Rectification of a contract. A new approach?

The remedy of rectification requires the Court to consider and amend the terms of a legal document as a result of an “actual common mistake” by the parties to it. In amending the document, the Court seeks to reflect what the parties actually intended rather than what was committed to in writing. The recent case of FSHC Group Holdings Ltd v Glas Trust Corporation Limited [2019] EWCA Civ 1361 (the “FSHC Group Holdings Case”) helped to clarify the appropriate tests to be applied by the Court when considering rectification.

The FSHC Group Holdings Case

In this case, the parties entered into two deeds, intended to satisfy FSHC’s obligation to provide security over a shareholder loan. Having failed to properly review the documents that they were entering into, the parties were found to have mistakenly entered into two deeds that not only granted the intended security, but also placed a number of additional onerous obligations on FSHC. Upon inspection of various past communications between the parties, it was clear to the Court that the parties had a common intention only to grant the relevant security and not to impose any additional obligations on FSHC. The Court held that the deeds should be rectified accordingly to reflect this intention.

The test for rectification

The FSHC Group Holdings Case clarified the relevant approaches to be taken by Courts when considering rectification. The Court in this case outlined that:

1. an objective test should be applied where the parties enter into a binding agreement to execute a subsequent document containing certain terms, but instead execute a document containing different terms. An objective test involves considering what a reasonable person, having all of the information that was available to the parties, would consider the signed contract to mean and what the common intention of the parties was. The Court referred to an objective test in such cases because of the principle that contracts should be kept and the terms of any subsequent contract should therefore be objectively determined in line with the Courts’ general approach to considering contracts; and
2. a subjective test should be applied to a scenario in which there is a common continuing intention between the parties and the contract entered into by the parties contained different terms. A subjective test considers the words and acts of the parties that demonstrate their subjective intentions. When taking this approach, the Court should therefore consider all available evidence and communications between the parties’ in order to understand the parties’ actual intentions. In outlining why a subjective test was appropriate, the Court pointed to the equitable doctrine that a written contract should not be enforceable when it contradicts the parties’ common intentions at the time that it was entered into.

In the FSHC Group Holdings Case, given the parties’ common intention in respect of the security to be provided by FSHC, the Court took a subjective approach and considered various past communications between the parties. This approach by the Court in the FSHC Group Holdings Case overrides the Court’s previous position (in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38) that the test for rectification is “wholly objective”.

What does this mean for businesses?

Whilst the Court made an order for rectification in the FSHC Group Holdings Case, orders for rectification are generally uncommon and the terms of a written agreement are ordinarily presumed to reflect the parties’ intentions. The subjective approach taken by the Court in this case when assessing the parties’ intentions also significantly raises the standard of proof for a party seeking rectification. It appears that a party wishing to establish a common mistake and seeking rectification will now also have to rely on tangible communications and documentary evidence of such intentions in order to succeed, as opposed to relying on the Court considering the reasonable persons interpretation of the agreement.

Businesses should ensure that the terms of the written agreements that it enters into accurately reflect the parties’ intentions and all relevant rights and obligations are included. The FSHC Group Holdings Case also serves as a reminder that maintaining a detailed record of all communications and negotiations with the other party can be invaluable and may be necessary in future to evidence what was understood and agreed between the parties.