Court Of Appeal's Paradigm Shift On Rectification For Common Mistake: FSHC v. GLAS

The Court of Appeal has recently reversed a controversial line of case law on the rectification of contracts where both parties are mistaken as to the contract's legal effect.

In FSHC Group Holdings Limited v. GLAS Trust Corporation Limited [2019] EWCA Civ 1361, the defendant appealed the lower court's order for rectification of two deeds that did not reflect the parties' subjective common intentions. The defendant argued that - objectively speaking - there was no evidence of a common intention and as such the deeds should not be rectified. However, in a shift from previous authority, the Court of Appeal agreed that it is the subjective common intention of the parties, as evidenced at the time of the contract, that is relevant to the question of rectification.

The facts

The background to the dispute was a corporate acquisition in 2012, by which a private equity investment fund acquired a controlling interest in FSHC Group Holdings (the holding company of Four Seasons Health Care Group). The acquisition was funded through a complex set of arrangements that were governed by an intercreditor agreement. Barclays Bank plc was the security agent in the intercreditor agreement (and the original defendant). GLAS stepped into Barclays' shoes as the security agent and the defendant later (after the lower court's judgment had already been handed down).

The issue arose because the intercreditor agreement required FSHC Group to assign to Barclays, by way of security, the benefit of a shareholder loan (worth £220 million). By an oversight, that assignment never took place when the acquisition completed in 2012.

The oversight came to light when FSHC Group's solicitors were instructed in 2016 to advise on a debt restructuring. The intercreditor agreement required any default identified by a party to be remedied within 30 business days of becoming aware. To remedy the default, FSHC Group's lawyers advised it to accede, by deed, to two other security documents that formed part of the financing arrangement. It was found as a fact that the parties had not realised that, by FSHC entering the accession deeds, it would not only be assigning the missing security, but would also be taking on additional onerous obligations that went significantly beyond the commercial deal struck in 2012.

FSHC's lawyers explained to Barclays prior to executing the accession deeds that their purpose was merely to ensure compliance with the intercreditor agreement. FSHC wanted to do...