The Court of Appeal confirms the decision correcting a drafting error by interpretation
The Court of Appeal dismissed an appeal from a High Court decision that ran counter to the unambiguous literal meaning of the clause: MonSolar IQ Ltd v Woden Park Ltd  EWCA Civ 961.
This is an app of what the court called the Chartbrook principle according to which obvious errors in the drafting of a document can be corrected in terms of construction (as illustrated by Chartbrook Ltd v Persimmon Homes Ltd  1 AC 1011). For this principle to apply, the court said, it must be clear both that the wording contains an error and how it is to be corrected. If either of these conditions is not met, the contract can only be corrected by a request for rectification, which was not invoked in this case.
This decision is interesting as a relatively rare example of a court finding that a contract should be interpreted against its clear literal meaning. Surprisingly perhaps, the judgment does not refer to what is now the Supreme Court’s main authority on contractual interpretation, Wood v Capita Insurance Services Limited  UKSC 24 (considered here). The suggestion in the present case that the court cannot depart from the clear literal meaning of the words used, unless that interpretation produces an absurd or irrational result, can be viewed as uncomfortable with the message in Wood vs. Captain that interpretation is a unitary exercise, in which the court must strike a balance between consideration of the language used (textualism) and its business implications (contextualism) – and that it does not matter which tool is deployed first, as long as the court balances the indications given by each.
In practice, however, when the language of a clause is clear and unambiguous, it will likely take something quite dramatic to persuade the court that its correct interpretation is something different, even when the tools of textualism and contextualism are balanced. In other words, when the language is clear, unless a literal interpretation leads to 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. These provisions have come under scrutiny over the years, as subtle language differences can have significant effects on (sometimes very large) rents. It was clearly relevant for the court to think that the presence of an escalation clause is not unusual – and that it universally plays a special and obvious role in allowing commercial rent to keep pace with inflation.
In many cases, a party seeking to argue that a contract should be interpreted against its literal meaning will plead another cause based on rectification – that is, the written contract should be corrected because that it does not reflect terms that the parties actually agreed to (or terms that a party believed to have been agreed upon, in circumstances where the other party should not be allowed to profit from the error). It is not known why this was not done here. However, complaints based on rectification are not easy to establish, especially since they depend in part on evidence of the state of mind of the counterparty at the time of the conclusion of the contract.
All of this highlights the need to ensure that the written contract properly executes the contractual agreement that a party believes it has entered into. For more details on how contracts are interpreted, see number 2 of our series of practical guides on contractual disputes: What does your contract mean? How the courts interpret contracts.
The plaintiff tenant entered into a 25-year lease with the defendant who owns a 15-acre site near Cardiff for the use of the site as a solar park. 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 follows:
Revised rent = Rent payable before the review date x (revised index number ÷ base index number)
The index referred to was the General Retail Price Index (or RPI), the revised index figure was defined as the RPI two months before the relevant revision date and the index figure baseline was defined as the RPI two months before the start of the contract term. lease.
It was agreed that there was no ambiguity in the formula and that, read literally, it would not result in an increase in the rent over time in accordance with the RPI, but at a much higher rate (since each year the rent would increase of the overall increase in RPI over the term of the lease up to that point).
The effect, on the literal interpretation, was that if (for example) the RPI increased by 2.855% per year (which was the average increase in RPI over the 20 years before the date of the lease), the rent payable in the 25th year of the term would be in the order of 76 million pounds, compared to less than 30,000 pounds if the rent were simply indexed to the RPI.
The plaintiff argued that the formula should be interpreted so that the rent is indexed in accordance with the RPI, applying the Chartbrook principle.
The High Court (Fancourt J) accepted the claim of the plaintiff and said that, on the actual construction of the lease, the rent was to be increased or decreased annually on the review date “in accordance with any proportional change in RPI during this period. an… “The Respondent appealed.
