Court of Appeal upholds decision correcting drafting error by interpretation

The Court of Appeal has dismissed an appeal against a High Court decision which went against the unambiguous literal meaning of the clause: MonSolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961.

This is an application of what the court referred to as the Chartbrook principle, by which clear mistakes in the drafting of a document can be corrected as a matter of construction (as exemplified by Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1011). For this principle to apply, the court said, it must be clear both that the drafting contains a mistake and how it should be corrected. If either of these requirements is not satisfied, the contract can only be corrected by a claim for rectification, which was not pleaded in this case.

This decision is of interest as a relatively rare example of a court finding that a contract should be interpreted against its clear literal meaning. Perhaps surprisingly, the judgment does not refer to what is now the leading Supreme Court authority on contractual interpretation, Wood v Capita Insurance Services Limited [2017] UKSC 24 (considered here). The suggestion in the present judgment that the court cannot depart from the clear literal meaning of the words used, unless that interpretation produces an absurd or irrational result, may be thought to sit uncomfortably with the message in Wood v Capita that interpretation is a unitary exercise, in which the court must strike a balance between considering the language used (textualism) and its commercial implications (contextualism) - and that it does not matter which tool is deployed first, so long as the court balances the indications given by each.

In practice, however, where the language of a clause is clear and unambiguous it is likely to take something fairly dramatic to persuade the court that its proper interpretation is something different, even where the tools of textualism and contextualism are balanced against one another. In other words, where the language is clear, unless a literal interpretation would result in absurdity, the reasonable observer will almost certainly be bound to conclude that the language reflects the objective meaning of the contract.

It is relevant that the clause in this case is a rent review provision. Such provisions have been the subject of much scrutiny over the years given that subtle differences in language can result in significant effects on (sometimes very substantial) rents. It was clearly relevant to the court's thinking that the presence of an indexation clause is not unusual – and that it universally serves a particular and obvious role in allowing a commercial rent to keep track with inflation.

In many cases, a party seeking to argue that a contract should be interpreted against its literal meaning will plead an alternative case based on rectification – ie that the written contract should be corrected because it does not reflect the terms the parties actually agreed (or the terms one party thought had been agreed, in circumstances where the other party should not be permitted to take advantage of the mistake). It is not clear why that was not done here. However, claims based on rectification are not easy to establish, particularly as they depend in part on evidence as to the counterparty's state of mind in entering into the contract.

All of this underlines the need to take care in ensuring that the written contract properly implements the contractual bargain a party thinks it has agreed. For further discussion of how contracts are interpreted, see issue 2 of our contract disputes practical guides series: What does your contract mean? How the courts interpret contracts.

Background

The claimant tenant entered into a 25 year lease with the defendant owner of a 15-acre site near Cardiff for use of the site as a solar farm. The lease provided for a starting rent of £15,000 and contained a rent review clause which provided that the rent payable would be reviewed annually and the revised rent would be calculated as:

Revised Rent = Rent payable prior to the Review Date x (Revised Index Figure ÷ Base Index Figure)

The index referred to was the General Index of Retail Prices (or RPI), the Revised Index Figure was defined as RPI two months before the relevant review date, and the Base Index Figure was defined as RPI two months before the commencement of the term of the lease.

It was common ground that there was no ambiguity in the formula and that, read literally, it would not result in rent increasing over the term in line with RPI, but at a very much higher rate (since each year the rent would increase by the aggregate RPI increase over the entire term of the lease to that point).

The effect, on the literal interpretation, was that if (for example) RPI increased by 2.855% annually (which was the average RPI increase over the 20 years before the date the lease was granted) the rent payable by year 25 of the term would be some £76 million, as compared with less than £30,000 if the rent was simply indexed in line with RPI.

The claimant claimed that the formula should be construed so that the rent was indexed in line with RPI, applying the Chartbrook principle.

The High Court (Fancourt J) accepted the claimant's contention and made a declaration that, on the true construction of the lease, the rent was to be increased or decreased annually on the review date "in accordance with any proportionate change in the RPI during that year...". The defendant appealed.

