George Wimpey UK Ltd. v VI Construction Ltd.

This is an appeal by the Defendant, V. I. Components Ltd. (“VIC”), from the order made on 23 June 2004 by Mr. Jules Sher Q.C., sitting as a Deputy High Court judge. By his order he ordered rectification of a contract executed on 2 July 1999 by VIC and the Claimant, George Wimpey UK Ltd., then George Wimpey Holdings Ltd. (“Wimpey”). By that contract VIC agreed to sell and Wimpey agreed to purchase the land known as the VIC Industrial Estate in Erith, Kent (“the Site”). The consideration payable by Wimpey consisted of an initial payment, but with a deferred payment becoming due in a certain contingency. The rectification ordered related to the contractual formula for the deferred consideration. The type of rectification the conditions for which the judge found were satisfied was that based on unilateral mistake.

In 1989 VIC ceased manufacturing at the Site. It then explored the possibility of selling the site for residential development. VIC retained Mr. Jonathan Youens of Montague Youens, chartered surveyors, to act for it in negotiating a sale. He reported to Mr. Ron Daykin, a director and the majority shareholder of VIC, who also took part in the negotiations.

Wimpey is a substantial company in the field of residential development, operating throughout the country. Mr. Ketteridge, Wimpey’s Regional Director in the South East, alone handled the negotiations for Wimpey. It had its own formal procedures for a decision to be made by the main board for Wimpey to enter into a contract to purchase land. Mr. Ketteridge did not have authority to take such a decision. Nor did the person to whom he reported, Mr. Steven Kendal, the Regional Director in the South East, as he was not on the main board. Before the board so decided, it required a written commercial report from Mr. Ketteridge and a written legal report from its solicitors.

In 1998 outline planning permission was obtained for 231 flats to be built on the Site. The plans, on the basis of which outline planning permission had been granted, showed an unusual amount of detail. This included the overall size of the flats, the number of bedrooms and the situation of the flats with particular reference to whether any particular flat commanded a river view. The amount of detail enabled a schedule to be prepared by Wimpey, identifying the area and projected selling price for each flat. The basic price of each flat was based on the flat’s square footage. To that was added a further sum for what were called enhancements: a premium for a river view of 10% of that basic price, a premium of £2,000 for undercroft parking and an uplift of £1,000 for every floor the flat was above ground level. The aggregate of the selling prices totalled £20,610,090 of which about £2 million consisted of enhancements. That aggregate was the basic figure, and from the outset of the negotiations between VIC and Wimpey it was recognised that not only would Wimpey pay an initial purchase price but it would also pay what was called an overage payment if the aggregate of the sale prices achieved exceeded the base figure. The overage payment was to be 50% of the excess over the base figure.

It was always likely that, in the course of obtaining detailed planning permission, there would be changes in the number and size of the flats. In the event, each of the 231 flats changed in size and a further four flats were built.

On 10 March 1999 Wimpey made an offer to VIC to purchase the Site for £2,250,000 plus 50% of the overage. On 15 March Mr. Ketteridge proposed to VIC a formula to cope with overage in respect of any changes in the size or numbers of flats constructed on the Site. His proposal was to adjust the basic price to allow for the change in the size of the flats; once that had been done, the enhancements were to be added back to the adjusted basic price. If a new flat, additional to the 231 flats, was constructed, he proposed that its basic price was to be calculated by taking the price per square foot of the flat in the schedule having an area closest to that of the new flat and multiplying that price by the square footage of the new flat.

Agreement in principle was obtained, but there were further discussions and exchanges. Each of VIC and Wimpey had substantial and reputable firms of solicitors acting for it. For VIC Macfarlanes acted, Mr. Talbot-Ponsonby being the solicitor primarily concerned. For Wimpey Eversheds acted. Mr. Speer was the experienced solicitor primarily concerned. By 25 March Mr. Talbot-Ponsonby had produced the first draft of the overage provisions in the draft contract of sale and purchase of the Site. Cl. 16. 10. 2 contained the formula for a new flat and cl. 16. 10. 3 the formula for an altered flat. In each formula the enhancements were shown added back by the inclusion of the notation “+ E”. The draft contract went through 12 editions.

By 15 April 1999 Eversheds had produced a legal report on the contract. By a commercial report of that date on Eversheds’ report Mr. Ketteridge described the overage provisions in general terms. The board of Wimpey approved the proposed acquisition.

On 11 April 1999 another interested purchaser made an improved offer, as did yet another purchaser shortly afterwards, and Wimpey dropped out of the negotiations. Wimpey re-entered the negotiations on 24 June 1999 when by letter Mr. Ketteridge offered an increased initial price of £2,650,000. He added:

“This revised monetary upfront figure is the only adjustment to the original deal agreed to which the contract is in place. It is acknowledged that there will be no other adjustments to this contract, other than the revised upfront payment, i.e. the original uplift remains.”

However, he requested a meeting with Mr. Youens in order to discuss the formulae in clauses 16. 10. 2 and 16. 10. 3, as, he said, they fell down in certain situations. A date of 2 July 1999 was said to be the target date for exchange of contracts.

On the same date, Mr. Daykin expressed VIC’s acceptance of the offer subject to contract. On 25 June Mr. Youens met Mr. Ketteridge and discussed the difficulty identified by Mr. Ketteridge. This related to a new flat with an area precisely midway between the areas of two existing flats in the schedule, each having a different price. There was no mechanism for choosing between them.

Mr. Ketteridge produced a proposal which largely, but not entirely, eliminated the difficulty which he identified. He described his proposal as “more even-handed”. Also on 25 June he sent Mr. Youens and Mr. Daykin his proposed new formulae by fax together with worked examples. The formulae included “+ E”, although in the final line of two of the worked examples he omitted “+ E”.

Mr. Youens then worked on the formulae and on 27 June sent a fax to Mr. Daykin in these terms, so far as material:

“Have been through Greg’s formulae. It is fairer, but on working through I encountered problems on three bedroom units. In addition there is no clarification that the price used must be for a flat of same number of bedrooms. The formulae in the contract can, as Greg points out throw up some serious anomalies which would probably affect you more.

I have refined the formula as follows:

Formula for calculation of Gross Selling Price where a unit is either altered in size or added.

G = Us x (£ + F(B – Us))

Where:

G = Gross selling price for the unit

Us = Unit Size

For three Bedroom flats:

£ = 90

F = 0.08757

B = 1100

For Two Bedroom flats:

£ = 112.71

F = 0.08339

B = 712

For One Bedroom flats:

£ = 130.95

F = 0.085

B = 378

The above means that 16.10.2 & 16.10.3 can be merged.”

Mr. Youens said that, if Mr. Daykin agreed, he would send the formula to Mr. Ketteridge and Macfarlanes.

