Case No: HC11C01348
Neutral Citation Number: [2013] EWHC 1633 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Rolls Building
Royal Courts of Justice
London, EC4A 1NL

Date: 18/06/2013

Before:

MR JUSTICE VOS
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Between :

	MICHAEL KIERAN BARDEN	
Claimant	
	- and –
		
	(1)	COMMODITIES RESEARCH UNIT INTERNATIONAL
 (HOLDINGS) LIMITED
(2)	CRU STRATEGIES LIMITED
(3)	CRU INTERNATIONAL LIMITED
(4)	CRU PUBLISHING LIMITED		
Defendants
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Ms Geraldine Clark (instructed by Cheyney Goulding LLP) for the Claimant
Mr Rhodri Davies QC and Mr Conall Patton (instructed by Norton Rose Fulbright LLP) for the Defendants

Hearing dates: 21st and 22nd March and 10th June 2013
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Judgment
Mr Justice Vos: 
Introduction
1.	This is an application by the Claimant, Mr Michael Kieran Barden (“Mr Barden”), for an order that the Defendants pay the sum of £673,177.16 by way of the alleged outstanding balance payable under a settlement agreement dated 19th October 2012 (the “SA”).  The SA was made between Mr Barden and the Defendants in the early hours of the morning after a mediation. 
2.	The SA was scheduled to a Tomlin Order made by Master Marsh on 5th November 2012.  As a result, when this dispute arose, no new action needed to be commenced, but an application notice was issued under the liberty to apply reserved in that order.
3.	The crucial clause 3 of the SA (“clause 3”) was headed “PAYMENT OF AGREED SUM” and provided that “[t]he CRU Parties shall by 4pm on 1 November 2012 pay £1,350,000 (the Settlement Sum) by telegraphic transfer into the Cheyney Goulding LLP client account at HSBC Bank, Guilford Branch, account number 73668010 sort code 40-22-26, IBAN GB64MIDL40222673168010, SWIFT CODE MIDLGB22”.
4.	Mr Barden alleges that clause 3 means that the Defendants (called the “CRU Parties” in the SA) were obliged to pay the full gross sum of £1.35 million to his solicitors’ bank account, and to pay another £1.35 million by way of PAYE income tax to Her Majesty’s Revenue and Customs (“HMRC”).  The Defendants contend that they were entitled, indeed obliged by law, to pay only a net sum having deducted PAYE income tax.
5.	It is common ground that the income tax payable is and remains a liability of Mr Barden (see the Court of Appeal’s decision in McCarthy v. McCarthy & Stone plc [2008] 1 All ER 221 at paragraphs 40-45).  In the event, the Defendants paid the net sum of £676,822.84 directly into Mr Barden’s solicitors’ bank account, and the balance of £673,177.16 to HMRC.
6.	It is also common ground that section 401 of the Income Tax (Earnings and Pensions) Act 2003 (the “ITEPA”) and the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) (the “PAYE Regulations”) required the Defendants to make the deduction, and to pay the relevant income tax on behalf of Mr Barden.  Mr Conall Patton, junior counsel for the Defendants, prepared a schedule showing the complex statutory derivation of this obligation, which I need not set out, as that too was common ground.  In essence, paragraph 21 of the PAYE Regulations requires an employer to “deduct or repay tax” on “making a relevant payment”.  Relevant payments are defined in paragraph 4 of the PAYE Regulations.  But to understand why “relevant payments” include termination or settlement payments of the kind included in the SA, one has to follow through some 6 further provisions culminating in section 401 of the ITEPA which makes the deduction requirement ultimately applicable by providing that Chapter 3 of Part 6 of ITEPA applies to “payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with – (a) the termination of a person’s employment”. 
7.	A second aspect of the statutory background that also occupied some time in this litigation, but which has ultimately been shown to be something of a red herring, was the Employment Rights Act 1996 (the “1996 Act”), which contains the latest incarnation of the provisions of what was the Wages Act 1986 and, long ago, the Truck Acts. Section 13(1) of the 1996 Act provides that: “[a]n employer shall not make a deduction from wages of a worker employed by him unless- (a) The deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker’s contract, or (b) the worker has previously signified in writing his agreement or consent to the making of the deduction”.  It is now common ground that the termination payment comprised in the SA did not constitute “wages” within the definition of that term in section 27(1)(a) of the 1996 Act.  The definition provides that “wages” include “any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise”, but exclude “any payment within subsection (2)”.  Section 27(2) refers to: “any payment by way of a pension, allowance or gratuity in connection with the worker’s retirement or as compensation for loss of office”.   But, this termination payment is not “wages”, because of the House of Lords’ decision in Delaney v. Staples [1992] 1 AC 687 (per Lord Browne-Wilkinson at page 697E-F) to the effect that the 1996 Act does not apply to termination payments of this kind.
8.	Although there have been no pleadings, three issues arise for me to determine, which can be simply stated as follows:-
i)	What is the true meaning of the SA?
ii)	If the SA does mean, as Mr Barden contends, that the gross sum of £1.35 million must be paid over to him on the agreed date, should the SA be rectified so as to allow the Defendants to deduct PAYE from the payment, as a result of:-
a)	Common mistake; or
b)	Unilateral mistake.
iii)	If not, has Mr Barden been unjustly enriched at the Defendant’s expense?
