LAW REPORT Contract induced by mistake can be rectified

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Commission for the New Towns v Cooper (Great Britain) Ltd (formerly Coopind UK Ltd). Court of Appeal (Lord Justice Stuart-Smith, Lord Justice Farquharson and Lord Justice Evans). 24 February 1995

A party to a contract who, intending the other party to be mistaken as to the terms of their agreement, made false and misleading statements to prevent the other discovering his mistake, was not entitled to insist on performance of the contract to the letter, but might himself be bound by the agreement which the other mistakenly thought was being made.

The requirement in section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, that contracts for the sale or disposition of an interest in land should be in writing, was not satisfied by offer and acceptance in correspondence.

The Court of Appeal dismissed an appeal by the defendant, Cooper (Great Britain) Ltd against the decision of Judge Micklem, sitting as a High Court judge on 20 July 1993, that the defendant was not entitled to give notice terminating the underlease of Unit 3A, Michigan Drive, Tongwell. A cross-appeal by the plaintiff, the Commission for the New Town, that the order be affirmed on additional grounds, was allowed.

Section 2 provided: "(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one documents or, where contracts are exchanged in each. (2) The terms may be incorporated in a document either by being set out in it or by reference to some other document. (3) The documents incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract."

David Neuberger QC and Jonathan Small (Baker & McKenzie) for the defendant; Derek Wood QC and Beverly-Ann Rogers (Denton Hall Burgin & Warrens, Milton Keynes) for the plaintiff.

LORD JUSTICE STUART SMITH said the defendant's predecessor as tenant of commercial premises underlet by the plaintiff's predecessor had made three agreements by deed with that underlessor: (i) the "put option", by which the underlessor covenanted to take an assignment of the underlease on certain conditions; (ii) the "larger premises option" under which the underlessee could opt to transfer to larger premises and (iii) the "side land option" under which it could acquire land alongside the existing premises.

After the defendant acquired the unexpired residue of the underlease, its parent company analysed the costs of closing the business, including the penalty payable to surrender the underlease. It decided instead to try to obtain the put option enjoyed by its predecessor from the plaintiff. The defendant therefore pretended to be negotiating for the side land option, although it had no intention of expanding operations, and the put option was not referred to in the negotiations. It was agreed that the defendant should acquire the rights and benefits enjoyed by its predecessor. As soon as agreement was reached, it purported to exercise the put option. The plaintiff sought rectification of the agreement.

The judge refused rectification but held that the correspondence between the parties did not satisfy the requirements of section 2 of the 1989 Act, so the plaintiff was not bound by the agreement.

His Lordship agreed with the judge on the latter issue: there must be one document recording the agreement of both parties, or an exchange of contracts in the sense of the formal delivery by each party to the other of documents intended to take effect as formal documents of title and incorporating all the terms of an agreement already arrived at with the mutual intention that the parties would be bound once the documents were exchanged. An exchange of letters, referring to oral discussions and other documents, by which an offer was made and accepted, was insufficient for section 2.

As to rectification, on his Lordship's construction of the contract, the put option was not included. But if it was, rectification should be ordered. Where A, intending B to be mistaken as to the meaning of an agreement, so conducted himself that he diverted B's attention from discovering the mistake by making false and misleading statements, and B in fact made the very mistake A intended, then, even if A did not actually know but merely suspected that B was mistaken, and it could not be shown that the mistake was induced by any misrepresentation, rectification might still be ordered. A's conduct was unconscionable and he could not insist on performance to the letter; that was sufficient for rescission.