Mr. Daykin sent back a copy of the last page of the fax sent to him by Mr. Youens on which Mr. Daykin wrote, “Agreed – this will also help re enhancements”. Thereby he showed that he had noticed the absence of the addition of enhancements from the formula.

On 28 June Mr. Youens faxed Mr. Ketteridge in the following terms:

“Having been through your formulae which does indeed make things more equitable I have been refining it. The formula is essentially the same whether a unit is altered or added and therefore I would suggest that 16.10.2 and 16.10.3 be merged.”

He then set out the formula which he had agreed with Mr. Daykin.

Mr. Ketteridge telephoned Mr. Youens and asked him to explain the formula and in particular the F factor. Having heard Mr. Youens’ explanation, he was satisfied. He thought that there was no change and he did not notice the absence from the formula of “+ E”.

Mr. Youens’ formula was sent to Mr. Speer as an agreed formula to be inserted into the contract. Mr. Speer was told by Mr. Ketteridge’s assistant, Ms. Kensington, that Mr. Ketteridge had “got clearance for this clause”. Eversheds took no responsibility for advising on the formula. They said in their legal report, to which the contract was appended:

“The new clause 16. 10. 2 has been agreed by you with the Vendors agent direct. We are unable to comment on it without understanding from you how the figures are worked out.”

On 1 July Mr. Ketteridge sent to Mr. Kendal a supplementary commercial report on Eversheds’ amended report. In it he said that he confirmed that the new deal did not increase the basic selling price related to the overage and that the new clause 16. 10. 2 was agreed and correct.

On 2 July 1999 contracts were exchanged. For Wimpey its Divisional Solicitor Mr. Chris Hewitt signed.

These proceedings were commenced by Wimpey on 18 June 2003. Wimpey’s primary case, as pleaded and opened before the judge, was based on mutual mistake, but in the alternative unilateral mistake was pleaded in this form. In para. 21 it was averred that as a result of an error made by Mr. Youens and/or by VIC the formula in the contract did not reflect and record that the price upon which the overage payment should be based would be a price which took account of enhancements. In paras. 26 and 27 it was pleaded:

“26 In the alternative, having made the error of drafting referred to in paragraph 21 above, [VIC] at a time which is not known to [Wimpey], became aware of the said error of drafting and, unconscionably, decided to take advantage of the said error by failing to draw it to the attention of [Wimpey] or to suggest to [Wimpey] that there should be an amendment of the said error of drafting and, unconscionably permitted the said error of drafting to be carried forward into the final contract for sale.

27 [VIC] acted unconscionably in that they decided to take advantage of the error of drafting in such a manner that they gain a significant potential or actual financial advantage which was not anticipated by or agreed between [Wimpey] and [VIC].”

By the time of closing submissions Wimpey had abandoned its case based on mutual mistake. It relied only on unilateral mistake.

At the trial only Mr. Ketteridge and Mr. Speer were called as witnesses for Wimpey. There was no evidence from Mr. Kendal, Mr. Hewitt, Ms. Kensington or any member of the board of Wimpey. The judge accepted Mr. Ketteridge’s evidence that he had made a mistake in not noticing that “+ E” had been omitted from the formula.

Mr. Daykin, Mr. Youens and Mr. Talbot-Ponsonby gave evidence for VIC. The judge was very critical of the evidence of Mr. Daykin and Mr. Youens and of their inability to recall some details of the events 5 years earlier in 1999. He disbelieved Mr. Youens’ evidence that he had deliberately omitted “+ E” from the formula sent to Mr. Daykin, and held that after Mr. Daykin had noticed its omission Mr. Youens was instructed or agreed with Mr. Daykin to send the formula to Mr. Ketteridge to see what happened.

The judge found that none of Mr. Ketteridge’s superiors put his mind to the mathematics of the formula and that Mr. Ketteridge alone went into its details. The judge concluded that Wimpey failed, in error, to notice the absence of “+ E” from the formula.

When the judge turned to the law, he described the case as concerning the boundary between legitimate negotiations and unfair dealing. He accepted that the jurisdiction to rectify for unilateral mistake must necessarily be very restricted. He referred to the requirements for the exercise of the jurisdiction which were set out by Buckley L.J. in Thomas Bates Ltd. v Wyndham’s (Lingerie) Ltd. [1981] 1 WLR 505 (“Bates”), and said that the only one where there was any doubt as to its fulfilment was whether VIC was aware of the mistake on the part of Wimpey. The judge referred to the judgment of Eveleigh L.J., who had based the jurisdiction to rectify on estoppel, and to the observations of Slade L.J. in Agip SpA v Navigazione Alta Italia SpA [1984] 1 Lloyds Rep 353 (“The Nai Genova”). They include the expression by Slade L.J. of his strong inclination to the view that in the absence of estoppel, fraud, undue influence or a fiduciary relationship between the parties, the authorities did not in any circumstances permit the rectification of a contract on the grounds of unilateral mistake, unless the defendant had actual knowledge of the existence of the relevant mistaken belief at the time when the mistaken plaintiff signed the contract. The judge also referred to the remarks of Stuart-Smith L.J. in Commission for the New Towns v Cooper (Great Britain Ltd.) [1995] Ch 259 (“Commission”) at pp. 279,280, disagreeing with Slade L.J. that actual knowledge was always needed. There it was said by Stuart-Smith L.J. that where A intends B to be mistaken as to the construction of a contract and diverts B’s attention from discovering the mistake by making false and misleading statements and B makes the mistake which A intends, then suspicion and not actual knowledge of the mistake is enough for rectification to be granted. The judge also referred to this court in that case holding that wilfully shutting one’s eyes to the obvious or wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make constitutes actual knowledge.

The judge reached the following conclusions. First, an honest and reasonable man would have asked Mr. Ketteridge whether he had noticed the elimination of “+ E” or would otherwise have drawn attention to its absence (para. 72 of the judgment). Second, Mr. Daykin and Mr. Youens suspected that Mr. Ketteridge was making a mistake and crossed the line from legitimate negotiations into unfair dealing when they failed to draw Mr. Ketteridge’s attention to the elimination of “+ E” (para. 73). Third, Mr. Daykin and Mr. Youens intended Wimpey to be mistaken in the sense that they could well see the possibility of error and consciously tested that possibility with Mr. Ketteridge by diverting his attention by making a false statement that all they were doing was refining the formula (para. 74). Fourth, Mr. Youens impliedly represented that his draft formula gave effect to the accord in principle that “+ E” would be part of the formula and, as intended by VIC, Wimpey relied on the misrepresentation (paras. 75 and 76). Fifth, while it would have been better if the allegation of positive misrepresentation or intentional misleading had been clearly pleaded, the general allegation of unconscionability was enough to communicate the essence of the complaint that VIC “slipped” the item past Wimpey (para. 77). Sixth, the judge said this in para. 78:

“I recognise, however, that I may be wrong on this pleading point. In that case I rest my judgment on the finding of knowledge on the part of Mr Daykin and Mr Youens in shutting their eyes to the obvious or wilfully and recklessly failing to do what an honest and reasonable person would have done in the circumstances. Although it could have been clearer, there is enough in the pleading to assert awareness by VIC of Wimpey’s error. There is no allegation that VIC did not act as an honest and reasonable person would have done, but the allegation of taking advantage of Wimpey by not telling them that E had been dropped is sufficient, in my judgment, against an alleged recognition that this was an error, known to VIC (and, impliedly) unknown to Wimpey.”

