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The smartest guy in the room – or too clever by half ?

Head of Business Law John Noctor examines the recent decision of the Court of Appeal in the case of Daventry District Council v Daventry District Housing which, he says, illustrates the dangers of sharp practice by those involved in commercial negotiations.

The recent decision of the Court of Appeal in the case of Daventry District Council v Daventry District Housing illustrates the dangers of sharp practice by those involved in commercial negotiations. In this instance, the smartest guy in the room (or so he thought) ended up costing his company £2.4 million pounds plus significant legal costs. They do say that honesty is the best policy, and the Court of Appeal has underlined that in a robust judgement which should cause people to think twice before trying to be too clever.

Background

In 2007, the Council wanted to transfer its housing stock to a registered social landlord, Daventry Housing. The staff employed by the Council would also transfer, and those staff were members of the Local Government Pension Scheme. The transferring staff carried with them a liability of approximately £2.4 million pounds, being the deficit in their pension fund. Therefore, one of the key points for negotiation related to the liability for that deficit. Would it be funded by the Council or by Daventry Housing ?

Throughout the negotiations, the Council believed that Daventry Housing would pay the deficit and Daventry Housing believed the opposite. It seems extraordinary that the parties should be at cross purposes on such a key issue, but the Court found that this misunderstanding existed throughout. Crucially, the only person who understood the position was the chief negotiator on behalf of Daventry Housing. He decided to say nothing and allow the Council to walk into the trap.

The Legal Issues

The chief negotiator realised early on that there was a difference of opinion on who should pay, but he chose to interpret an ambiguous“ agreement in principle “ as meaning that the Council would pay the deficit. He briefed his colleagues at Daventry Housing to that effect, although he knew very well that the Council expected his organisation to meet that liability.

The parties’ lawyers then prepared some draft documents based on the agreement in principle, but  failed to address the deficit in clear terms. The first draft suggested that the Council would pay the £2.4 million, and in the drafts that followed this wording was not changed. Notwithstanding that, the Council still believed that Daventry Housing would pay and vice versa. As mentioned, the only person who understood all this was the chief negotiator and he kept quiet.  

Four days before the final documents were due to be signed, the financiers who were backing Daventry Housing suggested a new provision, which made it clear that the Council would pay £2.4 million pounds into the pension fund. Not only that, they would do so within 5 working days of completion. The Council and its lawyers accepted this provision, apparently not realising that it contradicted the agreement in principle, and it was duly incorporated in the documents. The documents were then signed by the parties. Game, set and match one might think.

However, when the Council realised what it had done, it sought rectification of the agreement on the basis that it was always the intention for Daventry Housing to pay the deficit. Daventry Housing rejected this argument, on the basis that it had never intended to pay the deficit, and the signed agreement was an accurate record of the deal. The Council would have to accept that it had signed up to pay the deficit and that was that.

The Judgment

The case came before the High Court and was then taken to the Court of Appeal. The judgements reflect some interesting views on commercial morality, and the impact that improper conduct can have on what appear to be done deals. In summary, the courts found as follows:

1. The High Court found that whilst the chief negotiator had behaved badly in not pointing out the Council’s mistake, the late amendment proposed by the financiers saved him. Once the Council had accepted the clear obligation to pay the deficit within 5 working days of completion, the chief negotiator was not actually dishonest in failing to point out the Council’s error. He had not closed his eyes to obvious facts or failed to make the enquiries that an honest man would. It was therefore not unconscionable of him to keep quiet while the Council accepted the obligation and signed the agreement.

2. The Court of Appeal took a different view. The Court accepted that Daventry Housing never intended to pay the deficit, and would not have entered into the deal on that basis. However, thanks to the fact that its chief negotiator stayed silent, it never actually said so, even though its chief negotiator knew that the Council expected Daventry Housing to pay. This was sufficient to allow the Court to hold that, viewed in its entirety, the actions of Daventry Housing  would result in a reasonable person concluding ( as the Council did ) that Daventry Housing had agreed to pay the £2.4 million into the pension fund, notwithstanding the express terms of the agreement. Daventry Housing was therefore left with a bill for £2.4 million pounds plus costs.

The Lessons

The decision of the Court of Appeal must have come as a huge relief to the Council and its lawyers. After all, the Council ought to beable to look after itself, and having been independently advised it is hard to see how it could escape its clear contractual obligations. Indeed, this was the view expressed by Lord Justice Etherton. In a dissenting judgement, he found that the intention that Daventry housing should pay was displaced by the clear contractual provision which passed this burden to the Council. He gave more weight to the Council’s “ gross carelessness “ and less to the chief negotiators’ behaviour in keeping quiet about the whole thing.

Conversely, Lords Justice Neuberger and Toulson were heavily influenced by the behaviour of the chief negotiator in allowing the Council to sign up to something which he knew was not intended. The Court was keen to send out a message that sharp practice will be penalised, even where it does not amount to dishonesty or unconscionable practice.

Thus, if you are the smartest guy in the room, the message is to couple that with some basic honesty, failing which you could be the smartest guy on the street.

About the author

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John Noctor

John Noctor specialises in company and commercial work for major clients.

Published: Friday 2nd December 2011
Categorised: Corporate Law, Education, Public Sector

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