Misunderstandings During Negotiations to Your Counterparty
Must You Point Out Misunderstandings During Negotiations to Your Counterparty?
January 25, 2012
In Daventry District Council v. Daventry & District Housing Ltd [2011] EWCA Civ 1153, the Court of Appeal rectified an agreement for common mistake even though one party arguably did not intend to enter a contract on those rectified terms. The problem arose because the parties and their lawyers were at cross purposes on an important point during negotiations. The only person aware of the differing intentions was the chief negotiator for Daventry & District Housing Ltd (DDH). He told neither his own colleagues nor the counterparty. The court criticised him for keeping silent. Rectifying the contract cost his company £2.4 million (plus the litigation costs).
The decision provides lessons for all individuals involved in negotiating the terms of a deal or tasked with ensuring the final agreement accurately reflects the parties' commercial intentions. It follows a series of other cases in recent years where the courts have decided that one party should have pointed out drafting errors or other misunderstandings to their counterparty.
Daventry – the Background Facts
Daventry District Council (the Council) negotiated over several months to transfer council housing to DDH, a social landlord. The Council's housing department staff and their pensions would also move to DDH. One issue involved how to deal with a deficit of £2.4 million in the pension fund. The parties agreed commercial terms in principle, requiring DDH to meet this deficit. But the written proposals were ambiguous. An early draft of the formal contract referred to the Council meeting the shortfall. This wording never changed. Later (at the instigation of DDH's bank), another clause was added to the formal contract spelling out the deadline by which the Council must pay the deficit. The Council accepted this change, still oblivious that it contradicted the commercial agreement in principle.
In summary, the
January 25, 2012
In Daventry District Council v. Daventry & District Housing Ltd [2011] EWCA Civ 1153, the Court of Appeal rectified an agreement for common mistake even though one party arguably did not intend to enter a contract on those rectified terms. The problem arose because the parties and their lawyers were at cross purposes on an important point during negotiations. The only person aware of the differing intentions was the chief negotiator for Daventry & District Housing Ltd (DDH). He told neither his own colleagues nor the counterparty. The court criticised him for keeping silent. Rectifying the contract cost his company £2.4 million (plus the litigation costs).
The decision provides lessons for all individuals involved in negotiating the terms of a deal or tasked with ensuring the final agreement accurately reflects the parties' commercial intentions. It follows a series of other cases in recent years where the courts have decided that one party should have pointed out drafting errors or other misunderstandings to their counterparty.
Daventry – the Background Facts
Daventry District Council (the Council) negotiated over several months to transfer council housing to DDH, a social landlord. The Council's housing department staff and their pensions would also move to DDH. One issue involved how to deal with a deficit of £2.4 million in the pension fund. The parties agreed commercial terms in principle, requiring DDH to meet this deficit. But the written proposals were ambiguous. An early draft of the formal contract referred to the Council meeting the shortfall. This wording never changed. Later (at the instigation of DDH's bank), another clause was added to the formal contract spelling out the deadline by which the Council must pay the deficit. The Council accepted this change, still oblivious that it contradicted the commercial agreement in principle.
In summary, the