Seventh, the judge dismissed a complaint by counsel for VIC that dishonesty was not put by saying in para. 79:

“As to this, Mr Rodger complains that dishonesty was not put to Mr Daykin or Mr Youens. However, the nub of the case against VIC in this regard could not have escaped them. Their palpable unease in the witness box concerning the events of the 27^th and 28^th June and the evidence in general satisfies me that they knew that what was in issue concerned the honesty of their negotiations. They had every opportunity to explain to me precisely what happened and their then state of mind. Basically, when asked about it they took refuge in lack of memory. If they can not remember, a more confrontational cross-examination would have made no difference. In the absence of memory the facts had to be resolved by appropriate inferences, and that is what I have done.”

The judge therefore ordered rectification of the contract by adding at the end of the formula in clause 16. 10. 2 (see para. 12 above) the notation “+ E” and after the word “where” the words “E is the enhancement for the new Unit”.

The judge was asked to give permission to appeal to this court on the grounds, first, that dishonesty had not been put to Mr. Daykin and Mr. Youens, and, second, that Wimpey had not proved that it was under a mistake when executing the contract. In respect of the latter point, the absence of Mr. Kendal from the witness box particularly troubled the judge. He gave permission to appeal.

The grounds of appeal of VIC rely on both those grounds, the first ground being elaborated in a number of ways. It is not necessary to go into this in any detail because of the remarkable volte face performed by Wimpey in the course of this appeal. Mr. Wardell Q.C. appearing in this court (although he did not appear below) with Mr. Rodger for VIC made full submissions on the first ground that the judge erred in basing his decision on the dishonesty of Mr. Daykin and Mr. Youens. VIC and this court were entitled to assume that Wimpey would be defending the judge’s decision on the reasoning of the judge, because that was the burden of the skeleton argument of Mr. Cowen which was initially lodged and of the supplementary skeleton of Mr. Fetherstonhaugh Q.C. (appearing for Wimpey in this court, although not before the judge, with Mr. Cowen), which was lodged shortly before the hearing. Further, there was no Respondent’s Notice to alert VIC or this court in advance to the point which in the event Wimpey wishes to take on this appeal. Moreover, it was only after Mr. Fetherstonhaugh had commenced his submissions that, in response to a question from the court, he informed us that Wimpey did not rely on the judge’s finding of dishonesty. Instead he placed reliance only on the judge’s reasoning in para. 78 of the judgment as to VIC’s knowledge of Wimpey’s mistake but shorn of any imputation of dishonesty in that reasoning.

I have to say that this is not the way litigation should be conducted. It is contrary to the ethos of the Civil Procedure Rules. Courts have for some time insisted on a “cards on the table” approach so that everyone knows well in advance of a hearing what is the stance adopted by each side. That approach should be even easier to observe on an appeal. It is regrettable that Wimpey’s case on the appeal should emerge so belatedly in the way it did.

However, Mr. Wardell did not object to Mr. Fetherstonhaugh making his submissions and in his reply Mr. Wardell presented his arguments in response. Accordingly, I shall deal with the way Wimpey now puts its case. But, before I do, I must, in deference to the judge and his full and careful judgment, consider whether he was justified in finding dishonesty on the part of Mr. Daykin and Mr. Youens.

The volte face by Wimpey in this court has served to highlight what a remarkable decision it was by the judge. It is trite law that dishonesty must be pleaded with full particulars and put to the person alleged to be dishonest (see, for example, the remarks of Lord Millett in Three Rivers District Council v Bank of England [2003] 2 AC 1 at paras. 183 – 186 in a speech which, although dissenting in the result, was fully in accord with the views of other members of the House of Lords on this point). This is an essential procedural safeguard on which the courts insist. It is not open to the court to infer dishonesty from facts which have not been pleaded. Nor is it open to the court to infer dishonesty from facts which have been pleaded but are consistent with honesty.

Mr. Fetherstonhaugh said that Wimpey did not allege dishonesty or even sharp practice before the judge and that Mr. Cowen in cross-examination was scrupulous to avoid doing so. It is plain, pace the judge, that Wimpey’s pleaded case did not allege dishonesty. Nor could the nub of the case against VIC in regard to dishonesty not have escaped Mr. Daykin or Mr. Youens when that case was never put, and, as Wimpey now avows, never intended to be put. In fact Wimpey did allege dishonesty in relation to the use by Mr. Youens of the word “refining” in faxing his revised formula to Mr. Ketteridge. But that was not in the pleading nor in the questions put to Mr. Daykin or Mr. Youens by Mr. Cowen, although the judge himself asked Mr. Youens questions on the use of that word. The allegation of dishonesty (in the form of deliberate misleading) only appeared in para. 10 of Mr. Cowen’s closing submissions. Not merely was there no pleading of dishonesty or sharp practice, there was no pleading that VIC had knowledge of any sort that Wimpey had made a mistake. The mistake relied on in the pleading was that of Mr. Youens in drafting the revised formula without “+ E”. None of the ways in which the judge found Wimpey’s case proved against VIC was pleaded or put. Misrepresentation was never alleged by Wimpey in its Particulars of Claim nor put to VIC’s witnesses and it appears to have been the judge’s own point. In finding that Mr. Daykin and Mr. Youens had an intention to mislead and misled Mr. Ketteridge, the judge has ignored Mr. Ketteridge’s own evidence precisely to the contrary.

