Persimmon Homes Ltd vs Hillier
Once signed, the courts rarely decide that the terms of a contract should be rectified. Nevertheless, on 9 May 2019, the Court of Appeal rejected the appeal of a High Court ruling which ordered the rectification of a share purchase agreement (SPA), and supplementary disclosure letter.
Background (Persimmon Homes Ltd v Hillier  EWHC 221 (Ch))
Persimmon Homes Ltd (the Claimant) sought to obtain a development site owned by a group of companies that were run by the two defendants (the Defendants). To do so, the parties agreed that the Claimant would purchase the shares of two of the Defendants’ group companies (the Targets), and set out the legally binding terms in a SPA.
The development site was split into six parcels of land. One of the Targets held options to purchase four of the six parcels. The remaining two parcels (the Freeholds) were owned by another company in the Defendants’ group. However, this company had a separate chain of ownership and so did not form part of the share sale.
During the due diligence procedure, the Defendants did seek to inform the Claimant of this issue in a disclosure letter that was uploaded to the transaction’s data room. However, the warranties contained in the SPA indicated the contrary, stating that the Targets had good title to the development site. Further, the remaining data room documents, as well as the prior communications between the parties, demonstrated a common intention for the Claimant to acquire all six parcels of land.
Accordingly, it was only after completion of the purchase that the Claimant recognised it had acquired only four of the six parcels of land. Additionally, the two remaining parcels now blocked access to those owned by the Claimant. As a result, the value of the development site was significantly reduced and the Claimant sought rectification of the SPA and disclosure letter.
In the High Court, the Judge held that the parties’ common intention throughout the transaction was for the Claimant to acquire interest in the whole of the development site upon purchasing the Targets’ shares. Consequently, he ordered rectification of both the SPA and the disclosure letter to give effect to the parties’ intended result.
Court of Appeal
On the Defendants’ appeal, it was found that the High Court Judge had been entitled to conclude that the SPA and the disclosure letter did not accurately reflect the parties’ intentions, and should be rectified.
The Defendants argued that the heads of terms, which supported the information in the disclosure letter, should have been used to determine the parties’ common intentions rather than any preceding documents. However, it was found that the head of terms did not have any contractual force, and should therefore be considered as part of the negotiations leading to the agreement.
Also rejected was their submission that the Claimant, as a commercially aware entity, should have gathered that it would not acquire the Freeholds. The Judge reasoned that, as the controlling shareholders of the relevant companies, it was the Defendants’ responsibility to enact the parties’ common intention and ensure that the Claimant owned the whole of the development site at completion.
Consequently, the order to rectify the SPA and disclosure letter was upheld, and the Claimant was entitled to damages representing the difference between the site’s actual market value at the time of the acquisition and its value had the SPA warranties been correct.
What does this mean in practice?
Persimmon Homes Ltd v Hillier shows that a clear and identifiable common intention is key to the success, or failure, of a rectification claim. The courts’ main consideration will be if, in the circumstances, an independent observer would determine that the parties had a common intention which was not reflected in the resulting agreement.
Practically, it is therefore worth noting that in order for the courts to reach such a conclusion, there must be distinct evidence establishing the parties’ intended result of the transaction. So as to avoid potential disputes, when negotiating and drafting documents, language should be used that consistently, clearly and accurately presents the parties’ common intention in making the agreement.
For more information on this topic, please contact Sean Halliwell, or you can give us a call on 0345 070 6000.
This article was prepared by George Bogle.