Rectify me if I’m wrong

Mon, 16 Dec 2019

In a decision handed down on 31 July 2019, the Court of Appeal in FSHC Group Holdings Ltd v Glas Trust Corporation Ltd [2019] EWCA Civ 1361 have clarified the test for contractual rectification on the basis of common mistake. Gone are the days of the objective test articulated in Lord Hoffman’s obiter remarks in Chartbrook Ltd v Permisson Homes [2009] UKHL 38 as we enter a period of much needed clarity. Leggatt LJ, delivering the leading judgment to which Rose LJ and Flaux LJ assented, comprehensively delved into the history of the law on rectification and arrived at a neat and practical conclusion.

In FSHC Group Holdings Ltd, the Claimant, also referred to as “the Parent”, sought rectification of two deeds. These were executed by the Parent and Barclays Bank plc, the original defendant to these proceedings, who was replaced as security agent by GLAS Trust Corporation Limited in between the first instance decision and the appeal. At first instance, Carr J found as a fact that the intention of both parties was to provide missing security to a shareholder loan that should have been provided by the Parent during a corporate acquisition in 2012. In fact, by mistake, the deeds placed additional obligations on the Parent beyond that of the missing security. The deeds were rectified to give effect to the parties’ true intention.

Leggatt LJ set out two scenarios where a court may rectify a written instrument for common mistake –

  • Where a previous binding contract exists: the document sought to be rectified fails to give effect to the objective meaning of the previous binding contract; or
  • Where there is no prior concluded contract: when the parties executed the contract, they each subjectively had a common intention about a particular matter which, by mistake, the document did not accurately record; and there was an “outward expression of accord”, meaning that as a result of communication, each party understood the other to share the common intention.

In his analysis of the law, Leggatt LJ helpfully considered what is known as the “outward expression of accord” and what exactly is required for a finding of common intention. The court must be satisfied that the parties actually understood each other to have the same intention. However, an "outward expression of accord” might, in some circumstances, be communicated tacitly and there exist situations where silence speaks volumes. Context is vital.

Make no mistake, establishing a successful claim for rectification is no easy task. The subjective test “is rightly a demanding test to satisfy” and sets a high bar for parties seeking rectification. Contemporaneous evidence of the parties’ actual intention will be paramount. FSHC Group Holdings Ltd strikes a necessary balance: it upholds the certainty of written contracts, whilst allowing, in a clear and narrow set of circumstances, equity to step in and correct a written instrument where it does not reflect the actual intention of the parties.

 

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