Chronological background
9.	On 1st November 2004, Mr Barden became CEO of CRU Strategies Limited, the 2nd Defendant (“CRU Strategies”).  The parties agreed that Mr Barden should be entitled to a long term incentive payment when the CRU Group was sold (the “LTIP”). An email exchange between Mr Barden and Mr Perlman seems to have agreed that the LTIP should only be paid if the business were sold whilst Mr Barden was employed.
10.	In 2006, Mr Barden claims, but the Defendants deny, that he became CEO of the entire CRU Group.
11.	On 15th August 2008, Mr Barden and CRU Strategies entered into a severance agreement and a side letter, whereby Mr Barden left the CRU group on terms including an agreement securing payment of the LTIP.  It appears that both sides forgot the email agreement of 2004 when negotiating Mr Barden’s severance package.  Clause 4 provided expressly for the settlement sum then to be paid to Mr Barden (£220,000) to be paid net of deductions including income tax.  It was pointed out that, at this time, only 20% basic rate income tax was deducted from this payment, leaving Mr Barden to pay the higher rate tax.
12.	On 31st December 2010, the assets and business of CRU Strategies were transferred to Commodities Research Unit International Limited, the 1st Defendant (“CRU International”), leaving CRU Strategies as a shell company.
13.	On 19th April 2011, Mr Barden issued proceedings against all 4 Defendants claiming a declaration that the Defendants were liable to pay him a percentage of the sale price of the business.
14.	On 15th November 2011, an unsuccessful mediation took place with Mr William Wood QC as mediator.
15.	On 18th October 2012, a further mediation took place with Mr Charles Flint QC as mediator (the “Mediator”).
16.	In the early hours of 19th October 2012, the parties entered into the SA including clause 3 set out above.  Recital E and clauses 2.1 and 5 stressed the complete release of the parties that had been agreed, and the SA also included the following entire agreement clause:-
“10.	ENTIRE AGREEMENT
10.1	The terms of this agreement constitute the entire agreement between the Parties relating to its subject matter and supersede all prior oral and written agreements, understandings or arrangements relating to the subject matter of this agreement, and may not be modified except by an instrument in writing signed by the Parties or the duly authorised representatives of the Parties.
10.2	 Each Party acknowledges that it has not entered into this agreement in reliance wholly or partly on any representation or warranty made by or on behalf of the other Party (whether orally or in writing) other than as expressly set out in this agreement.
10.3	No other terms or conditions (whether written or oral) shall be included or implied into this agreement, except that nothing in this clause 10 will exclude liability for fraudulent statements”.
17.	On 19th October 2012, the Defendants’ solicitors began an email exchange with Mr Barden’s solicitors suggesting that PAYE should be deducted from the payment to be made under clause 3 of the SA.
18.	On 23rd October 2012, Mr Barden’s solicitors wrote to the Defendants’ solicitors saying that the payment had to be made gross under clause 3 of the SA.
19.	By 1st November 2012, the Defendants paid the sum of £676,822.84 directly into Mr Barden’s solicitors’ bank account.
20.	On 5th November 2012, a Tomlin order was made by Master Marsh reciting that “… the Claimant and the Defendants have agreed that any claim arising from an alleged breach of the terms of the Settlement Agreement contained in the confidential schedule hereto may, unless the Court orders otherwise, be dealt with by way of an application to the Court in these proceedings without the need for any party to make a new claim”.
21.	On 16th November 2012, the Defendants paid the sum of £673,177.16 to HMRC in respect of Mr Barden’s income tax liability in respect of the payment due under clause 3 of the SA.
22.	On 18th December 2012, Mr Barden issued an application notice seeking payment of the balance of the Settlement Sum of £1.35 million together with interest and indemnity costs.
23.	On 11th January 2013, Henderson J adjourned the hearing of this application and made a consent order requiring disclosure of notes of the mediation on 18th October 2012.
The evidence for Mr Barden
24.	Mr Barden’s 3rd statement dated 17th December 2012 included the following:-
i)	Paragraph 12: “I only agreed to settle my claim for £1,350,000 because the agreement provided that that was the sum I would receive.    I did not agree to settle my claims for £1,350,000 less the amount that the Defendants would become liable to pay to HMRC as my former employer if they paid £1,350,000 to me.  I certainly did not agree to settle my claim against the Defendant for a payment of £676,822.84”.
ii)	Paragraph 15: “… from my experience as an employer and as an employee both as CEO of the CRU Group and with other companies, I am well aware that employers are liable to account to HMRC for PAYE on termination payments made to employees.  I had this in mind during the mediation and I anticipated that the [Settlement Sum] of £1,350,000 would be worth more to me because I would be able to claim a tax credit for the amount of the PAYE paid by the Defendants to HMRC. I thought at the time that the tax credit would be worth 20% (£270,000) making the total value of the settlement £1,620,000.   However, since the Settlement Agreement was made I have learned that the value of the tax credit is likely to be higher than 20% because there has been a change in the law since I had last enquired.  I have been referred to reg. 37(2) [of the PAYE Regulations] as amended by reg. 3 of the Income Tax (Pay as You Earn) (Amendment) Regulations 2003 SI 2011/1054”.
