When there is a mistake with the language in a contract and the issue of interpretation is in dispute, the parties have two “safety devices” to rely on. The first is the Court’s ability to interpret the contract accordingly despite the mistake. This stems from a long established principle of construction set out by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society (1998) that whilst words should be given their “natural and ordinary meaning” if “one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have”. In this way, the Courts can consider the background to an agreement (also known as the “matrix of fact”) to deal with the mistake by way of construction.

The second safety device is rectification. This is a discretionary remedy allowing the Court to correct mistakes made in recording agreements but it must be pleaded and proved.

In the recent case of Cherry Tree Investments Limited –v- Landmain Limited [2012] EWCA Civ 736, the Court of Appeal had to consider whether a mistake in a registered legal charge could be saved by the Court using only the rules of interpretation since rectification had not been pleaded. In order to determine the extent to which background information could be examined in this case, the Court had to consider the purpose of the Land Registry system and the reliance placed on public documents by third parties.

The Facts

Landmain Limited (“Landmain”) was the registered proprietor of a property at 2 Battersea Rise, London and charged the property to Dancastle Associates Limited (“Dancastle”) for a loan of £635,000. Under the facility agreement between the parties, the statutory power of sale conferred on mortgagees by section 101 of the Law of Property Act 1925 was varied so that Doncastle’s power of sale arose on execution of the charge and was exercisable at any time after such execution.

The charge was duly registered at the Land Registry using the standard form CH1, which referred neither to the facility agreement nor the extension of the statutory power of sale itself. The facility agreement was not registered at the Land Registry.

A dispute about repayment arose with Dancastle alleging that there was a default, which Landmain denied.  Pursuant to the power of sale, Dancastle sold the property to Cherry Tree Investments Ltd (“Cherry Tree”) who sought to be registered as the proprietor of the property. However, Landmain disputed the validly of the transfer of the property to Cherry Tree and argued that it should remain the registered proprietor.

The Decision at First Instance

Cherry Tree sought an order that it be registered as the owner of the property due to the fact that the statutory power of sale had been varied by the facility agreement and the monies secured by the charge had become due on execution of the charge.

The Judge at first instance found in favour of Cherry Tree. He held that the facility agreement and the charge had been executed as part of a single transaction and therefore could be treated as one. The parties obviously intended the extended power of sale contained in the facility agreement to be effective. The Judge further held that the parties were mistaken in their belief that the power of sale had been effectively varied by the facility agreement, and because of this mistake, the charge should be read as if the variation to the statutory power of sale in the facility agreement had been incorporated into the charge.

In these circumstances, the charge effectively extended the statutory power of sale and so the sale to Cherry Tree was valid and effective.

Landmain appealed the decision.

The Issues arising on Appeal

Whether the charge and the facility agreement could be interpreted together for any purpose, having regard to the fact that the charge alone was registered at the Land Registry;
If the answer to the first question was yes, could the court correct by interpretation the mistake made by the parties in not varying the statutory power of sale in the charge itself; and
If the answer to the first and/or second question was no, could the charge and the facility agreement constitute in law a single document so as to meet the requirement for any variation of the statutory power of sale to be contained in the charge.
The Court of Appeal’s Decision

The majority of the Court of Appeal (Lewison and Longmore LJJ; Arden LJ dissenting) allowed the appeal. The standard form charge document and the facility agreement could not be construed as one document so as to include the extended power of sale from the facility agreement. The decision hinged upon the fact that the charge was a public document registered at the Land Registry.

The majority accepted that the facility agreement was admissible as background to the interpretation of the charge; however the question was then what weight would a reasonable person with the background knowledge of the parties attribute to the terms of the facility agreement given they did not appear on the face of the charge itself.

Lewison LJ stated that the reasonable person’s background knowledge would include the knowledge that the charge would be registered in a publicly accessible register upon which third parties might be expected to rely. A reasonable person would also know that the documents retained by the Registrar were to be taken as containing all material terms and it could be concluded that the matters which the parties chose to keep private should not influence the parts of the bargain that they chose to make public. A party may choose to incorporate terms by reference to another document but that was a matter for them. If they do incorporate the terms of another document by reference, that will be apparent on the face of the document that the Registrar has retained and which anyone may inspect.

If someone had inspected the register between the time of the original registration of the charge and the date on which the court “interprets” the charge, he would not have discovered the missing clause, because the facility agreement was not open to inspection. If the missing clause was inserted by means of interpretation, then the “interpreted” charge would rank in priority from the date of its original registration, thereby bypassing “the carefully calibrated rules of priority which are an essential feature of our modern system of land registration”.

Alternatively, if the missing clause was inserted into the charge by rectification, a person who has dealt with the land in the meantime would not be affected by the right to rectify. This is because, although a court order for rectification is retrospective so that the document will be read as if it had always been in its rectified form, the right to rectify is to be treated for the purposes of section 116 of the Land Registration Act 2002 as a property right and will take effect in accordance with the priority provisions of the Act rather than being fully retrospective.

Accordingly, the Court held that the insertion of the missing clause in the charge ought to have been effected by way of a properly pleaded and proved claim for rectification. The case was not to be decided as a pure question of interpretation.

Commentary

The outcome seems unfair for Cherry Tree, given that Landmain freely accepted the extended power of sale in the facility agreement. However, the majority seemed determined to confirm the principle that documents at a public registry should be deemed to be certain and complete. This principle would be diminished if private agreements, even though admissible, were taken into account as an aid to construction. In any event, the unfairness to Cherry Tree is somewhat mitigated by the fact that the majority hinted that Cherry Tree could perhaps amend their pleadings to make a claim for rectification.

The case confirms that there are limits to the extent that contracts can be corrected by interpretation and that, in the case of a public document, evidence relating to background has a more limited part to play. It also serves as a reminder that in disputes relating to contractual interpretation a claim for rectification should always be pleaded in the alternative especially where the contract in question is a public registered document. Careful consideration should always be given as to what information is included in any standard forms used, in order to ensure that the registered rights fully reflect those which the parties might wish to enforce.

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