Costly Contracts And Problematic Punctuation
When you are trying hard to look after the pennies there can be
few things worse than realising that your contract doesn't mean
quite what you thought it did...and that you might lose out as a
result. A missing definition, a comma in the wrong place or an
extra zero on an already high figure can lead to a costly and
time-consuming dispute. Whilst there is, of course, no substitute
for getting it right in the first place, the recent case in the
House of Lords (Chartbrook Limited (Respondents) v Persimmon
Homes Limited and others (Appellants) and another (Respondent)
[2009] UKHL 38) is a good reminder of the arguments that might be
encountered when things go wrong. As a House of Lords decision, the
judgment is the latest and definitive word on contractual
interpretation.
The dispute arose over the construction of a term in a contract
entered into between the parties. The House of Lords held that
Chartbrook's construction of the contract, which was probably
the most literal interpretation of the words used, made
"no commercial sense" and allowed
Persimmon's appeal. Their Lordships also confirmed that
pre-contractual negotiations are inadmissible as to the
construction of a contractual term (the "exclusionary
principle").
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Background
Chartbrook Limited acquired a piece of land in Wandsworth and
entered into an agreement with Persimmon Homes Limited, whereby
Persimmon obtained planning permission for the land, constructed a
mixed residential and commercial development on the land and sold
the properties on long leases. Persimmon received the proceeds from
such sales and paid Chartbrook an agreed price for the land. In
addition to the agreed payments relating to the land value, a
balancing payment, defined in the agreement as the Additional
Residential Payment ("ARP"), would also be payable by
Persimmon and would be calculated in accordance with a specified
formula. The formula contained a "grammatical
ambiguity", with the result that each party put forward a
different interpretation of the calculation with wildly different
results: Persimmon claimed the amount payable by it was
£897,051 whereas Chartbrook claimed it was
£4,484,862.
The Court therefore had to consider what a reasonable person
would have understood the contract to mean.
In its claim, Persimmon sought to introduce evidence of the
parties' pre-contractual negotiations, in order to support its
arguments as to the way it considered the formula was intended to
work. It argued that, despite established case...
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