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    When construing a profit sharing provision in a development agreement made between the parties, a judge had erred in holding that a letter sent by one of the parties included an offer to agree in relation to the calculation of the profit payments.

    The appellant company (X) appealed against an order made at a preliminary issues trial ((2010) EWHC 243 (Ch)) in relation to proceedings brought by the respondent developer (C). C and X had entered into an agreement in relation to the development of a commercial property. Under the agreement, C was entitled to receive profit payments from X in relation to unlet units two years after the completion of the building works. A dispute later arose about the calculation of those payments. C claimed that (i) a letter it had sent to X contained an offer to treat target rents in respect of the unlet units as the market rents of those units for the purposes of calculating the payment; (ii) X’s email response, which added a provision relating to turnover rents, constituted a counter-offer; (iii) its agreement by email to the proposal relating to turnover rents constituted acceptance of that counter-offer. It was X’s case that the letter and emails did not constitute a valid offer capable of acceptance. The judge accepted C’s analysis and ordered that the open market rent for each unlet unit was agreed to be the figure shown in the schedule attached to C’s letter in the column headed “Target Rent”. X argued that the judge had applied the wrong test in law and was wrong to hold that the letter included an offer by C to agree that for the purpose of calculating the payment, rents shown as target rents in the schedule to the letter should be treated as open market rents.

    HELD: (1) There was a distinction between the court’s task when seeking to ascertain the parties’ intention under the terms of a contract which both accepted had been made, and the court’s task when seeking to determine whether or not a contract had been made at all. In the former case the question was “what did the parties intend by the words used in the agreement which they made”; in the latter, the questions were “was there a proposal (or offer) made by one party (Y) which was capable of being accepted by the other (Z)” and, if so, “was that proposal accepted by the party to whom it was made”. In determining the first of those questions, the correct approach was to ask whether a person in Z’s position, acting reasonably, would understand that Y was making a proposal to which he intended to be bound in the event of an unequivocal acceptance, Chartbrook Ltd v Persimmon Homes Ltd (2009) UKHL 38, (2009) 1 AC 1101 and Harvey v Facey (1893) AC 552 PC (Jam) considered, Schuldenfrei v Hilton (Inspector of Taxes) (1999) STC 821 CA (Civ Div) applied (see para.25 of judgment). (2) If the judge’s analysis was correct, the relevant offer would not be found in C’s letter, but rather in X’s email. That email contained an offer by X to be bound by an unequivocal acceptance of its proposal in respect of the treatment of rents determined by reference to turnover. It was clear that that offer was accepted by C in its subsequent email. However, it was far from clear that X’s email contained any other proposal to which it invited acceptance; in particular, it was far from clear that it contained a counter-proposal to the effect that it would agree the proposals in C’s letter if, but only if, C agreed to its proposal in respect of the treatment of turnover rents. There was nothing in X’s email which suggested that its agreement to the proposal’s in C’s letter was conditional on C’s agreement to X’s proposal as to turnover rents. Furthermore, it was plain that C did not understand X’s email in that sense. Accordingly, the analysis of offer, counter-offer and acceptance was incorrect; the correct analysis was that X’s email contained an unequivocal acceptance of “the proposals set out” in the letter. The relevant question, therefore, was whether the letter contained a proposal in relation to the treatment of target rents as market rents, in respect of which X’s acceptance was invited and required. On the facts, it did not. It did not invite agreement to matters which had not already been agreed. Furthermore, the properly informed reader would appreciate that that part of C’s letter stating that the target rent schedule showed the market rents for the remaining unlet units, was plainly incorrect. The schedule did not show market rents; it showed target rents, and the two were distinct concepts and were not interchangeable (paras 27-39).

    Appeal allowed

    [2010] EWCA Civ 1331


    “Lawtel”: 29.11.10