Obviously wrong enough? Just how extreme does an error have to be?
A provision of a contract is unambiguous. The meaning of its words is clear and incontrovertible. The language is not open to doubt. However, the effect of the provision, read in line with how the parties drafted it, is commercially absurd.
What, if anything, can be done about this? Not much, it might seem, at first glance:
There is, after all, no ambiguity in the wording. The provision is not open to two possible interpretations. Thus there is no room for the court to select that which best accords with common sense.
Moreover, it is clear that commercial common sense should not be invoked to undervalue the importance of the language of the provision.
Further, it is not open to the court to alter an unambiguous provision of a contract simply because it represents an imprudent or bad deal for one or other party. That would involve illegitimately re-writing the parties’ bargain in the name of commercial good sense.
The above 3 propositions were all confirmed in Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961. (Paragraphs [25], [27] & [29-30].)
But, as appears from Monsolar, in an extreme case there may be a way out; help may be at hand in the form of “correction by construction”.
Monsolar was an extreme case. A 25 year lease reserved a rent of £15,000 per annum. The rent was subject to annual review with reference to changes in the RPI. However, because of the way in which the formula was (unequivocally) expressed, the effect of the review clause, applied literally, was that each year’s increase reflected not the change in RPI for the previous year but the cumulative change in RPI since the beginning of the lease (all of which, bar that in respect of the latest 12 months, had already been taken into account, in most cases repeatedly. The result was an exponential rise in the rent over the term, exacerbated if inflation was high at the beginning of the term (since increases in the early years of the term would be compounded many times over).
The landlord said that the tenant was stuck with this. The formula was clear. The tenant had simply made a bad bargain. The Court of Appeal, upholding Fancourt J [2020] EWHC 1407 (Ch), had no hesitation in rejecting this.
As the court said, although the language used by the parties is important, matters are different where it is suggested that the parties have made a drafting mistake, in which case the very question is whether the language really does reflect their intentions. (Paragraph 27)
The escape route arises from the fact that, as confirmed in Chartbrook Ltd v Persimmon Homes [2009] UKHL 38, it is well established that clear mistakes in the drafting of a document can be corrected as a matter of construction. The Chartbrook principle operates if (1) it is clear that a mistake has been made and (2) it is clear what the provision was meant to say.
As to the first point, Nugee LJ (with whom the other members of the court agreed) held (paragraph 31) that there is a distinction between a case where a provision seems merely imprudent and one which appears irrational. In the latter scenario, that is demonstrative of an error in the drafting.
On the facts of Monsolar, the result of the literal formula used for the rent review was so bizarre as to render it clear that a drafting error had been made. As Nugee LJ said (paragraph 31), “it is about as plain a case of such a mistake as one could find”. The arbitrary, exponential outcome was nonsensical and absurd. It was impossible to think that any rational parties could have intended it (paragraph 39). Also, although not a legal requirement for correction by construction, it was easy to see how the mistake had occurred, namely by the drafter’s erroneous combination of an incompatible multiplicand and multiplier.
As to the second point, it was also clear how the mistake should be corrected. The correction necessary was to provide that the rent would be adjusted each year by reference to the change in RPI over the preceding year alone (as opposed to the aggregated change in RPI over the whole term of the lease).
In this regard, it did not matter whether one corrected the multiplicand (by amending the reference to the previous year’s rent to the original rent) or the multiplier (revising it from the difference between current RPI and RPI at the date of grant of the lease to the difference between current RPI and the previous year’s RPI); the mathematical effect was the same either way (paragraphs 49 & 55).
Therefore, the court confirmed that the lease was to be read as if it provided for a formula which achieved the intended, sensible result – even though that involved departing from the natural, indeed only, meaning of the words actually used (interpreted in accordance with the ordinary rules of syntax) and substituting a corrected formula.
The decision in Monsolar may thus offer comfort to those faced with extreme cases where something has obviously gone wrong with the drafting of a contractual provision.
But the challenge will always be to decide on which side of the “fine dividing line between a case where the result appears ‘commercially unattractive and even unreasonable’ and a case which appears ‘nonsensical or absurd’” (paragraph 31).
As to this, it is plain that what is required is a result which is, on any view, patently bizarre and unjustifiable – so much so that no one could cogently believe that the parties could have intended it. This is clear from the descriptors used and cited by the Court of Appeal: “arbitrary and irrational”; “commercially absurd”; “nonsensical”.
The principle is thus clear. As ever, the difficulty may lie in its application. What strikes one person as wholly untenable may not appear so to another.
Monsolar may have been an obvious candidate for correction but not all cases will be so extreme. Indeed, there are those who believe – like the dissenting Lord Carnwath – that Arnold v Britton [2015] UKSC 36 (in which a fixed service charge was held by the Supreme Court to rise on a compound basis by 10% each year) was a case of an obvious mistake which yielded a result which was “absurd”, although the decision of the majority was that it was not. It may have been (to use the words of Nugee LJ in Monsolar) “unduly favourable to one party, or imprudent for the other party to enter into” but (in the eyes of the majority) it did not cross the line into the sphere of the arbitrary and irrational.
All this goes to illustrate: ill-drafted contracts will continue to give room for dispute. Just how bad does seemingly clear drafting have to be before it can be capable of correction? How extreme does the error and result have to be? Is the drafting in your case obviously wrong or only questionably so? It may make all the difference.
Martin Dray
5 July 2021
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