How did the judge come to make these surprising errors? I fear that, having formed a clear view that there had been a mistake with serious consequences for Wimpey and a strongly adverse view of VIC’s conduct, he was not content with Wimpey’s allegation of mere unconscionability. In finding Mr. Daykin and Mr. Youens dishonest, he appears to have been guided by hindsight. The judge was plainly impressed by the fact that Wimpey’s error benefited VIC by as much as £800,000 as it eventually transpired. But what was important was what was in the minds of Mr. Daykin and Mr. Youens at the end of June 1999. There is no recognition by the judge of the fact that Mr. Daykin, a businessman who had been engaged in the manufacturing industry, had no experience of selling property for residential development and might reasonably form the view that there were unlikely to be great changes in the 231 flats for which outline planning permission had been obtained in such detail. At the time of the negotiations Mr. Ketteridge himself did not envisage wholesale changes in the scheme. The contract provided for the construction to be in accordance with that permission. Nor is there recognition of the fact that Mr. Youens, although a chartered surveyor with experience of commercial development, had no previous experience of residential development. What both witnesses consistently stated was that the primary concern of VIC was that Wimpey, having purchased the Site for an initial price based on 167,000 square feet of development, would succeed in increasing the number of flats for a development beyond 167,000 square feet and that this would not adequately be reflected in the consideration payable to VIC. True it is that Mr. Ketteridge had stipulated in the letter of 24 June 1999 that the increase in the initial payment was the only adjustment to the previously agreed terms, and that Mr. Daykin had accepted that. But that accord was subject to contract, the evidence before the judge was that VIC, at the time Wimpey re-entered the negotiations, felt itself in a strong negotiating position and that the accord did not stop VIC thereafter trying to get Wimpey to concede more in respect of new units additional to the 231 flats. Mr. Ketteridge’s own evidence was that in property negotiations “No” sometimes meant “May be”. Mr. Daykin’s evidence in respect of the judge’s questioning was that he believed that the omission of E would produce a benefit to VIC of about £80,000, and he was not challenged on that evidence. Whilst that is not a negligible sum, in the context of the consideration payable it was, in Mr. Daykin’s words, “not a huge deal either way” and nothing like the million pounds which the judge thought it obvious was potentially involved in the dropping of “+ E”.

I conclude that it was simply not open to the judge to infer dishonesty against Mr. Daykin and Mr. Youens, having regard to Wimpey’s pleadings, to the way the case was put by Wimpey to the witnesses and to the arguments advanced, and it is regrettable that the judge should have made the adverse and damaging findings which he did against a businessman and a professional man in the circumstances. Unless the reliance by Mr. Fetherstonhaugh on para. 78 of the judgment can salvage the judge’s decision, this appeal must be allowed, quite apart from the second ground of appeal.

Mr. Fetherstonhaugh relies on the judge’s finding that Mr. Daykin and Mr. Youens had knowledge of Wimpey’s mistake in the extended sense that they shut their eyes to the obvious or wilfully and recklessly failed to do what an honest and reasonable person would have done in the circumstances. Mr. Fetherstonhaugh acknowledged that in reaching that conclusion the judge applied the reasoning of Stuart-Smith L.J. in Commission [1995] Ch at pp. 280, 1 which suggests that such types of knowledge involve dishonesty. But he argued that neither dishonesty nor sharp practice was a necessary ingredient for rectification on the ground of unilateral mistake and that for Mr. Daykin and Mr. Youens to behave unconscionably by having knowledge, in the extended sense, of Wimpey’s mistake and not drawing the mistake to Wimpey’s attention was sufficient.

The modern authorities on unilateral mistake commence with the decision of Pennycuick J. in A. Roberts & Co. Ltd. v Leicestershire County Council [1961] Ch 555 where he said at p. 570:

“a party is entitled to rectification of a contract upon proof that he believed a particular term to be included in the contract, and that the other party concluded the contract with the omission or a variation of that term in the knowledge that the first party believed the term to be included”.

In Riverlate Properties Ltd. v Paul [1975] Ch 133 (“Riverlate”) this court (Russell, Stamp and Lawton L.JJ.) approved the principle stated in Roberts but commented at p. 140:

“Whether there was in any particular case knowledge of the intention and mistake of the other party must be a question of fact to be decided upon the evidence. Basically it appears to us that it must be such as to involve the lessee in a degree of sharp practice.”

The requirements of the jurisdiction to rectify for unilateral mistake were considered further in Bates. That case concerned a claim for rectification of a rent review clause in a lease. When executing the lease, the tenants’ officer, Mr. Avon, noticed that the rent review clause in the lease drafted by the landlords was defective in not including a provision in default of agreement. The trial judge held that the conduct of Mr. Avon, who had not given evidence, amounted to sharp practice. This court did not approve that stricture but found that the tenants knew of the omission and of the landlords’ mistake. Buckley L.J. (with whom Brightman L.J. agreed) suggested that the reference in Riverlate to “sharp practice” might be obiter, and continued ([1981] 1 WLR at pp. 515, 6):

“In that case the lessee against whom the lessor sought to rectify a lease was held to have had no such knowledge as would have brought the doctrine into play. The reference to “sharp practice” may thus be said to have been an obiter dictum. Undoubtedly I think in any such case the conduct of the defendant must be such as to make it inequitable that he should be allowed to object to the rectification of the document. If this necessarily implies some measure of “sharp practice”, so be it; but for my part I think that the doctrine is one which depends more on the equity of the position. The graver the character of the conduct involved, no doubt the heavier the burden of proof may be; but, in my view, the conduct must be such as to affect the conscience of the party who has suppressed the fact that he has recognised the presence of a mistake.

For this doctrine - that is to say the doctrine of A Roberts v Leicestershire County Council - to apply I think it must be shown: first, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist rectification to give effect to A’s intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake.”

I accept that as the authoritative statement of the requirements for rectification for unilateral mistake.

Before I leave that case, I should refer to the observations of Brightman L.J. at p. 521 on the standard of proof, where he said:

“The standard of proof required in an action of rectification to establish the common intention of the parties is, in my view, the civil standard of balance of probability. But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties’ intention displayed by the instrument itself. It is not, I think, the standard of proof which is high, so differing from the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written instrument truly represents the parties’ intention because it is a document signed by the parties.

The standard of proof is no different in a case of so-called unilateral mistake such as the present.”

In The Nai Genova rectification was unsuccessfully sought of an escalation clause in a charter-party which provided for a base figure in US dollars to be increased by reference to Italian inflation. The plaintiffs claimed that an accord had been reached that the base figure should be in lire rather than dollars, but that when the defendants prepared a draft charter-party, they put the base figure in dollars. Slade L.J. (with whom Oliver and Robert Goff L.JJ. agreed) noted at p. 360 that the effect of allowing rectification for unilateral mistake was to impose on the defendants a contract which, at the time of its execution, they did not intend to make. He reviewed the authorities and found it a significant feature that they all required actual knowledge by the defendant of the existence of the plaintiff’s mistake. He accepted that there could be a case of an implied misrepresentation that a proffered draft gave effect to an accord and of a resultant estoppel if it was intended or reasonably foreseeable that the representation would be relied on and if the representee relied on that representation. However, Slade L.J. said (at pp. 364, 5) that on the facts those conditions were not satisfied, as it had not been shown that the defendants intended or could have foreseen that the plaintiff would rely on any such representation when the defendants could have reasonably assumed that the plaintiffs would have read the escalation clause for themselves and would have noted any objection when discussing the clause with the defendants. Slade L.J. said that the greater the degree of the carelessness in not detecting the error, the more unrealistic it became for the plaintiffs to assert that the reliance on the representation was foreseeable. He thought it significant that the plaintiff’s witnesses did not attempt to blame the defendants for their mistake. He was unpersuaded that there had been sharp practice by the defendants or that it would be inequitable to allow them to resist the claim for rectification.