25.	Mr Barden’s 4th statement dated 21st February 2013 included these paragraphs:-
i)	Paragraph 12: “At the early stages of the negotiations, after we had made an initial offer to settle the [Mediator] informed us that the defendant had requested that any offer should not be made as a figure plus costs but should rather be made on [an] “all-in basis”.  I assumed that this request was to avoid any uncertainty about the final amount of legal costs that might be payable. From that time onwards I consider[ed] all offers and counter offers to comprise settlement for the claim and the legal costs that I had incurred. However, there was no agreement or understanding that the basis of the offers was “as a gross figure, before deduction of Mr Barden’s income tax” nor that I agreed that CRU would be entitled to deduct any tax liability, as has been alleged in correspondence”.
ii)	Paragraph 15: “During the negotiations I did raise the issue of tax. I told the mediator that there was an asymmetry in the tax situation between myself and CRU. Notably I said that I had had to pay VAT on my legal costs where CRU could claim theirs back and that any settlement would be subject to income tax whereas CRU could deduct the same payment as an expense for corporation tax.  The purpose of this statement was to indicate to the other side the strength of my resolve not to accept an unreasonably low settlement offer in the same way that Mr Perlman had made equivalent positioning statements in the opening session of the mediation (Goodman paragraph 31). I did not discuss with the Mediator at any stage, either during the negotiations or after the figure was agreed, the issue of any deductions being made from the [Settlement Sum] for tax or any other purpose”.
iii)	Paragraphs 23 and 24: “23. One of the key final negotiating issues I was anticipating, was that I would want the agreement to separate out the part of the £1.35m that reflected my legal costs in the agreement so that those costs would be tax deductible. The draft did not do that.  However, it was already late at night and I expected that even small further changes would be difficult to achieve given Mr Perlman’s absence and the time taken earlier in the evening to respond to previous rounds of offers.  I realised that in CRU agreeing to make this payment that they would need to pay the PAYE and I would get a 20% tax credit from the payment that CRU made to HMRC (I was mistaken as to the percentage as I explain in paragraph 15 of my first statement) and this … benefit would offset my legal costs probably not being tax deductible.  24.	As a consequence I decided that there was therefore no need for any further negotiation and I signed the settlement agreement as drafted by Norton Rose”.   
26.	Mr Barden was cross-examined on his witness statements. He answered the questions put to him cautiously.  I think this was because he was conscious of the tightrope he was walking.  But I formed the view that, despite his caution and occasionally evasive answers, he was a broadly truthful witness. Indeed, in some crucial parts of his evidence, Mr Barden was extremely candid. 
27.	Two particular examples assumed importance in the argument that followed:-
i)	First, Mr Barden accepted that the various financial offers and counter-offers made by the parties in the course of the negotiations at the mediation immediately leading up to the SA would have been reasonably understood to be inclusive of income tax.  Indeed he accepted that he had passed a message to the other side, through the Mediator, that the Settlement Sum would be subject to tax (and that he had to pay VAT on his costs and expenses, and possibly tax on a payment for legal costs as well).
ii)	Secondly, Mr Barden accepted that he knew, when he read the draft SA that was presented to him by the Defendants’ solicitors, that a mistake had been made in not providing for the deduction of income tax.  He thought that the Defendants would have to pay 20% in PAYE, which as it turned out was inaccurate. In evidence, Mr Barden also accepted that he considered whether to raise the question of providing specifically for his legal costs in the SA so as to avoid paying tax on them, but he decided not to do so, thinking that he would take the benefit of the mistake instead.  He accepted this proposition put to him by Mr Rhodri Davies Q.C., leading counsel for the Defendants: “[s]o that’s the trade you made in your mind, you thought “looks as if they have made a mistake here, which will give me an extra 20 per cent, and I can either point that out and then negotiate my legal costs, or shut up and leave the legal costs out of it”, and you decided the latter?”
28.	Mr Barden explained why he had not raised the matter with the Mediator or the Defendants in the following instructive passage:-
Q.  Mr Barden, at the very least it must have been so likely that it was a mistake, that the honest and straightforward thing to do was to ask, wasn’t it?
A.  Sorry, this is a negotiation, it is about achieving the best commercial outcome for both respective parties.  If the other side volunteers something that I haven’t asked for in a negotiation, I do not believe it’s my duty of care to go to them, especially when they are professionally acquitted [sic], and say “Have you made a mistake here?  Are you offering me something that I shouldn't have?””.
29.	Mr Barden also made clear that he did not think he had a deal until the agreement was reduced to writing.  Nonetheless, he accepted that the commercial terms were agreed when the Defendants agreed orally (through the Mediator) to pay the sum of £1.35 million, and that there was no oral negotiation of any kind after that.
