Part 36, construction and the doctrine of mistake

For many reasons, the tool of choice to use for the compromise of disputes, either litigated or at the pre-litigation stage is the part 36 offer. But sometimes, the party making the offer may be at cross purposes, with the party seeking to accept the offer, and the two may believe that a dispute has been compromised on quite different terms.

This problem can arise in the context of loose or sloppy drafting in the terminology used in drafting the offer, or more prosaically through the drafter neglecting to insert a crucial decimal point in a proposed settlement figure.

In those circumstances, a dispute over the terms of the settlement is likely to come before the court. It is likely that the court will seek to resolve the dispute, either by recourse to the canons of contractual construction, or by reference to the common law doctrine of mistake.

In this post, I turn to consider the relevant principles of law which will inform the court’s approach.

In terms of construction, the starting point is to note that per C.v.D it is legitimate to borrow from the canons of statutory construction to construe a part 36 compromise to ascertain what the terms of that compromise were. The law has moved on from ICS Ltd.v.West Bromwich Building Society in that Lord Hoffmann’s principles have been expanded, and explained in a series of further cases, before the House of Lords and Supreme Court. The most recent of these is Arnold.v.Britton handed down a few months ago.

Reference can usefully be made to Lord Neuberger’s restatement of principles in paragraphs 14 to 22 of his speech: those principles demonstrate a re-emphasis on the importance of the language used, and count against broad, sweeping constructions which do violence to the language used by the parties.

The principle recognised in paragraph (3) of Lord Hoffman’s restatement of principle in ICS Ltd that previous negotiations must be excluded from construction of a written contract, was reformulated at length in the case of Chartbook Ltd.v.Persimmon Homes Ltd in paragraphs 28 to 41. Such matters remain admissible only for the purposes of estoppel or rectification.

Where mistakes are particularly gross, such as the missing decimal point noted above, the construction to be given to the offer may be clear, and the party seeking to upset the compromise will be thrown back on the doctrine of mistake.

An interesting lacuna in the authorities, is that there appears to be no authority either binding or even on point to support the contention that the court should take the self contained procedural code of Part 36 and import into it wholesale the common law doctrine of mistake.

In fact the balance of authority and argument could be argued to point the other way, that the doctrine of mistake has no application to a part 36 compromise.

Such a conclusion would of course be antithetical to the notion that the court should have some power to save the bacon, of the poor secretary who drafted a part 36 offer and left out the crucial decimal point.

The starting point for an analytical discussion must be Gibbon.v.Manchester City Council. In particular terms it is interesting to note, that in that case, the Claimant’s solicitors plainly made a mistake of law as to the effect and interpretation to be given to part 36. Neither the parties nor the court, even suggested that the common-law doctrine of mistake of law could be deployed to grant relief. Instead the Court’s emphasis was that the provisions of part 36 are a self-contained code, to be read and understood according to its own terms and without important rules derived from the law governing the formation of contracts save where that was clearly intended. This counts against importing the doctrine of mistake into the resolution of disputed part 36 offers.

Casting around for contrary authority, the case of Flynn.v.Scougall merely supports the proposition that an application made to vary a part 36 offer (as contemplated by the rules) which is followed closely by an acceptance should be determined, taking into account the acceptance as a material factor. It is interesting to note, that the case is wholly explicable as an exercise in construction of the relevant rules of part 36 as then in force, and whether the acceptance constituted calling “snap” to render the application otiose.

The case of Warren.v.The Random House Group Ltd is more interesting, even if it only permits an argument to be made by way of analogy. In the statutory scheme set out in the Defamation Act 1996 a procedure exists for offers of amends and acceptance of them: in a statement at paragraph 17 the Court of Appeal expressed obiter dicta, that such a compromise might be capable of upset on traditional common law grounds: but it was not necessary to decide the point. However in that case an entirely different set of concerns were in play: the article 8 and article 10 rights of the parties under the ECHR and the construction of the Parliamentary purpose behind the Act in question.

Thinking through the various strands of authority, it should be noted that the parties are free to use a contractual compromise, but through electing to use part 36 have declined that option. In such circumstances, to all intents and purposes, they have rejected the trappings of contract law and elected for a self contained code. The underlying theme of part 36 running through all the case law on it, and finding emphasis in the Gibbon case has been the emphasis on the public policy of certainty: ensuring that such compromises are water tight and strictly confined within the Rules.

There are no Rules which provide for setting aside the compromise on the basis of mistake: but there are many rules which act to prevent mistakes occurring eg: the requirement to satisfy the form of a part 36 offer, the ability to ask for clarification of it, an unfettered right to withdraw a part 36 offer, a right to seek a variation of it. If the Parliamentary purpose was to include an implied power to set aside compromises for mistake, it sits uneasily with the existence of these rules.

Material that is inadmissible for the purposes of construing the compromise, can be admissible in principle for an action for rectification: or rather the remedy of rectification grounded on a claim of mutual mistake.

A helpful summary of the differing kinds of mistake which collectively make up the doctrine of mistake in the context of contract law is provided by chapter 3 of Chitty on Contracts (32nd edition). Also see Foskett on Compromise (8th edition) from page 43 et seq.

Perhaps the leading case on the doctrine in the context of impeachment of a compromise, remains that of Brennan.v.Bolt Burden. However that case expressly recognises the requirement for there to be a common operative mistake and also the defence of compromise, which severely restricts the operation of the doctrine.

Even if there has been a mistake through infelicitous drafting, although the doctrine of unilateral mistake exists, it imposes a series of very high hurdles on a litigant seeking to be relieved from the consequences of his own mistake.

Per George Wimpey UK Ltd.v.V I Construction Limited see the requirements set out in the judgment of the Court of Appeal from paragraph 35 et seq: in particular not only must the party establish that they made a unilateral mistake about the terms of the compromise, but also that the other party knew about it. Actual knowledge is required. An extended definition in the case law applies. Knowledge in this context is (i) actual knowledge (ii) wilfully shutting one’s eyes to the obvious or (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make.

Conversely (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man and (v) knowledge of circumstances which would put an honest and reasonable man on inquiry would not constitute knowledge.

The case law aptly notes that the true distinction is between honesty and dishonesty: later in the judgment Sedley LJ also makes the point that this must be dishonesty in an arm’s length commercial negotiation, where parties are entitled to put their own interests first: see paragraph 61 of the judgment. The context is even starker where the parties are already engaged in adversarial litigation: it is trite law that no duty of care is owed to one’s opponent in litigation.

In short, should the parties ostensibly settle a dispute, but then fall out over the actual terms of the settlement, there remains some scope to argue for a contrary view of the compromise or to seek to set it aside by reason of the doctrine of mistake, but the extent of the scope on the current authorities will be uncertain.

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