceeded the increase in the value of the residential units; and
• fundamentally, the base value for assessing the increase in the residential unit prices was drastically wrong.

Connolly sought rectification on the basis of unilateral or mutual mistake. A claim based on mutual mistake failed, given that neither party was of the same mind at any time. Similarly, the court rejected unilateral mistake, there having been an error of judgment, rather than a literal misunderstanding (as per the George Wimpey case).

The final basis of challenge pursued by Connolly lay in the tort of deceit, the judge summarising the requirements to be met as follows:

‘(a) a clear false representation of fact (or law);

(b) fraud by the maker, in the sense that he knew that the representation was false, or had no belief in its truth, or was reckless whether it was true or false;

(c) intention by the defendant that the representation should be acted upon by the claimant;

(d) action by the claimant in reliance on the representation; and

(e) damage suffered by the claimant by reliance on the representation.'

At the heart of the matter was how the base figure came into existence. A local agent acting for Bellway provided figures in the range £161-£200 per sq ft (the upper end of the scale intended to apply only to the better quality units). Ultimately, however, Bellway's representative adopted a higher starting figure in the sale contract negotiations of £210, giving the impression that this was based on a comparable development (subject to a small uplift to reflect better location).

Negotiations proceeded in reliance on this representation and the base figure of £212 per sq ft was eventually agreed. The evidence produced at trial, however, suggested that the correct valuation would have been more in the order of £183 per sq ft.

The Court held that the proposed base figure of £210 was so far wide of the mark that it could infer dishonesty - indeed, Bellway's own internal board approval papers had been based on sale prices of £170-£180 per sq ft. It was held that Bellway's representative had no belief that the figure was a genuine or realistic estimate of the sale price and, thus, ground (b) was met, and grounds (c) and (d) were similarly satisfied as the base figure put forward had been presented as a fact upon which Connolly had relied. The fact that Connolly's representatives had not investigated the basis of the figure put forward by Bellway was not fatal to Connolly's claim, since negligence by a victim in relying on a misrepresentation is no defence in deceit.

There are lessons to be learned here, and following the guidelines below may help to avoid these sorts of disputes arising:

• In the event of a simple typographical error, a variation should be agreed, as one party or the other may otherwise be successful in a later rectification claim for mutual mistake.
• Reliance on an inadvertent error made by the other party raises the risk of later rectification, with the attendant possibility of damages and costs. Parties should deal openly with such issues and seek to reach a sensible compromise.
• Representations of fact need to be fully supported by proper evidence - the party relying on an incorrect representation is not under a positive duty to verify the position. Ideally, the other side should have its own experts on board, so that issues can be properly considered and argued.

At the end of the day, a court is unlikely to look favourably on attempts to enforce terms in a written contract that do not reflect the parties' true intentions and the agreement which was actually made between them.  © Property Law Journal