30.	Mr Graham Young was the partner in Mr Barden’s solicitors representing him at the mediation.  He said this at paragraph 10 of his statement dated 22nd February 2013:  “A third discussion then took place with the Mediator at which figures were discussed.  During the course of these discussions, the Claimant referred to the tax position briefly, commenting that he understood he would be required to pay income tax on any settlement payment he received.  I was aware that the Claimant had taken advice from his accountants prior to the Mediation regarding the tax treatment of any settlement payment he received and that his understanding was that he would be required to pay tax on the sum he received”.
31.	Ms Rebecca Gowing (“Ms Gowing”) was the assistant solicitor representing Mr Barden at the Mediation.  Her statement dated 22nd February 2013 corroborates some of Mr Barden’s recollections and exhibits her notes, but adds nothing more.  The notes at page 61 record that the Mediator told the Claimant’s side that the Defendants “want to deal gross (inclusive of costs)”.

The Defendants’ evidence
32.	Mr Radford Goodman was the partner in Norton Rose representing the Defendants at the mediation.  His statement dated 1st February 2013 includes the following:-
i)	Paragraph 32:- “around mid-afternoon, the [Mediator] conveyed an offer from the Claimant to the Defendants to settle the dispute for a sum of £2m plus costs.  We were informed by the mediator that the £2m sum had been calculated as follows.  The Claimant’s starting point was the figure of £7m pleaded in the draft Re-Amended Particulars of Claim.  The [Mediator] explained that the Claimant contended he had a 60% chance of winning the claim, giving rise to a figure of £4.2m, to which the Claimant had then applied a further 50% discount to reflect the fact that the LTIP might never be triggered or might not be triggered for a significant period of time, giving a figure of £2.1m.  On this basis, the Claimant was offering to settle for £2m plus costs (pages 20 and 25 of RG2).  There was no suggestion that there was any tax to be added to this figure and, indeed, the calculation explained to us left no room for any additional sum for tax”.
ii)	Paragraph 35: “…probably by now around 7pm or 8pm, the [Mediator] informed us that the Claimant was willing to come down to £1.9m “all-in” … This was not accompanied by any supporting calculations. I believe it was simply a reduction from the Claimant’s previous offer designed to try to elicit a corresponding movement upwards by the Defendants. The mediator told us that the £1.9m was not a final offer, but the Claimant wanted a “swift and substantial response” to it.  Like the earlier offer of £2m I understood the £1.9m to be inclusive of tax and, in addition, it was now expressed to be inclusive of costs as well (in contrast to the previous £2m offer)”.
iii)	Paragraph 36: “the [Mediator] came into the Defendants’ room and, unprompted by us, relayed to us a message regarding tax. The [Mediator] delivered this message as soon as he entered the room, while he was still standing, which indicated to me that the message was coming directly from the Claimant or his advisers. I cannot recall the exact words he used but the clear import of what he said was that the Claimant knew and accepted that he would incur an income tax liability as a result of any settlement and that such tax would come out of any settlement sum, leaving the Claimant with much less than the headline settlement figure. This confirmed my, and I believe the Defendants’, existing understanding. Within the context of the ongoing negotiations, this message served (and I assume was intended) to remind us to take into account the fact that, after paying tax, the Claimant would end up with considerably less than the gross sums being discussed, applying a 50% tax rate”.
iv)	Paragraphs 38 and 39: “38. The [Mediator] told us that the Claimant wanted £1.5m, but his final offer was £1.35m “all-inclusive” (pages 24 and 26 of RG2). I believe this offer was made at around 9.30pm.  … I informed Mr Perlman of the offer by telephone and, after about an hour, I was instructed by Mr Perlman to accept the offer on behalf of the Defendants. We asked the mediator to come into our room and informed him that the Claimant’s final offer of £1.35m was accepted by the Defendants. The [Mediator] then left our room to communicate this to the Claimant. At this point I understood that we had a deal and that all that remained was to document and sign it.  39. It was my understanding and I believe that of everyone on the Defendants’ team, that the agreed settlement sum was a gross figure, which represented the totality of what the Defendants would have to pay. At no stage had there been any suggestion from the [Mediator], the Claimant, or the Claimant’s advisers, that the Claimant expected the Defendants to pay all or any part of his income tax liability on top of the settlement sum which had been agreed. On the contrary, as described above in paragraph 36, the Defendants had been informed by the mediator that the Claimant’s liability for income tax would be satisfied out of the settlement sum”.
v)	Paragraph 43: “It was an obvious piece of background to the claim and the mediation that, if the Claimant recovered any sum from the Defendants, he would have to account for it for tax purposes.  What was not obvious at the mediation was that the [PAYE Regulations] would apply to any payment by the Defendants to the Claimant, even though it was more than four years since he had left the Second Defendant’s employment.  However, following discussions with colleagues in Norton Rose’s tax department, I learned the morning after the mediation (i.e. the morning of Friday 19 October 2012) that the Defendants were obliged to account to HMRC on the Claimant’s behalf for the income tax arising in respect of the settlement”
33.	Mr Andrew Wanambwa, the assistant solicitor at Norton Rose representing the Defendants at the mediation confirmed some aspects of Mr Goodman’s statement.  Paragraph 6a of his statement dated 1st February 2013 said that Mr Perlman had told the Mediator that “he wanted the Defendant to make a “global” offer so that he had certainty as to the amount under discussion”.
