What happens when a contract doesn’t say what you thought it said?

It is not an uncommon situation. A disagreement arises with your customer or supplier as to your contractual arrangements.

It is not an uncommon situation. A disagreement arises with your customer or supplier as to your contractual arrangements. The other party fails to see your side of the argument, at which point the contract is located and reviewed in detail. This reveals that the contract does not actually say what you thought it said. Do you have a remedy?

There are two arguments commonly advanced in these situations. First, there must be implied into the contract the term which you are seeking to rely on. Alternatively, one party argues that the written contract did not reflect the terms agreed by the parties and accordingly it should be “rectified”.

These two arguments were advanced in the recent case of NHS Commissioning Board v Silovsky.

Drs Silovsky and Driscoll entered into a personal medical services agreement (PMS Agreement) with, what was then, Suffolk County Primary Care Trust in December 2007. Under the terms of the contract the GPs were entitled (amongst other things) to a payment of £77,000 per year, which was referred to as “rent”. In reality the surgery premises were not rented, but owned by the GPs, and this sum reflected the then current interest payments on their property loan. Once the agreement had been signed however, the rate of interest plummeted on the loan, to the extent that the GPs received a significant windfall. Their borrowing costs reduced yet the Trust continued to pay them the fixed sum of £77,000 per year. Ultimately the Trust took steps to recover from the GP practice in excess of £400,000.

There was nothing in the agreement which said that the £77,000 was in any way linked to the interest paid on the loan. The Trust’s argument was that the agreement contained an implied term that the GPs’ entitlement to financial assistance for the premises was subject to, and consistent with, a set of regulations (GMS Premises Directions) which were applicable to a “GMS contract”, which is another type of medical services contract which Trusts frequently entered into with GPs.  Statute only applied these directions to GMS contracts and not to PMS agreements of the type entered into between the Trust and the GPs. If these directions were nevertheless found to be implied into the PMS Agreement, there would have been a strong argument that the figure of £77,000 in the contract was just the starting point and subject to adjustment in accordance with the directions as the rate of interest fell.

The GPs’ previous PMS agreement, which had been entered into in 2004, stated that the premises costs were payable in accordance with the GMS Premises Directions but the current contract had no such statement.

Mr Justice Leggatt decided that the question for the Court to decide was whether the words said to be implied by the Trust into the contract spelt out what the contract would reasonably be understood to mean even though it did not say so expressly. He went on to ask of himself “would reasonable people who entered into a contract in the terms these parties did have thought it so obvious that the sums specified to be payable for premises costs was intended to be subject to alteration by reference to the GMS Premises Directions, but there was no need to say that in the detailed and complex agreement and it could simply be taken as read?” In his view the clear answer to that question was “no”.

Having failed in its argument as to implied terms, the Trust then sought to argue that the contract should be rectified on the basis of a common mistake. In order to succeed in this argument, the party seeking rectification must show that:

  • The parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
  • There was an outward expression of accord;
  • The intention continued at the time of the execution of the instrument sought to be rectified; and
  • By mistake the instrument did not reflect that common intention.

This argument did not wash with the Judge, who could find no common continuing intention or expression of accord.

Having failed to obtain rectification based on common mistake, the Trust advanced an equally difficult argument to sustain, namely that there had been a unilateral mistake. For this purpose, the subjective state of minds of the parties are relevant and to succeed the claimant would need to show that:

  • At the time when the contract was signed the Trust was under a mistaken belief that the contract provided for premises payments to be calculated in accordance with the GMS Premises Directions;
  • The defendants were aware that the Trust was labouring under this mistake; and
  • The defendants behaved unconscionably in not correcting the Trust’s mistake before the agreement was signed.

Whilst the Judge was prepared to concede that the Trust had a mistaken belief that the premises payments were to be calculated in accordance with the GMS Premises Directions, he was not at all convinced that either of the defendants were aware that the Trust was labouring under this mistake or that the defendants behaved unconscionably in not correcting the mistake. It is interesting to note that even if the GPs had been aware of the Trust’s mistake, they would not necessarily be said to have behaved unconscionably in not drawing it to the Trust’s attention. Whilst arm’s length negotiations between parties of unequal competence and resource may well place greater constraints of honesty and reasonable conduct on the stronger party than on the weaker, it seems that it is much harder for the stronger party to argue that the weaker party has acted unconscionably by failing to draw the stronger party’s attention to its own oversight.

What conclusions can we draw from the case?

The decision has not changed the law but is a good illustration of the need to spend time and attention at the drafting stage of contracts to make sure they reflect the true intention of the parties. The Courts will not rewrite a contract just because in hindsight it provides one of the parties with, what may be considered to be, an unreasonably large windfall.

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