How do contract errors arise?

Contracts can be long and complicated documents, subject to lots of change and amendment during the negotiation process. Most of the negotiations we get involved in at Devant involve electronic documents with “tracked changes” flying backwards and forwards between the parties as we shuffle towards a meeting of minds. Given the varying levels of expertise in using word-processing software it’s not that surprising to find mistakes creeping in to the contract document.

Of course, most of those errors are simply spelling, grammar or numbering issues and it’s not difficult to fix them before the final draft is printed for signature. However, sometimes a drafting error creeps in that distorts the intention of the agreement. Of course if the error works against our interests we’re going to insist it gets corrected. However let’s suppose we spot a drafting error that error works in our favour. What should we do then?

To speak up, or keep quiet?

It’s not uncommon to hear people say that “it’s the other side’s fault for not spotting it, and it works in our favour so we won’t say anything”. For those who regard the whole negotiation business as a contest where one party wins and the other loses this might seem an attractive option. However this approach conveniently forgets that signing the contract is only the first step on the road to delivering the deal. There will inevitably be a point where we need the other party’s co-operation to fulfil our contractual commitments, and if they think we have “stitched them up” in some way, they are unlikely to go out of their way to help us in our time of need.

There’s a second reason why the “we won’t say anything” approach isn’t a good idea, as a 2011 case from the Court of Appeal illustrates. The following is a brief outline of what happened – I’ve left out a lot of the legal detail to focus on the core messages.

Daventry District Council and  Daventry & District Housing – the facts

The case concerned an agreement made by Daventry District Council to transfer council housing to a social landlord, Daventry & District Housing (DDH). Part of the deal involved the council’s housing department staff being transferred to DDH along with their pension benefits. However this led to the problem of who would be responsible for the £2.4million deficit in the pension fund.

The agreement in principle was that DDH would meet the deficit, but unfortunately the contract draft incorrectly referred to the council meeting the deficit. The only person who seems to have noticed this was DDH’s negotiator, but he didn’t point out the error to the council. It seems he decided to rely upon the contract’s error in DDH’s favour, rather than pointing it out to the council and then trying to negotiate to share the deficit. He didn’t mention the misunderstanding in a briefing to his own board either, leaving them to believe the council would be carrying the full cost of the pension deficit.

After the agreement was signed the council realised the mistake and took DDH to court seeking to have the mistake rectified and alleging a breach of duty by DDH.

The outcome

The council’s claim was dismissed at first instance but, as so often with commercial cases, went to the Court of Appeal who overturned the initial judgement. The Appeal Court’s view was that the negotiator’s knowledge of the council’s mistake in not spotting the error, and his decision not to tell them or his own colleagues, was key. The Court decided that both parties wrongly believed the final signed contract reflected their shared understanding of what had been agreed. As a result the judges agreed to rectify the contract and correct the drafting mistake.

This decision left DDH holding the full £2.4 million pension deficit and, no doubt, a significant bill for legal costs. Had the DDH board been aware of the drafting error they would surely have attempted to negotiate a reduction in their pension commitment and been significantly better off. In their judgement, the appeal judges suggested they expect parties to an agreement to highlight misunderstandings during their negotiations or run the risk of a similar contract rectification by the courts.

The judgement covered only the specific issues of the case, but it would interesting to know what impact all this had on relationships between the two parties as they tried to implement the staff and housing transfer. It’s difficult to believe that it didn’t give rise to a lack of trust by the council, and a suspicion of DDH’s motives for every subsequent action – hardly the best way to ensure a successful business relationship.

Lessons learned?

So what’s the lesson from all this? At Devant we view the contract as the “handbook” for the business relationship it formalises. If both parties share a common understanding of what each them is responsible for and how any problems will be addressed, then it’s much more likely to result in a successful outcome for both sides. So, don’t ignore errors in the wording of the contract, or misunderstandings about who’s responsible for what – fix them!

Finally, it’s always worth remembering that whilst Parliament seems to generate a never-ending stream of new laws, very few of them relate to commercial agreements. In fact very little of English commercial law is governed by statute, with the majority being derived from case law. Whilst the judges deciding cases are, of course, highly trained and very experienced, it’s clear to anyone following reports of commercial cases that they don’t always reach the same conclusions.

One recent case was decided differently at each stage, in the High Court, the Court of Appeal, and finally the Supreme Court, clearly demonstrating how difficult is to be sure what the outcome of a commercial court-case will be.

Of course, this rather nicely reinforces the Devant view that creating a sound working relationship with the other parties to your deal, being clear about how to make it successful, and having thought about what might go wrong and how you will put it right should be the priority. Because it’s always better to avoid getting to court, where even the winners still lose!

Tiffany Kemp

Founder and Managing Director, Devant