34.	Mr Robert Perlman, the Chairman of the Defendants’ CRU Group, made a statement dated 1st February 2013.  It includes the following:-
i)	Paragraph 7:  “Firstly, as mentioned in Mr Wanambwa’s statement at paragraph 6a., I specifically made the point at this time to the [Mediator] that I did not want to and was not interested in dealing in offers where we were going to need to add costs onto the figure.  I said I wanted the Claimant to make a global all-in offer.  The reason I said this was because I wanted to know we had certainty as to the amount under discussion so that if and when that number was agreed I and the Defendants would know precisely what we would have to pay and that would be all we would have to pay.  I confirm that this remained my understanding throughout the mediation”.
ii)	Paragraph 8: “Late in the evening I received notification by telephone from Mr Goodman that the Claimant had offered to settle for payment of £1.35 million, as referred to in Mr Goodman’s statement at paragraph 38. My understanding was that the offer made by the Claimant was that we pay him an all-in figure of £1.35 million.  I thought about the offer, and I then accepted the offer on this basis, and then communicated that acceptance to Mr Goodman.  I accepted the offer on the understanding that we would not have any further liability to pay over and above £1.35 million”.
iii)	Paragraph 9: “When the final form agreement was delivered to me at about 12.30am on Friday morning for signing, I understood clearly that the £1.35 million settlement sum we had agreed, which was in clause 3 of the [SA], was an all-in global sum and that £1.35 million was the full extent of our liability to pay.  Any tax due on that sum would be for the Claimant to pay. This was my understanding prior to signing the agreement and my understanding at the time I signed the agreement. It remains my understanding today.   So far as I was aware, there had been no further negotiation of the substantive terms of the settlement after I had authorised the acceptance of the Claimant’s final offer on the basis described above.  I understood that the purpose of the settlement agreement was simply to record the agreement which had previously been reached on that basis”.
35.	Mr Ian Glick QC was counsel representing the Defendants at the mediation.  Paragraph 8 of his statement dated 1st February 2013 said this: “I do not disagree with paragraph 36 of Mr Goodman’s Second Witness Statement, but I prefer to record my own recollection of the events he describes.  Some time in the evening, the [Mediator] came into our room and, without being prompted by us, said words to the effect that we needed to appreciate that Mr Barden accepted or realised that any sum he received by way of settlement was going to be subject to tax.  It was clear to me that the [Mediator] was seeking to emphasise to us that we needed to keep in mind that Mr Barden would view any sum offered by way of settlement as a sum from which tax would need to be deducted, and so any offer we put forward would look smaller in his eyes because of the tax he would have to pay on it. I do not now recall whether this was the first thing the [Mediator] said when he entered the room, but certainly he said it very soon after he came in. I also recollect Mr. Wanambwa later asking the [Mediator] if Mr. Barden would have to pay part of any settlement monies to his former wife, under their divorce settlement, to which (I believe) the [Mediator] did not know the answer”.
36.	Mr Perlman was cross-examined on his witness statement.  He told me that he was the Chairman of the CRU group, and had become its sole controller in the 1980s.  I found Mr Perlman to be a reliable witness.  He said he did not know much about PAYE, and that he delegated such matters to his finance director, Mr Geoff Barber.  Mr Perlman’s understanding was that Mr Barden would have to pay 50% income tax, but he did not discuss PAYE at all throughout the mediation or when Mr Goodman brought him the SA to sign at 12.30am at his home.  His only concern was that the Defendants did not have to pay more than the agreed sum of £1.35 million.
Issue 1: Construction
37.	It is important first to make clear that much of the evidence that I have recorded above is not admissible in considering the true construction of the SA.  All that is admissible is the properly so-called factual matrix (see Lord Hoffmann’s now famous 5 propositions at pages 912-3 in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 W.L.R. 896 – “ICS”).  Such factual matrix does not include either the negotiations of the parties or their subjective intent.
38.	Ms Geraldine Clark, counsel for Mr Barden, has submitted that the relevant factual matrix includes the following:-
i)	That, when the SA was made, each party was separately aware that Mr Barden would have to pay income tax on the Settlement Sum; 
ii)	There was no discussion or agreement between the parties as to the amount of income tax that would be payable, who would pay it, or how it was to be paid;
iii)	The Defendants were or ought to have been aware that they were or might be liable to account for PAYE on the Settlement Sum because (a) they had paid PAYE in respect of two previous payments to the Claimant in relation to the 2008 settlement; (ii) they are experienced employers; and (c) they had experienced legal advisers at the mediation, who failed to consider whether PAYE was payable.
iv)	Both parties intended at the mediation that the Defendants would pay the entire Settlement Sum to Mr Barden.
39.	Ms Clark tried to justify these submissions by contending that subjective intentions of the parties were admissible as factual matrix when they were common intentions.