In Commission the primary question determined by this court was whether the parties had entered into a binding agreement whereby the claimant had granted the defendant a put option. This court held that they had not. However, it went on to consider whether, if wrong on that, the contract should be rectified on the ground of unilateral mistake. That was on the basis that the claimant mistakenly believed that there was no agreement to grant the put option, while the defendant knew of the mistake or its conduct was such that it was unconscionable to insist on the performance of the contract. The trial judge held that the claimant was not entitled to rectification because the defendant did not have actual knowledge of the mistake and only actual knowledge would do.

At [1995] Ch at p. 280 Stuart-Smith L.J. expressed the view that actual knowledge was not always necessary and that a fraudulent misrepresentation, intended to mislead and succeeding in misleading, when coupled with suspicion of a mistake, would suffice to allow rectification to be granted. That was one of the passages which the judge quoted, as noted in para. 24 above. The judge also quoted the following passage from Stuart-Smith L.J.’s judgment at pp. 280, 1:

“Did [the defendant] have actual knowledge of the mistake? The judge held not; they merely suspected it. [Counsel for the claimant] submits that the judge was in error and he should have found actual knowledge. His attention was drawn to the analysis of various forms of knowledge made by Peter Gibson J. in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA (Note) [1993] 1 WLR 509 and cited by Millett J. in Agip (Africa) Ltd v Jackson [1990] Ch 265, 293:

“Knowledge may be proved affirmatively or inferred from circumstances. The various mental states which may be involved were analysed by Peter Gibson J. in Baden’s case [1993] 1 W.L.R. 509 as comprising: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry. According to Peter Gibson J., a person in categories (ii) or (iii) will be taken to have actual knowledge, while a person in categories (iv) or (v) has constructive notice only. I gratefully adopt the classification but would warn against over refinement or a too ready assumption that categories (iv) or (v) are necessarily cases of constructive notice only. The true distinction is between honesty and dishonesty. It is essentially a jury question. If a man does not draw the obvious inferences or make the obvious inquiries, the question is: why not? If it is because, however foolishly, he did not suspect wrongdoing or, having suspected it, had his suspicions allayed, however unreasonably, that is one thing. But if he did suspect wrongdoing yet failed to make inquiries because ‘he did not want to know’ (category (ii)) or because he regarded it as ‘none of his business’ (category (iii)), that is quite another. Such conduct is dishonest, and those who are guilty of it cannot complain if, for the purpose of civil liability, they are treated as if they had actual knowledge.””

Stuart-Smith L.J. then referred to the trial judge’s view that actual knowledge within category (i) was needed, but disagreed with that view, saying that categories (ii) and (iii) also constituted actual knowledge in law. He described the defendant’s conduct in raising a smokescreen about one matter other than the put option as “dishonest and intended to deceive”. He also found that there had been a fraudulent misrepresentation by the defendant. He therefore found the defendant’s conduct unconscionable and the circumstances such that equity required the contract to be rectified.

Evans L.J., agreeing with Stuart-Smith L.J., agreed with the claimant’s view that the defendant’s conduct was dishonest and disgraceful. He said that that conduct was unconscionable and had no hesitation, if necessary, in holding that knowledge in this context included categories (ii) and (iii). Farquarson L.J. also agreed.

Mr. Fetherstonhaugh relies on Commission as holding that actual knowledge by the non-mistaken party of the mistaken party’s mistake is not a requisite of the jurisdiction to rectify for unilateral mistake. He relies on the views expressed in that case that knowledge in categories (ii) and (iii) suffices. But he criticizes as illogical the reasoning of Millett J in Agip (Africa) Ltd. that knowledge in those categories involves dishonesty, at any rate to the extent that this court adopted that reasoning as applicable to what knowledge of the mistaken party’s mistake is needed for rectification. Why, he asks, if rectification can be ordered if the non-mistaken party has actual knowledge of the mistaken party’s mistake, but there is neither dishonesty nor sharp practice, should knowledge in categories (ii) and (iii), which is the equivalent in law of actual knowledge, involve dishonest behaviour for the purposes of rectification? I see force in that submission. However, Mr. Fetherstonhaugh ’s difficulty, as it seems to me, lies, first, in this court’s acceptance in Commission of the reasoning of Millett J. in the context of rectification for unilateral mistake and this court’s application of that reasoning to a case of dishonest conduct, and, second, in the judge’s acceptance of the same approach in para. 78 in finding dishonest conduct when concluding that VIC had knowledge (in categories (ii) and (iii)) of Wimpey’s mistake. I do not accept that it is open to Wimpey to rely on the judge’s finding in para. 78 that VIC had such knowledge but to say that such knowledge was without dishonesty or sharp practice where it is plain that the judge’s remarks in para. 78 were permeated by his finding of dishonesty, which, because of Commission, he thought was required.

In any event, I cannot see that Wimpey has discharged the onus on it of providing convincing proof that VIC did have knowledge in either of categories (ii) and (iii) of Wimpey’s mistake. These were arm’s length negotiations for the sale of property for residential development between, on the one hand, VIC, with no relevant experience and, on the other, Wimpey with its vast experience. It is a “heavyweight”, as Mr. Ketteridge said. He was an experienced negotiator and said in cross-examination:

“When you are buying a piece of land, it is your responsibility to make sure that everything is as you are happy with, not what individuals are telling you, because people do tend to tell you things which aren’t 100 per cent.

Q. And that makes you particularly cautious, does it?

A Yes, it does.”

Mr. Daykin said of Mr. Ketteridge not coming back on the omission of “+ E” from the formula:

“I did not think for a moment that Greg had actually missed it; he was not that kind of person …. It is just too improbable that he would miss the fact that E was not included in the formula.”

VIC had been informed by Wimpey of the necessity for its board to give approval for the purchase. VIC knew that Wimpey was being advised by Eversheds on the contract but it did not know that Eversheds were not advising on the formula to which Mr. Ketteridge agreed. Mr. Youens and Mr. Ketteridge discussed that formula and Mr. Youens answered such questions as Mr. Ketteridge put to him. I do not doubt that Mr. Ketteridge did make a mistake in not noticing the omission of “+ E”. The circumstances of the present case seem to me to bear a similarity to those of The Nai Genova to which Slade L.J. adverted when rejecting the allegation of misrepresentation (see para. 40 above). As in that case, it is significant that Mr. Ketteridge acquitted Mr. Youens of any intention to mislead. In truth, it was a mistake by Mr. Ketteridge not to see what is obvious, that the formula inserted in cl. 16. 10. 2 did not contain “+ E”. I acknowledge that VIC’s conduct comes near to crossing the line. However, in the light of all the circumstances, in my judgment, Wimpey has failed to provide convincing evidence that VIC shut its eyes to the obvious or wilfully and recklessly failed to do what an honest and reasonable person would have done in the circumstances, and it would not be inequitable to allow VIC to resist the claim for rectification.

