Court Of Appeal Clarifies Test For Rectifying Terms Of Written Contract For Common Mistake

The Court of Appeal has upheld a decision granting rectification of two deeds on the basis that they did not reflect the parties' subjective common intention: FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361.

This is an important judgment which establishes, at Court of Appeal level, the test for rectifying a contractual document on grounds of common mistake, on which there had been conflicting authority and uncertainty as to the state of the law. It determines that, to establish a claim for rectification, a party must prove that the document failed to give effect to either:

a prior concluded contract, in which case the terms of the prior contract must be objectively determined; or a common intention shared by the parties, in which case the existence of the intention must be established as a subjective state of mind - though it must also be shown that, as a result of communication between them, the parties understood each other to share that intention. The court disagreed with Lord Hoffman's (obiter) observations in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 that, even for the second limb above, the test is purely objective and subjective intentions are irrelevant. Leggatt LJ, who gave the judgment of the court, explained the doctrine as resting on an equitable principle of good faith - ie that a party will not be allowed to enforce the terms of a written contract when that would be against conscience because it was inconsistent with the parties' mutual intentions at the time of contracting.

Unless and until there is a further appeal to the Supreme Court, therefore, the test to be applied is as set out above. In most cases, this is likely to mean (even) greater difficulty in establishing a claim for rectification for common mistake, in the absence of a prior concluded contract. In particular, a claim will not succeed unless the claimant can establish not only that it had a particular intention but that the defendant shared that intention, and that the parties understood one another to share that intention. (There may however be a claim based on unilateral mistake, if the defendant knew the claimant believed there to be a common intention when that was not in fact the case, and knew the document did not give effect to the claimant's intention).

Background

This was a claim for rectification of two deeds executed by the claimant in November 2016. The purpose of executing the deeds was to provide security which the claimant had previously agreed to provide in connection with a complex corporate acquisition which took place in 2012. The omission of the security - an assignment of the benefit of a shareholder loan - was not noticed until it was spotted by the claimant's lawyers during a review of the security documentation in 2016.

In order to provide the missing security, the claimant entered into deeds to accede to two pre-existing security agreements...