40.	This view of the factual matrix, in my judgment, confuses the subjective intentions of the parties with what was truly the relevant background that the objective observer would have expected the parties to have had in mind. As Lord Hoffmann said in ICS at page 913 in the third of his 5 propositions: “[t]he law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent”.  Moreover, Ms Clark’s arguments that (i) the court should also take into account, as a matter of construction, that the Defendants had entirely overlooked the possible application of the PAYE Regulations at the time the SA was made, and that (ii) Mr Barden only agreed to settle on the terms drafted by the Defendants because he thought he would get a tax credit, fall foul of the same problem.  The court cannot, in construing a contract, take account of the parties’ subjective intentions.  It can only take account of what an objective observer would consider the parties to have meant by the words they used in the contract, taking into account relevant factual matrix.
41.	Moreover, Ms Clark has submitted that the PAYE Regulations requiring the Defendants to deduct income tax from the clause 3 payment was not part of “the background knowledge which would reasonably have been available to the parties in the situation they were at the time of the contract” (within Lord Hoffmann’s second proposition in ICS).   In effect, Ms Clark submits that the PAYE Regulations requiring deduction of income tax some years after an employment contract terminated is a difficult and recherché piece of law.  Thus, she argues, the words must be construed to mean what they say.  The meaning conveyed by clause 3 to a reasonable person having the background knowledge that would reasonably have been available to the parties (which did not include the knowledge that tax was deductible) was that the gross sum must be paid.  
42.	I considered this question in the recent case of Spencer v. The Secretary of State for Defence [2012] EWHC 120 (Ch), in which the Court of Appeal (Mummery and Etherton LJJ and Sir Stephen Sedley) upheld my decision on somewhat different grounds at [2012] EWCA Civ 1368.  I concluded at paragraph 96 that “the reasonable observer, having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, must be endowed with knowledge as to the established legal effect of the Memorandum in this case, even if the parties were themselves not so aware”.  Whilst the Court of Appeal did not specifically uphold this formulation, it did not cast specific doubt upon it.  I do not propose to repeat in this judgment the detailed reasoning that led me to this conclusion.  The authorities and reasoning are carefully stated in my judgment in Spencer.  Ms Clark reserved Mr Barden’s right to argue that I was wrong in holding in that case that “when considering the implication of a term, it was permissible to assume that the reasonable observer had knowledge that the parties did not in fact have, certainly if that knowledge is as to established and well known legal principles (e.g. implied surrender and re-grant of tenancy)” (see paragraph 21 of Mummery LJ’s judgment summarising what I had decided).  Ms Clark submitted that, in any event, the reasonable observer in question was the reasonable man or woman or even businessman in the street, not the reasonable qualified or specialist lawyer or judge. 
43.	Ultimately, however, the construction of the SA is, in my judgment, very simple.  The legislative background is well known; sums paid in connection with employment attract income tax.  Income tax must in all normal circumstances be paid by way of PAYE by the employer on behalf of the employee.  It is the most common thing for an employment contract to provide that the employee’s salary is £x per month.  No employer or employee actually expects the gross sum of £x to be paid every month.  Instead, it would be understood by any objective observer, reading the employment contract, that the amount to be paid would be £x less the income tax due from the employee to HMRC which is to be paid by the employer on the employee’s behalf.  The statutory provisions that I have already referred to simply encapsulate what is the common understanding.  The idea that there is something strange or recherché about the inclusion of post-employment termination packages in this regime is far-fetched and in my judgment simply wrong.  The fact that the Defendants’ experienced advisers momentarily lost sight of these obvious realities when they drafted the SA late in the evening is nothing to the point.  It was simply a function of the heat of mediation, which always seem to reach fruition only in the small hours of the morning, when the parties have been sufficiently worn down by the day’s combat finally to show their hands.
44.	The terms of section 13 of the 1996 Act requiring an employer not to make an unauthorised deduction from an employee’s wages seem only to reinforce the conclusion I have reached.  The Act contemplates the common understanding that deductions can be made by an employer if statutorily authorised before paying the net sum to the employee.  This deduction was authorised by regulations 21 and 37 of the PAYE Regulations.  The fact that, as I have said, section 13 did not actually apply to this payment does not affect this aspect of the commonly understood statutory regime.
45.	For these reasons, I take the view that any objective observer would, taking into account all the relevant factual matrix available to the parties, but not their subjective intentions or the course of their negotiations, have had no doubt as to what was meant by the SA.  It meant, simply put, that the sum of £1.35 million agreed should be paid to Mr Barden, net of any PAYE that was due from him to HMRC as a result of the payment.
46.	The construction advanced by Mr Barden is a commercial absurdity.  The Defendants would be required to pay an additional £1.35 million to HMRC on Mr Barden’s behalf without any such liability being mentioned in the SA, and when clause 3 itself defines the £1.35 million as the “Settlement Sum”, clearly indicating that that is the sum in exchange for which Mr Barden is agreeing to settle his claims.
47.	I do not think that it is necessary to imply any term into the SA in order to achieve this result.  The proper construction of the clause requiring the payment, set against the legislative background that I have mentioned, is sufficient.  But the same effect could also be achieved by the necessary implication of the words “net of any PAYE due” into clause 3 of the SA after the words “(the Settlement Sum)”.  Clause 10.3 of the SA does not have the effect of preventing a necessary implication to make clause 3 of the SA work and to prevent commercial absurdity.  It simply prevents new additional, supplementary or “other” terms or conditions being added to the SA.  Mr Davies suggested that the words to be implied might rather be “subject to such deductions as are required by law”, but it does not seem to me that the difference is material to what I have to decide in this case.
