Construction of Contracts

[Thanks to www.emplaw.co.uk for allowing me to reproduce their summary of this case]

The House of Lords decision in Chartbrook v Persimmon Homes is not an employment law case. It is noted here because it deals, at length, with the important questions of:

• the extent to which context and backgound can be taken into account in determining the proper meaning of words in a contract;
• the distinction between context and backgound (which can be taken into account) and pre-contractual negotiations (which must not be taken into account) in determining the proper meaning of words in a contract;
• the distinction between "rectification" of a contract, which applies when the parties are in complete agreement on the terms of their contract but by error wrote them down wrongly, and "construction" of a contract which means giving a proper interpretation to words actually used.

In this case the House of Lords allowed an appeal by the Persimmon house building company. The House of Lords construed a contract in the manner contended for by Persimmon. Rectification was neither appropriate nor necessary.

Overruling the Court of Appeal, the House of Lords interpreted a badly drafted, even nonsensical, part of the contract by taking into account the context and commercial background behind it (but not the negotiations leading up to it). The result was that Persimmon Homes Ltd owed Chartbrook Ltd, a landowning company, just £900,000 rather than the £4 million which would have resulted from a literal, albeit unintended, interpretation of the wording.