M&A and Corporate Disputes Case Report: Correcting mistakes in contracts

When the Court will sort out a mistake in corporate acquisition legal documentation: Recent Court of Appeal Judgment in Persimmon Homes Limited v Hillier & Creed [2019] EWCA Civ 800.

Background

It is generally the case that commercial organisations are free to negotiate the terms of their private deals and record them in binding contracts. The Courts therefore usually prefer not to correct or “rectify” contracts. One exception to this general rule is when there has been a clear mistake in the documents and that mistake is shared by both contractual parties. This is known as “common mistake”.

Facts of the Case

Persimmon acquired two companies which held interests in four of six parcels of land which made up a potential development site. The remaining critically important parcels were owned by another of the sellers’ companies so were not transferred upon the corporate sale. The SPA contained warranties that the acquired companies had good title to the land without specifically identifying the individual parcels but the Disclosure Letter specifically disclosed that the acquired companies did not own the 2 remaining parcels.

In 2018 the High Court ruled that the SPA and Disclosure Letter be corrected, so that the sellers gave a warranty that the acquired companies owned the 2 parcels of land. Whilst this did not result in Persimmon gaining title to the land,  it gave them a claim for breach of warranty for the damage suffered.

The sellers appealed. In 2019 the Court of Appeal upheld the High Court’s decision to rectify the SPA and the Disclosure Letter so that Persimmon kept their ability to pursue a breach of warranty claim.

Why the Court rectified the mistake

The High Court had considered the parties’ pre-contractual negotiations in detail including the history of negotiations, the content of Heads of Terms, emails and recollections of meetings. The Court of Appeal reviewed this, and ruled that the Judge had been correct to conclude that the SPA and Disclosure Letter did not accurately reflect the terms agreed between the parties. It was all about determining the parties’ common intention, as demonstrated by the communications between them that the 2 parcels of land would be and were owned by the acquired company on the date of the acquisition.

The Court of Appeal also upheld the Judge’s decision that the Disclosure Letter was an integral part of the suite of M&A documents and, if it did not give effect to the terms of the transaction, it was also capable of rectification, which it was.

Lessons

When acquiring or selling a company, it is always imperative to ensure robust due diligence on the assets owned by the target company and list the assets in the SPA. In addition, it is worthwhile keeping a good record of negotiations in case a claim for rectification is made. Our specialist M&A lawyers will be pleased to assist.

If you have bought a company and the documents don’t tally with what you think you should have acquired, our specialist Corporate Disputes lawyers can advise on potential breach of warranty claims or rectification claims.