Issue 2: Rectification
48.	In the result, therefore, the Defendants’ claim that the SA should be rectified so as to add the words “inclusive of tax” or similar words into clause 3, does not need to be decided.  I shall, however, say shortly what I would have decided on the evidence in case the matter goes further and my construction of the SA is held to be wrong.
49.	The requirements for mutual mistake rectification have recently been restated by Etherton LJ (with whom Lord Neuberger MR agreed on this point) in the Court of Appeal at paragraph 80 in Daventry District Council v. Daventry & District Housing Ltd [2012] 2 All ER (Comm) 142 as follows:-
i)	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;
ii)	which existed at the time of execution of the instrument sought to be rectified;
iii)	such common continuing intention to be established objectively, that is to say by reference to what an objective observer would have thought the intentions of the parties to be; and
iv)	by mistake, the instrument did not reflect that common intention. 
50.	Etherton LJ had adjusted the four requirements previously summarised by Peter Gibson LJ in Swainland Builders Ltd v. Freehold Properties Ltd [2002] 2 EGLR 71 at paragraph 33, to take account of Lord Hoffmann’s dicta at paragraphs 59-65 in Chartbrook Ltd v. Persimmon Homes Ltd [2009] 1 AC 1101 to the effect that the reference to a “common continuing intention” was not to what the parties subjectively believed they had agreed but to what, objectively regarded, they had actually agreed.
51.	Etherton LJ also identified four possible scenarios that might arise in relation to claims for mutual mistake rectification at paragraphs 85-88.  Only the third scenario set out at paragraph 87 as follows is relevant here: “where there was objectively a prior accord, but one of the parties then subjectively changed their mind, but objectively did not bring that change of mind to the attention of the other party.  It is right that, if the documentation gives effect to the objective prior accord, the formal documentation should not be rectified to reflect the changed but uncommunicated subjective intention; and if the documentation as executed reflects the changed but uncommunicated subjective intention, it should be rectified to give effect to the objective prior accord”.
52.	Toulson LJ preferred a different formulation, but at paragraph 207 Lord Neuberger MR agreed with Etherton LJ, indicating that if the conduct of the party changing its mind: “would have signalled to a hypothetical observer that [he] intended to resile from the prior accord” it would be unreasonable to hold him to that accord.
53.	If, contrary to my construction of clause 3, it did require a gross payment of £1.35 million to Mr Barden and a similar payment to HMRC, this was plainly, on the evidence I have described above, not what Mr Barden and the Defendants had, objectively regarded, agreed when the Mediator reported that the Defendants had accepted Mr Barden’s settlement offer of £1.35 million.  Mr Barden could not, in evidence, quite bring himself to accept that any reasonable person would have understood that his final offer of £1.35 million was inclusive of income tax.  But, in my judgment, that is a necessary consequence of his having accepted that his immediately preceding offers were intended to be understood as being inclusive of tax.  Indeed, that was the import of the message that he had sent to the Defendants earlier in the mediation to the effect that he would have to pay tax on any settlement sum.  The offers were intended to be “all in”, that term plainly being understood by both sides to comprehend costs, interest and any tax due.  The note made by Ms Gowing seems to have been incomplete, since it referred to costs only.  But even if Mr Barden, for Machiavellian reasons of his own, did not intend the offer so to be understood, I am entirely satisfied on the evidence that I heard that any objective observer considering what the parties had agreed when the offer of £1.35 million was accepted, would have thought that what was agreed was that £1.35 million would be paid inclusive of costs, interest, and tax.
54.	Moreover, the common intention of the parties that the offer of £1.35 million should be inclusive of costs interest and tax continued, to the eye of the objective observer, up until the moment that the SA was signed.  Mr Barden accepts that he kept silent about his own subjective position. 
55.	Mr Barden’s point that, in making his offers “all in”, he was only suggesting they were inclusive of interest and costs does not, in my judgment, reflect the reality of what was discussed.  As I have already said, I am quite satisfied that all the later offers were made on the basis that the sum mentioned was to be the entire liability of the Defendants.
56.	On the third day of the hearing, which due to the commitments of counsel was delayed by some two months, Ms Clark made two new points on common mistake.  First, she suggested that Etherton LJ’s third scenario in Daventry should also involve a gloss or a further requirement that the party changing its mind should be shown to have been guilty of sharp practice or dishonesty.  Secondly, she relied on George Wimpey UK Limited v. V.I. Construction  [2005] EWCA Civ 77 as an example of a case where a person in Mr Barden’s position (V.I. Construction) did not have rectification awarded against it.
