Rectifying a done deal

15 July 2019

What happens if you find out that the agreement you entered into was not what you had in mind? In the recent case of Persimmon Homes Ltd v Hillier and Creed[1], the Court of Appeal upheld a decision of the High Court ordering the rectification of a share purchase agreement and disclosure letter to reflect the parties’ common continuing intention.

The backdrop

The Defendants ran a group of companies (the Group), two of which (the Development Companies) jointly and indirectly owned a development site which the Claimant sought to purchase. The Claimant intended to indirectly obtain ownership of the site by buying all the shares the Development Companies, which it thought completely owned the land.  The Claimant later found out that it did not end up purchasing two parcels of land (the Felbridge Freeholds) which were essential for access to the site.

The Claimant sought damages for rectification and breach of warranties on the basis that it should have been an unqualified warranty of the agreement that the Development Companies had ownership of the Felbridge Freeholds.

The High Court agreed, and ruled to rectify both the share purchase agreement and the disclosure letter which qualified the warranties.

What happened to “that’s business”?

The Defendants appealed on two grounds:

  1. That based on evidence, the judge erred in ordering rectification;
  2. That the disclosure letter was not capable of being rectified as a matter of law.

The appeal was dismissed.

The Court of Appeal held that the High Court judge had been entitled to conclude that the agreement and disclosure letter did not accurately record the terms agreed between the parties and that the requirements for rectification had been met. In the circumstances, there was no reason why the disclosure letter would not be capable of rectification.

The Court rejected the submission that the Claimant should have gathered that it would not acquire the Felbridge Freeholds by virtue of being a commercially aware entity. As the controlling shareholders of the Development Companies, the Defendants’ should have ensured that the Claimant would own the whole of the Felbridge Freeholds on completion of the transaction between them where this was their common intention.

Why was intention looked at?

 So when will the Court intervene and correct what had already been formally agreed?

The Development Companies warranted that they had good title to the development site. Discussions and documents passing between the parties also demonstrated a common intention that the Felbridge Freeholds be included in the transaction. Although the Defendants sought to inform the Claimant of an intention to withdraw the Felbridge freeholds, the Defendant’s agents never informed the Claimant. Having regard, therefore, to the contemporaneous documents as evidence of intention, it was held that there was overwhelming evidence that the parties agreed for Felbridge freeholds to be included in the transaction.

When else could this happen?

The key question will be, would an objective observer find that the parties had a common intention which was not reflected in the final agreement? As evidenced in this case, the Courts will take matters into their own hands if they have reason to conclude that what was formally agreed between parties was not what parties intended to agree to. Evidence produced over the course of pre-contractual negotiations will be key, and should establish that the parties’ intended result of the transaction was not in fact fulfilled.

[1] [2019] EWCA Civ 800