Thus far I have proceeded on the footing that Wimpey made the relevant mistake. The second ground of appeal raises the question whether Wimpey at the time it entered into the contract did not intend to agree the formula without “+ E”. In this context it is important to identify the person who is the decision-taker in the corporate body which entered the contract and to see whether he was making a mistake. Prima facie a person who enters a contract intends to be bound by all its terms. The fact that the contract has been negotiated by a person who is not the decision-taker and has made an error is irrelevant unless it can be shown that the decision-taker shared the intention of the negotiator; but that requires evidence. That elementary proposition is illustrated by the recent case of The London Borough of Barnet v Barnet Football Club Holdings Ltd. [2004] EWCA Civ 1191. The details of the circumstances of that case differ from those of the present case, as Mr. Fetherstonhaugh pointed out, but the essential facts are the same, if Mr. Wardell is right in his submission: there the negotiator for the Borough made an error in the drafting of the contract, but he was not the decision-taker; those who took the decision for the Borough were not called to give evidence and it could not be inferred that they intended the Borough to contract other than in the form of the contract which the Borough executed.

In the present case Mr. Ketteridge was also only the negotiator and not the decision-taker. The judge was troubled by the absence from the witness-box of Mr. Kendal, but Mr. Kendal was also not the decision-taker. However, had he been called it may be that he could have given evidence of any presentation which he made to the board of Wimpey to obtain its approval to the contract in its final form. The evidence does not even establish that he did make such a presentation. There is no evidence of what the decision-takers themselves, the members of the board, thought. There are no minutes of any board meeting nor any instructions to the signatory of the contract, Mr. Hewitt, who gave no evidence. There was no evidence from Ms. Kensington as to how it was that she could tell Mr. Speer that Mr. Ketteridge had clearance for the formula which went into the contract.

There are in evidence Eversheds’ legal reports and Mr. Ketteridge’s commercial reports, but they are worded in general terms and do not draw attention to the specific point of enhancements featuring in the formula. Without further evidence I do not see how one can escape the conclusion that the board, which was supplied with the draft contract in April and with the final draft at the beginning of July 1999, intended to approve the contract in the form in which it was put to the board and in which it was executed. I would allow the appeal on this ground too.

Mr. Fetherstonhaugh described as absurd the notion that Wimpey intended to drop “+ E” from the formula and said that to refuse rectification would be grotesquely unfair. I recognise that the mistake has had serious consequences for Wimpey and brought a benefit to VIC to an extent which it did not foresee in putting forward the formula. But that is not determinative of whether Wimpey can successfully invoke the exceptional jurisdiction to rectify for unilateral mistake. For the reasons given, I do not think it can. I would allow the appeal, set aside the order of the judge and dismiss the action.

I agree that this appeal should be allowed. With gratitude, I adopt the account of the facts, the issues and the law set out by Peter Gibson LJ.

The classic pathway to rectification is where the executed instrument is shown not to give effect to a prior accord or agreement as to its content. The mistake may be unilateral or bilateral. Wimpey initially suggested that VIC no less than themselves intended to contract “+E”, so that rectification was warranted, even if by the time of signature the mistake was Wimpey’s alone. But on the judge’s findings, VIC fully expected to be asked to add E back into the formula and to have to agree to do so. They did not, however, intend it to happen. Nor for that matter, in a significant sense, did Wimpey, for with eyes open they approved a formula which omitted E.

Was this then a unilateral mistake on Wimpey’s part? If a party’s conduct amounts to deception or fraud, there is no need to resort to doctrines of mistake. But here it is accepted, notwithstanding the judge’s findings, that no such claim was before the court. What Mr Fetherstonhaugh founds upon as being all he needs in order to hold the judgment is paragraph 78 of it.

He submits, first, that the application of the ‘honest and reasonable person’ test is different from an inquiry as to whether a party has behaved dishonestly. The latter, he accepts, was barred on the pleaded case; but the former, he submits, was not because it involves the application of an objective standard, not a judgment of a party’s state of mind. Mr Wardell submits that this is a distinction without a difference: a party who is found not to have acted as an honest and reasonable person would have done has been publicly convicted of dishonesty.

Mr Wardell may well be right as a matter of general perception, but I consider that he is wrong in law. An individual who has not acted as an honest person would have done may still have a variety of good answers to a charge of personal dishonesty. Even so, it might avoid the problem of perception, without diluting the test, if one were to substitute ‘honourable’ for ‘honest’.

I would therefore be disposed to accept Mr Fetherstonhaugh ’s submission that the finding in paragraph 78 was open to the judge on the pleadings. Absent any demurrer, he was bound by authority to consider whether an honourable and reasonable person would have drawn Wimpey’s attention to the omission of E from the final formula. Where I respectfully part company with Mr Fetherstonhaugh is in relation to the judge’s conclusion on the question.

There is, as it seems to me, a paradox in the notion of what an honourable and reasonable person would do in the context of an arm’s-length commercial negotiation. This is a context in which honour (or honesty) and rationality (or reasonableness) are frequently not on speaking terms. I doubt whether Mr Fetherstonhaugh ’s submission that the two epithets qualify each other does more than compound the paradox.

Take the present case. An honourable person negotiating for VIC would probably have asked Wimpey if they realised that E had been left out, but I very much doubt whether a reasonable negotiator would have done so. His first duty would have been to his own principal, whose interests undoubtedly lay in leaving E out and not alerting Wimpey to the omission.

The phrase ‘honest and reasonable’ is not a term of art. It is a judicial attempt to sketch a line beyond which conduct may be regarded as unconscionable or inequitable. Its duality, however, is a recognition that honesty alone is too pure a standard for business dealings because it omits legitimate self-interest; while reasonableness alone is capable of legitimising Machiavellian tactics.

Mistake is a concept which sits awkwardly in this space. Absent a prior accord which has simply not been carried into effect, absent also a dishonest inducement to contract, one is looking for a mistake on the claimant’s own part which the defendant was honour-bound, despite his own legitimate business interests, to point out to him. I am unable to accept that this was such a case on any tenable view of the evidence.

There are at least two kinds of mistake. One is a literal misunderstanding of some fact material to the proposed contract. The other is an error of judgment in entering into the contract. I find it difficult to think that the second kind has any relevance to the law of unilateral mistake. Nobody is bound, even in honour, to help his opposite number to negotiate to the best advantage.

What then was the material fact that Wimpey misunderstood? That E was omitted? They had only to look at VIC’s draft to see that it was. Their mistake was failing to renegotiate it, and that seems to me an error of judgment, not of fact.

Mr Fetherstonhaugh ’s submissions in effect have recognised this. He submits that VIC must have realised that, unless Wimpey had undergone a sudden fit of altruism, they had overlooked the omission of E. I think that this is a more convincing analysis of the evidence than Mr Wardell’s, and more consistent with the judge’s appraisal of the witnesses. But it seems to me to take Wimpey into a dead end, for I do not see how either honesty tempered with reasonableness or reasonableness tempered with honesty can have required VIC to point out to Wimpey where the latter’s own best interests lay.