57.	Starting with the second point, the reason why V.I. Construction managed to avoid rectification in the Wimpey case was because (i) Wimpey had failed to plead dishonesty in support of the unilateral mistake case that had succeeded at first instance, and (ii) the case was heard before the change in the law effected by Chartbrook supra.  Whilst there was probably an objectively viewed common accord, there was not a continuing subjectively viewed one (as required at that time), so Wimpey fell between two stools and lost its order for rectification on appeal.  Although Wimpey is an interesting case exploring the boundaries between the protection of a party’s commercial interests, on the one hand, and sharp practice on the other, it does not advance Mr Barden’s defence to the rectification claim for common mistake under the present law.
58.	As for the first point, I cannot change the carefully devised parameters laid down by the Court of Appeal.  There is, in any event, no warrant, in my judgment, for the introduction of a requirement of dishonesty into the law of common mistake.  I shall not engage in this judgment with the now quite extensive academic debate as to the effect of the decision in Daventry.
59.	This is really quite a simple case, where an objective common accord was reached, and Mr Barden saw (if I am wrong on construction) that a mistake had been made by the Defendants in reducing that accord into the draft SA.  He decided to stay silent, and, in those circumstances, equity (under the current law) allows the Defendants to have the written agreement rectified to accord with the agreement previously and objectively made.
60.	Ms Clark’s final point was that there was an over-riding discretion in the grant of rectification, and that it should not in justice be granted in this case.  She relied on Mr Barden having taken a great commercial risk, thinking his upside was a 20% tax windfall, but his downside was losing the opportunity to negotiate a number of matters including a change to the terms of the SA so as to reduce or eliminate the income tax payable on some £324,000 worth (including VAT) of his costs under the then version of section 413A of ITEPA.  
61.	Though I accept that rectification is a discretionary equitable remedy (see page 607 of Spry on Equitable Remedies 5th edition 1997, and paragraphs 219 and 223 of Lord Neuberger’s judgment in Daventry), equity does not normally refuse rectification where the requirements are made out.  Of course, it could do so.  But I am quite clear that I would not have exercised such a jurisdiction in this case.  Mr Barden did indeed take a chance, but part of the chance he took was that, by failing to point out that the Defendants had made a mistake, he would be caught out.  That is what has happened.  Had he taken the alternative course of pointing out the error, he might have spent a longer night in negotiation, but he would have been clear as to his rights and obligations under the SA.  One thing is for certain, such continuing negotiations would not have resulted in Mr Barden becoming entitled to a further £1.35 million.  Mr Barden was, I think, well aware of that.  Justice and equity do not require that rectification be refused in the factual circumstances that I have described.  As Sir Paul Morgan pointed out in the Jonathan Brock QC Memorial Lecture 2012 entitled: “Rectification: Is it Broken? Common Mistake after Daventry” at paragraphs 67 and 69: “… if the subjective state of mind of the claimant … is relevant to an argument as to whether it is equitable to order rectification, then the door opens again in relation to disclosure as to their subjective intentions …”.  But the pursuit of this point may be better left to a higher court in another case. 
62.	Thus, in my judgment, if the SA is not to be construed as I have held, but is to be taken to mean that the Defendants had to pay the gross sum of £1.35 million to Mr Barden in accordance with clause 3, and to pay a similar sum by way of PAYE to HMRC, the conditions for common mistake rectification would be made out.  In that event, I would have ordered rectification of clause 3 so as to make it read:  
“[t]he CRU Parties shall by 4pm on 1 November 2012 pay £1,350,000 (the Settlement Sum), net of any PAYE due to HMRC, by telegraphic transfer into the Cheyney Goulding LLP client account at HSBC Bank, Guilford Branch, account number 73668010 sort code 40-22-26, IBAN GB64MIDL40222673168010, SWIFT CODE MIDLGB22” (amendment underlined).
63.	In these circumstances, I do not need to consider the claim for unilateral mistake rectification, which could have raised some quite difficult questions.  In particular, the claim to unilateral mistake rectification could have raised the question of whether Mr Barden acted with dishonesty or sharp practice in keeping silent about the wording of clause 3, on the basis that he would get the windfall of the tax credit, but would give up the opportunity to negotiate in respect of his costs and other matters.  All I will say, again in case the matter goes further, is that I am sure that Mr Barden did genuinely think that the contract was not concluded until it was signed and that he was entitled to rely on his strict legal rights, and to take his chances as to what a court would hold the SA actually to mean.  Whether keeping silent in these circumstances reaches the necessary standard of inappropriate conduct for unilateral mistake rectification is something that, in the light of the extensive existing authority on this subject, can await another case.
Issue 3: Unjust enrichment
64.	Mr Davies argued that, if all his other arguments, failed he could advance a case that Mr Barden would be unjustly enriched, if CRU were required to make any further payment to Mr Barden.  The unjust enrichment in question would be the £673,177.16 already paid by CRU to Mr Barden in discharge of Mr Barden’s liability for tax.  I do not think it is necessary to deal with this argument, in the light of my other decisions.
Conclusions
65.	For the reasons I have sought to give, I have reached the clear conclusion that the SA is to be construed as meaning that the payment of £1.35 million due to Mr Barden should be paid net of any PAYE due to HMRC thereon.  If I were wrong about that, I would have ordered common mistake rectification of clause 3 as set out in paragraph 62 above. 
66.	I will hear counsel as to the form of the appropriate order and costs.