Mistakes Will Happen: English Court Of Appeal Clarifies The Test For Rectification For Common Mistake

The Court of Appeal has handed down judgment in the case of FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd1, which concerned whether or not two deeds should be rectified on the basis that they did not reflect the parties' common intention.

Background to the appeal

The background to this claim concerned a complex corporate transaction which took place in 2012, pursuant to which FSHC Group Holdings Ltd ("FSHC") had agreed to provide security as part of the transaction.

However, in 2016 it became apparent during a review of the security documentation that an assignment of the benefit of a shareholder loan (being the security which should have been in place) had not been executed. In order to correct the omission, FSHC entered into deeds (the "Deeds") to accede to two pre-existing security agreements, although it later became apparent that these agreements went further than the provision of security and imposed additional and onerous obligations on FSHC.

FSHC issued a Part 8 claim seeking rectification of the Deeds. Although GLAS Trust Corporation Ltd was not the original security agent (and therefore was not a party to the original claim), it was subsequently added to the litigation following its appointment as security agent earlier this year.

First instance decision

At first instance, the late Mr Justice Carr made the factual finding that when the Deeds were executed, it was both parties' subjective understanding and intention only to provide the previously omitted security and that the parties had not intended to impose any additional obligations on FSHC. The judge also held that an objective observer would have reached the same view based on the background facts and communications between the parties. Consequently, the judge found in favour of FSHC.

This decision was appealed by the defendant (the "Security Agent") on the basis that, whilst not challenging the judge's factual findings, the test for rectification was purely objective and, on that basis, an objective observer would have concluded that the parties had intended the additional obligations to be binding on FSHC.

Court of Appeal's decision

At the outset of the Court of Appeal's judgment, it was noted that there was "uncertainty and dissatisfaction" surrounding the law around rectification for common mistake - particularly following obiter comments previously made by Lord Hoffman in relation to this issue in Chartbrook Ltd v Persimmon Homes Ltd2 in which he expressed the...