If It Ain't Broke Don't Fix It - Contract Interpretation After Chartbrook v Persimmon

The recent House of Lords decision in Chartbrook v Persimmon,

with Lord Hoffman delivering the leading judgment, confirmed that

the rules for contractual interpretation remain:

what a reasonable person, having all the background knowledge

which would have been available to the parties, would have

understood them to, by using the language in the contract,

mean.

pre-contract negotiations are inadmissible for the purpose of

interpreting a contract.

It is a little unusual that a case which decides nothing new

creates so much interest in the legal community. It might be

thought that the reason Chartbrook v Persimmon has done so may be

due to the fact it is the last decision of Lord Hoffman sitting on

the House of Lords Judicial Committee. However, that would be to

vastly underestimate the usefulness of the case and the

comprehensive review of the rules undertaken by Lord Hoffman.

Dispute

Knowing the nature of the actual dispute that was decided is not

all that important but, for what it is worth, it related to the

price to be paid by a developer to a land owner in relation to

property built on the land when the property built was sold. The

dispute required interpretation of a clause that provided for

additional sums to be paid by the developer to the land owner if

the price achieved on sale exceeded an anticipated amount. The

question was whether a particular deduction from the sale price was

applied before or after calculating the percentage of the price to

be paid to the landowner by the developer .This question was worth

about 3.5 million pounds.

The House of Lords decided that it should not interpret the

clause according to the normal rules of syntax as it made no

commercial sense to have the clause read in that way. Also, such an

interpretation rendered other parts of the contract arbitrary and

irrational. Accordingly, the House of Lords ruled in favour of the

developer paying the land owner on the basis of the contract

interpretation that led to less money being due to the land

owner.

Reasoning

Lord Hoffman started from the point that the well established

rule of contract interpretation is what a reasonable person, having

all the background knowledge which would have been available to the

parties, would have understood them to mean when using the language

in the contract. The House of Lords had said previously that it did

not easily accept that people have made linguistic mistakes,

particularly in formal contracts, but that in some cases the court

was driven to the conclusion, from looking at the background and

context, that something had gone wrong with the language of the

contract. However, it required a strong case to persuade the court

that such a thing had happened.

Lord Hoffman considered that where the court was driven to the

conclusion that something had gone wrong with the language, whether

with the meaning or the syntactical arrangement, it doesn't

matter that the meaning the court must give the words does not

reflect the conventional meaning of the words. The job of the

court, in such a case, is to...