Decision

The Court of Appeal agreed with Fancourt J's reasoning and conclusion (Nugee LJ giving the lead judgment, with which Males and Baker LJJ agreed).

Nugee LJ noted that the authorities relating to contractual construction are largely concerned with the position where a contractual provision is open to two possible interpretations. That was not, however, the situation in this case, as it was common ground that the contractual formula was clear and unambiguous. Instead, the court was concerned with the Chartbrook principle, under which the literal meaning of a provision can be corrected if it is clear both that a mistake has been made, and what the provision was intended to say.

Nugee LJ rejected the defendant's submission that what Lord Hoffmann said in Chartbrook now had to be read in the light of Arnold v Britton [2015] UKSC 36 (considered here). In Arnold the Supreme Court had underlined the need for judicial restraint in two ways. First, the courts should not invoke commercial common sense and surrounding circumstances to undervalue the importance of the contractual language. In Nugee LJ's view, the underlying point was that the parties cannot control such factors but they can control the language of their contract, and that is primarily where the reasonable reader would expect to find what the parties intended. That did not apply, however, where the question is whether the parties have made a drafting mistake. The second point made in Arnold around the need for judicial restraint was that the courts cannot illegitimately re-write the parties' bargain according to what a reasonable and properly informed party would agree. The reasonable objective reader cannot know why the relevant party agreed to a particular term, so unless it was clear that there was a drafting mistake, they had to read the contract as providing what it unambiguously says. This was consistent with Chartbrook, in which Lord Hoffman said that the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says.

The distinction, Nugee LJ explained, was between a provision which seems merely imprudent and one which appears irrational. In Chartbrook Lord Hoffmann used a number of expressions including that the natural interpretation was "sufficiently irrational to justify a conclusion that there has been a linguistic mistake” or was “commercially absurd”. There was nothing in Arnold v Britton to suggest that this dividing line had been redrawn.

Was it clear that there was a mistake?  

Nugee LJ rejected the defendant's first ground of appeal, ie that it was not clear that the relevant clause contained a drafting error. In his view this was "about as plain a case of such a mistake as one could find", including because:

• The general purpose of a rent review clause is to reflect changes in the value of money, usually (since we live in inflationary times) by increasing the rent in line with increases in the relevant index. That did not prevent the parties agreeing to review the rent for a different purpose, but it was a reasonable working hypothesis that the general purpose of a rent review clause based on changes in an index such as RPI was to enable the rent to be increased in line with changes in the index.
• That general purpose was echoed by a statement in a schedule to the lease that if RPI ceased to exist a a new arrangement would be substituted whereby the figure calculated under the clause “shall reflect increases in the cost of living on a similar basis to that set out in" the clause. The formula, read literally, did not “reflect” increases in the cost of living, as a result of its exponential effect.
• The results of applying the formula literally could aptly be described as "both arbitrary and irrational", or "commercially nonsensical or absurd, such that it cannot be supposed that rational parties really intended them". An example of the arbitrary results it produced was that if inflation was high at the beginning of the term but low at the end, that would produce a much higher rent than if inflation was low at the beginning and high at the end.
• It was not difficult to see how the mistake came about. This was not a necessary prerequisite to correcting a mistake under the Chartbrook principle, and since evidence as to the drafting process would (unlike in an action for rectification) almost always be inadmissible, it would often be impossible to know. But the existence of a plausible explanation supported the conclusion that there had indeed been an error.
• The lease had been granted to a newly incorporated SPV, and the landlord would not actually receive any rent unless the SPV installed and operated a solar farm which would not happen unless the package, including the lease, could be sold. If the formula really operated as drafted, it would prevent a sale to any well-advised purchaser.

Was it clear how the mistake should be corrected?

Nugee LJ also rejected the defendant's second ground of appeal, that it was not clear how any drafting error should be corrected.

The defendant argued, in particular, that it was not clear whether the parties actually intended an upwards only rent review. Nugee LJ agree with Fancourt J that the actual rent review clause was not drafted as an upwards only rent review clause, and including such provision would have nothing to do with correcting the mistake that had been made. There was reason to suppose that the parties intended to include a provision to that effect.