In saying this I recognise that sharp practice has no defined boundary. An arm’s-length negotiation between parties of unequal competence and resources may well place greater constraints of honest and reasonable conduct on the stronger party than on the weaker. But the present case practically reverses the paradigm: it is the weaker party which is accused by the stronger of having unconscionably misled it by failing to draw the stronger party’s attention to its own oversight.

The general rule, as Slade LJ said in The Nai Genova [1984] 1 Ll.R. 353, 363, “is that in the absence of a duty to speak, mere silence or inaction is not such conduct as amounts to representation which will give rise to an estoppel.” The difficulty, as Slade LJ went on to say, lies in determining when such a duty arises.

If ever a party was entitled to assume that its opponent knew what it was doing, it was VIC in its negotiations with one of the country’s largest construction and development enterprises. In my judgment the mistake made by Wimpey was a result of their own corporate neglect for which VIC bore no legal or – so far as it matters – moral responsibility.

I agree with the judgment given by Peter Gibson LJ. In deference to the very full and careful judgment given below, I add a few observations of my own on grounds 1 and 6 of the appeal. I shall not repeat the history of the dispute which Peter Gibson LJ has fully set out.

Shorn of dishonesty, which Wimpey neither raised in its pleadings nor suggested in cross-examination to Mr Daykins or Mr Youens and which therefore it was not open to the judge to find, the position is relatively straightforward. There was plainly no case of common mistake. As regards unilateral mistake, the pleaded allegations, fairly understood (the relevant pleas are ill-worded but their import is reasonably clear), were as follows:

It is, to my mind, of great importance to appreciate that it was no part of Wimpey’s pleaded case that VIC did anything, whether by words or conduct, to give Wimpey to think, directly or indirectly, that “+E” was still included in the formula. Nor did Wimpey plead that, having earlier reached an “accord” with VIC that the formula should include “+E”, the subsequent proffering by VIC of a draft which omitted “+E” of itself amounted to a representation that the draft contract continued to include “+E” so as to estop VIC from asserting that it did not. In short, there was no allegation of any kind of misrepresentation by VIC which contributed in some material way to Wimpey’s alleged mistake.

Much was made by the judge of the reference in Mr Youens’ 28 June letter to Mr Ketteridge to “refining” the formula. Apart from the fact that this reference was not raised by Wimpey in its pleaded case or even when Mr Youens was cross-examined, Mr Ketteridge’s own evidence was that he attached no importance to the phrase.

What then was the law applicable to the pleaded claim? In particular, was it necessary to allege and prove dishonesty or sharp practice by VIC if the claim was to succeed?

In Thomas Bates & Son Ltd v Windham’s (Lingerie) Ltd [1981] 1WLR 505 Buckley LJ (with whom Brightman LJ agreed), after stating that the reference by Russell LJ in Riverlate Properties Ltd v Paul [1975] Ch 133 at 140 to the defendant’s conduct (in a claim based upon unilateral mistake) having to involve sharp practice was obiter, said this (at 515):

“Undoubtedly I think in any such case [rectification for unilateral mistake] the conduct of the defendant must be such as to make it inequitable that he should be allowed to object to the rectification of the document. If this necessarily implies some measure of ‘sharp practice’, so be it; but for my part I think that the doctrine is one which depends more upon the equity of position. The graver the character of the conduct involved, no doubt the heavier the burden of proof may be; but, in my view, the conduct must be such as to affect the conscience of the party who has suppressed the fact that he has recognised the presence of a mistake.

For this doctrine - that is to say the doctrine of A. Roberts & Co Ltd v Leicestershire County Council - to apply I think it must be shown: first, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision or possibly did not contain a particular term or provision which, mistakenly it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist rectification to give effect to A’s intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake.”

In Agip SpA v Navigazione Alta Italia SpA (The “Nai Genova”) [1984] 1 Lloyd’s Rep 353, Slade LJ, after referring to and quoting from the decisions in Roberts, Riverlate and Bates, said this (at 361):

“One significant feature, however, is common to all of the Roberts, Riverlate and Bates decisions. In all the various formulations of the relevant principle in the judgments in those cases, none of the members of the respective Courts suggested that rectification can properly be granted on account of unilateral mistake unless the defendant had actual knowledge of the existence of the plaintiff’s mistake at the time when the contract was signed. Since, in the present case, the Judge has specifically found that the defendants were not aware of the mistake of IIP at the time of signature of the charter-parties, and there is no appeal against this finding, it is obvious that the plaintiffs, if they are to succeed on this appeal, must in some way succeed in persuading the Court to extend the frontiers of the circumstances in which rectification may be granted on the grounds of mere unilateral mistake, beyond the frontiers established by any of the cases cited. The Court, therefore, must in my opinion proceed all the more cautiously before granting rectification of these two written instruments against defendants who at the time when the negotiations first ripened into a binding contract, intended to contract on the terms which were reflected in the written charter-parties and on no other terms.”

The reference in that citation to “mere unilateral mistake” was intended, as I read the judgment, to distinguish the case from one in which fraud or undue influence or a fiduciary relationship is alleged which, as Slade LJ pointed out (at 360), was not alleged in that case. This was a matter to which Slade LJ (with whose judgment the other two members of the court, Oliver and Robert Goff LJJ, agreed) returned later in his judgment when he said (at 365):

“… I might perhaps add that I strongly incline to the view that in the absence of estoppel, fraud, undue influence or a fiduciary relationship between the parties, the authorities do not in any circumstances permit the rectification of a contract on the grounds of unilateral mistake, unless the defendant had actual knowledge of the existence of the relevant mistaken belief at the time when the mistaken plaintiff signed the contract. In view of the drastic nature of such an order, so far as the non-mistaken defendant is concerned, the consequences of any such conclusion may not appear unduly harsh. I do not say that even where estoppel, fraud, undue influence or a fiduciary relationship exists rectification will necessarily be an available or appropriate remedy.”

It is worth pausing to reflect on the reference in that passage to the “drastic nature” of a rectification order. It is drastic because rectification for unilateral mistake has the result of imposing on the defendant a contract which he did not, and did not intend to, make and relieving the claimant from a contract which he did, albeit did not intend to, make.

A question which can arise in cases of unilateral mistake - and it arose in the appeal before us - is as to the meaning of “actual knowledge” in the passages from the judgment of Slade LJ in The Nai Genova. Mr Fetherstonhaugh QC submitted that “actual knowledge” for the purposes of unilateral mistake extends to categories (ii) and (iii) in the well-known categorisation of knowledge analysed in the judgment of Peter Gibson J in Baden v Societe Generale etc (note) [1993] 1WLR 509 at 575 and following, and that the decision in Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 made that clear. He submitted that it is not necessary to show dishonesty as an ingredient of knowledge falling within those two categories, indeed that it would be illogical to require dishonesty given that dishonesty is not a necessary ingredient of knowledge falling within the category (i) (actual knowledge).

