Council wins appeal over £2.4m pension deficit on housing stock transfer

A district council has successfully appealed a High Court ruling that it should make good a £2.4m pension deficit when it transferred its housing stock to a residential social landlord.

The background to the case was that Daventry District Council (DDC) had been involved in extensive negotiations with Daventry & District Housing (DDH) about the transfer, which also involved the council’s housing department staff joining the RSL.

Actuarial estimates showed that the £2.4m payment was necessary to make up the pension deficit and ensure the scheme was fully funded from the date of the transfer.

The negotiations between the parties were based from September 2007 on a document drawn up by DDC and proffered to DDH (known as Version 1). These talks then led to a formal signed agreement in principle (the “prior accord”), which reflected Version 1 and was contained in a signed “Valuation”.

DDH’s principal negotiator knew the council believed that the effect of the prior accord was that Daventry & District Housing would meet the deficit. He also knew that DDH’s financial adviser had made it clear to the local authority’s consultants that that was the effect of the prior accord. The negotiator did not suggest to the council that its understanding might be wrong.

However, the board of DDH believed that the council would be paying off the deficit, and its negotiator did not disabuse them of this belief.

The parties’ solicitors had been drafting the contract during the process. The draft contract had always included a clause which suggested that DDC was to fund the deficit, and that remained in the contract. In November 2007 DDH’s funders, RBS, suggested including a new clause which clearly set out that the council would pay the deficit.

The council and the RSL, through their solicitors, then agreed to inclusion of the additional clause and the transfer contract was executed.

In bringing a claim for rectification on the grounds of mutual mistake (or, alternatively unilateral mistake) Daventry District Council acknowledged that its solicitors and lead negotiator had consented to the clause’s insertion, but claimed that the authority was mistaken in giving that consent. It argued DDH had agreed to pay £2.4m less for the transfer of the housing stock on the basis that it would cover the deficit.

Defending the claim DDH argued the relevant clauses had not been included in error and instead represented the true agreement between the parties. It would not otherwise have entered the deal, the RSL argued.

In the High Court Mr Justice Vos concluded that the local authority, and not DDH, should be responsible for making up the deficit. Amongst other things, he found – after reviewing an exchange of emails concerning the clause’s introduction – that there had been a change in the parties’ common intention.

In Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153, the council argued before the Court of Appeal that Mr Justice Vos was wrong to find that the parties had reached a new accord by virtue of the communications on the draft clause.

The authority’s barrister, Ian Croxford QC, submitted that it made no commercial sense for DDC to accept the change, which would leave it substantially worse off – if the council made the payment, DDH would have received net £1.2m of value from the council for nothing.

He added that the judge, in making an objective assessment, should have held that the inclusion of the clause did not show DDC had changed its contractual intention, but rather that the council had mistakenly failed to notice that the new clause did not reflect its contractual intention.

The Court of Appeal – by a majority of two (The Master of the Rolls, Lord Justice Toulson) to one (Lord Justice Etherton) – overturned Mr Justice Vos’ decision.

Lord Justice Toulson concluded that both DDC and the DDH board shared a mistaken belief that the transfer contract accorded with their prior commercial agreement, although their reasons for sharing that mistaken belief were “diametrically opposite”.

Daventry DC should succeed in its claim for rectification on the principle set out in the House of Lords case of Chartbrook Ltd v Persimmon Homes Ltd, the judge added.

He said: “I would hold that [the district council] is entitled to rectification for mutual mistake as to whether the transfer contract conformed with the prior commercial agreement. DDC and the board of DDH believed that it did, but they were both wrong.

“It was argued on behalf of DDH that it would not have entered into the transfer contract if the provision for payment of the pension deficit had been as per Version 1 and the Valuation [the prior accord]. That may be so, but it is no defence, nor is it unfair in circumstances where DDH’s misunderstanding of Version 1 and the Valuation which approved was brought about by its own principal negotiator.”

The judge agreed with the Master of the Rolls, Lord Neuberger, that this was not a case for refusal of rectification on discretionary grounds.

The Master of the Rolls criticised the negotiator for wrongly permitting both parties to be misled and to enter into a contract where they were at cross purposes and which was different from what at least one of them intended.

Lord Neuberger said: “It may appear counter-intuitive to describe the parties as having signed the contract under a common mistake, as the board of DDH, and even (by the time the contract was signed) [the negotiator], intended to agree what it provides; accordingly any claim for rectification by DDC might appear to the uninitiated to be more appropriately based on unilateral mistake.

“However, as has been explained in all three judgments on this appeal, Lord Hoffmann's speech in Chartbrook establishes that the issue as to whether there was a common mistake must be judged objectively.”

By contrast, Lord Justice Etherton said Mr Justice Vos was right to conclude that DDH, prior to the contract, had indicated to the council its intention with regard to the payment of the £2.4m which was different to the prior accord. “It was DDC’s oversight, rather than any equity arising from mutual mistake, which was the cause of its misfortune,” the judge argued.

The Court of Appeal awarded costs to Daventry DC and refused DDH’s request for permission to appeal to the Supreme Court.

Cllr Chris Millar, Leader of Daventry District Council said: “We are pleased that the judgment of this appeal has been found in our favour. We always believed we had a strong case and the court would put right what was nothing more than a simple mistake on the face of the stock transfer contract.”

Cllr Millar said he hoped that the Court of Appeal judgment would draw a line “under this unhappy saga”.

He added: “The council decided to commence legal action only after strenuous attempts to resolve the dispute with DDH failed and, in the interests of protecting the public funds which the council holds for the benefit of the people it represents. Today’s outcome vindicates the approach we have taken.”

Elaine Bradbury, Chair of the board at Daventry & District Housing, said: “At the original hearing the court concluded that the council was responsible for meeting the pension shortfall. This was in line with contract which was signed by both parties following legal advice.

“The appeal hearing did not reconsider the evidence given at the original hearing but, instead, looked at how the law was applied. We are disappointed that the Appeal court has now found in the council’s favour.”

Bradbury said DDH had made “every effort to settle the matter without incurring legal expenses, including offering mediation, but unfortunately a settlement was not made possible.”

She added that DDH’s teams continued to work in partnership with the council as both organisations provided services to the local community in Daventry and its surrounding district.

Bradbury said: “We are pleased to say that this judgement does not affect our financial stability. Through effective management we remain in a strong financial position and will continue with our plans to improve homes and services for our tenants.”

Philip Hoult