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Clarification of the test for rectification for common mistake

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"… we are unable to accept that the objective test of rectification for common mistake articulated in Lord Hoffmann's obiter remarks in the Chartbrook case correctly states the law.” The Court of Appeal clarifies test for rectification for common mistake in FSHC Group Holdings ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361.

Rectification of a common mistake

Where the parties to a written contract are mistaken that the contact records their common intention, the contract may be rectified by the court to reflect that common intention. Cases involving common mistake inevitably result from the parties disputing that a common mistake has been made. With the parties at logger-heads, how does the court evaluate the parties’ intentions?

In Chartbrook v Persimmon Homes Ltd [2009] 1 AC 1101, Lord Hoffman observed that the parties’ intentions were to be assessed objectively, which ran contrary to established authority that held that actual intention was relevant. Lord Hoffman’s comments in that case were not however relevant to the decision in Chartbrook and were not binding precedent, but the comments were subsequently applied by the parties and the court in Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153 leading to uncertainty as to the correct approach. The Court of Appeal, however, has recently determined that the correct test for rectification is not wholly objective but that different tests are applicable in different scenarios with one scenario requiring a subjective assessment of the parties’ understanding of each other’s intentions.

FSHC Group Holdings ltd v. GLAS Trust Corporation Ltd [2019] EWCA Civ 1361

The claim was for the rectification of two deeds executed by FSHC in November 2016. Under a complex financing transaction in 2012, FSHC was required to provide security over a shareholder loan. In 2016, it was discovered that the security was missing, and perhaps had never been provided, which could have led to an event of default under the financing agreements. Against the backdrop of remedying the position before the next compliance reporting date, FSHC entered into deeds to accede to two pre-existing security agreements. However, the effect of acceding to these agreements was not only to provide the missing security but for the FSHC to undertake additional, onerous obligations.

At first instance, the judge concluded that the parties subjectively had a common intention to execute a document that did no more than to provide the missing security. He, therefore, granted rectification of the deeds so as to exclude the additional obligations from their scope.

On appeal, GLAS argued that the test for rectification was purely objective.

In dismissing the appeal the Court of Appeal held that the test for assessing intention differed between two different scenarios.

1. An antecedent agreement

Where the parties produce a written contract to incorporate the terms of an agreement between them but that document does not accurately reflect that prior agreement, the terms of that prior agreement must be determined objectively to hold the parties to what they had agreed.

2. No agreement prior to the written contract

Where, as in the FSHC case, the parties had not actually reached a binding agreement prior to producing the written contract but nevertheless had a common continuing intention in respect of a particular matter the Court of Appeal held the position is different. The Court of Appeal concluded that a party should not be allowed to enforce the terms of a written document that are inconsistent with what both parties intended (similar to rectification for unilateral mistake).

In such a scenario, the Court of Appeal said, the basis of rectification is “entirely concerned with the parties’ subjective states of mind”.

The Court of Appeal compared the objective approach to rectification where there was a prior agreement with the application of an objective test in interpretation of contracts. Objective interpretation of contracts and proceeding on the assumption that specific words were intended to have specific meanings leads to a degree of certainty as to how provisions will be interpreted.

In the absence of a binding agreement, however, the rationale for objective interpretation of the terms falls away because there are no agreed terms for the objective observer to give meaning to. Instead, what must be demonstrated is the parties’ actual common intention which is a subjective assessment based on what the parties actually thought, as well as what they outwardly said and did, and the parties’ intention should be assessed subjectively.

Comment

The Court of Appeal’s clarification now means that there are two different tests for rectification depending upon the nature of the contract in respect of which rectification is sought.

If the written document merely incorrectly records the parties’ agreement the test will be an objective one. If, however, the parties do not reach a binding agreement before the written contract is produced the test will largely be a subjective assessment of the parties’ actual common intention.

Despite the clarification, however, successfully obtaining rectification of a written contract remains no less difficult.

Ben Moon

Ben Moon Legal Director

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