Mr Wardell QC submitted that for anything less than actual knowledge (in the sense that that expression was used in category (i)) dishonesty of some form is a necessary ingredient if the “knowledge” requirement of the jurisdiction to rectify for unilateral mistake is to be satisfied. As he put it, if actual knowledge is lacking, dishonesty is needed to “tip the balance”. He submitted that this was apparent from the judgments in Commission for New Towns.

The key passage in the judgment of Stuart-Smith LJ in that case relevant to this issue is the following (at 280 to 281):

“Did CoopInd have actual knowledge of the mistake? The judge held not; it merely suspected it. Mr Wood [counsel for the Commission] submits that the judge was in error and that he should have found actual knowledge. His attention was drawn to the analysis of various forms of knowledge made by Peter Gibson J in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA (Note) [1993] 1WLR 509 and cited by Millett J in Agip (Africa) Ltd v Jackson [1990] Ch 265, 293:

‘Knowledge may be provided affirmatively or inferred from circumstances. The various mental states which may be involved were analysed by Peter Gibson J in Baden’s case [1993] 1 WLR 509 as comprising: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which will put an honest and reasonable man on inquiry. According to Peter Gibson J, a person in category (ii) or (iii) will be taken to have actual knowledge, while a person in categories (iv) or (v) has constructive notice only. I gratefully adopt the classification but would warn against over refinement or a too ready assumption that categories (iv) or (v) are necessarily cases of constructive notice only. The true distinction is between honesty and dishonesty. It is essentially a jury question. If a man does not draw the obvious inferences or make the obvious enquiries, the question is: why not? If it is because, however foolishly, he did not suspect wrongdoing or, having suspected it, had his suspicions allayed, however unreasonably, that is one thing. But if he did suspect wrongdoing yet failed to make enquiries because ‘he did not want to know’ (category (ii)) or because he regarded it as ‘none of his business’ (category (iii)), that is quite another. Such conduct is dishonest, and those who are guilty of it cannot complain if, for the purpose of civil liability, they are treated as if they had actual knowledge.’

After referring to this passage, the judge continued:

‘I do not think that case assists him. Whatever view the courts may take in relation to other remedies, the Court of Appeal has emphasised in recent years that in cases of unilateral mistake nothing less than actual knowledge will do; in that context someone with less than actual knowledge will not in my judgment be taken to have actual knowledge: see Agip SpA v Navigazione Alta Italia SpA [1984] 1 Lloyd’s Representative 353 and Morsil Properties Ltd v Allied Lyons Plc (unreported), 16 December 1986; Court of Appeal (Civil Division) Transcript No. 1132 of 1986’

The judge appears there to be holding that only Peter Gibson J’s category (i) is sufficient. But with all respect to him, this is not so: categories (ii) and (iii) also constitute actual knowledge in law. … Their (CoopInd’s representatives’) conduct in raising the smokescreen in relation to the side issue was dishonest and intended to deceive. If the question is posed as a jury question, I find it impossible to reach any other conclusion but that an honest and reasonable man would have mentioned the point expressly … I am persuaded in this case that the judge misdirected himself as to what amounts to actual knowledge and that on his own findings … the case falls within categories (ii) and/or (iii) of Peter Gibson J’s analysis.”

Evans LJ (at 292) agreed with a description of the defendant’s conduct as “dishonest” and “disgraceful” and said that he would have no hesitation, if necessary, in holding that “knowledge” in the context of rectification for unilateral mistake included knowledge within categories (ii) and (iii) of the analysis in Baden. Farquharson LJ agreed with both judgments.

How then does the matter stand? First, as a matter of strict logic, it is difficult to disagree with Mr Fetherstonhaugh 's submission; if dishonesty is not a necessary ingredient of actual knowledge, why should it have to be a component of knowledge within categories (ii) and (iii)? Second, however, it is difficult to regard as altogether honest the conduct of a person who allows another to enter into a contract with him, knowing that that other is labouring under a mistake as to the contract’s terms (the mistake being one which is calculated to benefit the former) but saying nothing to alert that other to his mistake. In short, by its nature, a successful rectification claim based upon unilateral mistake will usually, if not always, call into question the probity of the defendant. Third, it is difficult to regard this court's view in Commission for New Towns that “actual knowledge” for the purposes of rectification includes knowledge in categories (ii) and (iii) as necessarily separate from and not dependent upon the finding in that case of dishonesty. Fourth and critically for the purposes of this ground of VIC’s appeal, the judge having stated (at paragraph 73 of the judgment) that neither Mr Daykins nor Mr Youens “actually knew (in the ordinary acceptation of those words) that Mr Ketteridge was making a mistake”, his finding that VIC had the requisite knowledge of Wimpey’s mistake was intimately bound up with his finding that Mr Daykins and Mr Youens had behaved dishonestly. In short, it is not possible, as Mr Feathersonhaugh sought to persuade us to do, to divorce the judge’s finding of knowledge from his finding that Mr Daykins and Mr Youens acted dishonestly.

For the reasons set out in Peter Gibson LJ’s judgment, however, it was simply not open to the judge below, given the way the case had been pleaded, opened and VIC’s witnesses cross-examined, to reach such a conclusion.

In Bates Brightman LJ pointed out (at 521) that:

“… as the alleged common intention ex-hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties’ intention displayed by the instrument itself. It is not, I think, the standard of proof which is high, so differing from the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written instrument truly represents the parties’ intention because it is a document signed by the parties.”

It was essential therefore, if Wimpey was to succeed in its claim, that it demonstrate - and do so by convincing proof - that, when it entered into the contract, it did not intend to agree the formula without “+E”. Relevant to this is that, according to the evidence, the decision whether to enter into a contact with VIC and if so on what terms was that of the board of directors of Wimpey.

On this issue Mr Ketteridge was the only witness to be called by Wimpey and he was not a member of Wimpey’s board. Neither was Mr Kendal to whom Mr Ketteridge reported. There were no minutes of the board meetings at which the terms of the contract were discussed and the decision made to enter into the contract. Accordingly, whether Wimpey believed “+E” to be a part of the formula at the time the contract was executed was a matter of speculation. Nor was there sufficient or indeed any material to justify the court concluding, as Mr Fetherstonhaugh submitted to have been the case, that, at any rate on this point (whether or not “+E” should be in the formula), “Mr Ketteridge's mind was Wimpey’s mind”.

In a sentence, convincing proof was lacking that Wimpey intended to enter into the contract on terms other than those which the written instrument contained.

In the result, I agree that this appeal should be allowed, the order of the judge set aside, and the action dismissed.