The Court of Appeal agreed with the reasoning and conclusion of Fancourt J. (Nugee J. delivering the principal judgment, with which Males and Baker JJ. Concurred).
Nugee LJ noted that contract construction authorities are largely concerned with the position where a contractual provision is open to two possible interpretations. This was not the case in the present case, however, since it was common ground that the contractual formula was clear and unambiguous. Instead, the court was concerned with the Chartbrook principle that the literal meaning of a provision can be corrected if it is clear both that an error was made and what the provision was intended to say.
Nugee LJ rejected the Respondent’s argument that what Lord Hoffmann said in Chartbrook was now to be read in light of Arnold vs. Britton  UKSC 36 (considered here). In Arnold the Supreme Court has emphasized the need for judicial deference in two ways. First, courts should not use commercial common sense and the surrounding circumstances to underestimate the importance of contract language. In Nugee LJ’s view, the underlying point was that the parties cannot control these factors, but they can control the language of their contract, and this is primarily where the reasonable reader would expect to find this. that the parties wanted. This does not apply, however, when it comes to whether the parties have made a drafting error. The second point made in Arnold about the need for curial deference was that courts cannot illegitimately rewrite the parties’ contract to whatever a reasonable and knowledgeable party would agree. The reasonable objective reader cannot know why the affected party agreed to a particular term, so unless it was clear that there was a drafting error, they must have read the contract as providing what it wanted. said unambiguously. This was consistent with Chartbrook, in which Lord Hoffman said that the fact that a contract may appear unduly favorable to one of the parties is not sufficient reason to assume that it does not mean what it says.
The distinction, explained Nugee LJ, was between a provision that just seems reckless and one that seems irrational. In Chartbrook Lord Hoffmann used a number of expressions, including that the natural interpretation was “sufficiently irrational to warrant a conclusion that there was a linguistic error” or was “commercially absurd”. There was nothing in Arnold vs. Britton suggest that this dividing line had been redrawn.
Was it clear that there was an error?
Nugee LJ dismissed the respondent’s first ground of appeal, namely that it was not clear that the relevant clause contained a drafting error. In his opinion, this was “about as obvious a case of an error as one could find”, in part because:
- The general purpose of a rent review clause is to reflect changes in the value of money, typically (since we live in times of inflation) by increasing the rent based on increases in the relevant index. This did not prevent the parties from agreeing to review the rent for another purpose, but it was a reasonable working hypothesis that the general objective of a rent review clause based on the evolution of an index such that the RPI was to allow a rent increase in line with the index changes.
- This general objective was echoed by a statement in an annex to the lease that if RPI ceased to exist, a new arrangement would be replaced by which the figure calculated under the clause “must reflect increases in the cost of living on a basis similar to that set out in »the clause. The formula, read literally, did not “reflect” the increase in the cost of living, due to its exponential effect.
- The results of literally applying the formula could rightly be described as “both arbitrary and irrational”, or “commercially absurd or absurd, so that one cannot assume that rational parties actually wanted them” . An example of the arbitrary results it produced was that if inflation was high at the start of the term but low at the end, it would produce a much higher rent than if inflation was low at the start and high at the end.
- It was not difficult to see how the error had occurred. It was not a necessary precondition to correct an error under the Chartbrook principle, and since evidence relating to the drafting process would (unlike 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 formed SPV, and the landlord would not receive any rent unless the SPV installed and operated a solar farm, which would only happen if the whole, including the lease, could be sold. If the formula really worked as written, it would prevent a sale to any savvy buyer.
Was it clear how the error was to be corrected?
Nugee LJ also dismissed the respondent’s second ground of appeal, that it was not clear how to correct a drafting error.
The defendant argued in particular that it was not clear whether the parties really intended to revise rents only upwards. Justice Nugee agrees with Justice Fancourt that the rent review clause was not drafted as an upward-only rent review clause, and that the inclusion of such a provision was not would have nothing to do with correcting the mistake that had been made. It was assumed that the parties intended to include a provision to this effect.