Title: Reviewing the recent Court of Appeal decision relating to the availability of contractual rectification in cases involving a common mistake in the case of FSHC Group Holdings Ltd v Glas Trust Corporation Ltd

The Court of Appeal recently considered the availability of rectification as a remedy in cases where there is a common mistake in FSHC Group Holdings Ltd v Glas Trust Corporation Ltd [2019] EWCA Civ 1361.

In the case the Claimant sought rectification of two deeds against the Barclays Bank plc as security agent for the lenders in question in the lower court. Glas Trust Corporation Ltd replaced Barclays Bank plc as security agent and as the party to the proceedings after the first instance decision and appealed to the Court of Appeal. Under the agreement the Claimant was to provide security for a corporate acquisition.

The trial judge, the late Henry Carr J, found as a fact that, when the deeds were executed, both the Parent’s representatives and those acting for Barclays understood and intended the deeds to do no more than provide the missing security. However, the mechanism chosen to achieve this was for the Parent, by entering into the deeds, to accede to two pre-existing security agreements. The effect of acceding to these agreements was not only to provide the missing security over the shareholder loan but to undertake additional, onerous obligations. The judge found that no one involved in the transaction realised before or at the time of execution of the deeds that this was their effect. The judge also concluded that it was both ‘objectively’ and ‘subjectively’ the common intention of the parties to execute a document which satisfied the Parent’s obligation to grant security over the shareholder loan and which did no more than this. In these circumstances, the judge granted rectification of the deeds so as to exclude from their scope the additional obligations.’

The Appellant did not challenge the findings at first instance and instead submitted that the test to be applied in cases of rectification is a purely ‘objective one’ and that the objective intention of the parties as they would appear to a third party observer is a ‘question of law’ which the Court of Appeal can form its own opinion on. The Appellant argued that the evidence, and in particular the communications between the contracting parties ‘would not have led an objective observer to conclude that the parties intended to do anything other or less than procure the [Claimant’s] accession to all the terms of the pre-existing security agreements, including… additional obligations’.

The Court noted that historically rectification, which is an equitable remedy, was concerned with amending contracts which failed to reflect the ‘actual intention of the parties… as a matter of psychological fact’. Referring to Lord Hoffman’s judgment in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 the Court recognised that a different approach has been taken recently where there is a written contract and that the test to be applied in Lord Hoffman’s view is in fact an objective one ‘meaning by this what a reasonable observer with knowledge of the background facts and prior communications between the parties would have though their common intention at the time of contracting to be’. These comments by Lord Hoffman in Chartbrook were, notably, obiter dicta.

Leggat LJ noted that Lord Hoffman’s views in Chartbrook have been heavily relied upon and have proved controversial, in particular due to the fact that they run against the general approach to equitable rectification where there is a mistake.

In FSCH the issue of which test was the correct one was in issue, with the Appellant maintain that an objective approach should be taken and the Respondent argued that the parties must actually be mistaken about the content or effect of the contractual document which they executed. That requires it to be shown that the document failed to give effect to what the parties subjectively intended. The Respondent argued that this was a matter of primary fact not law.

The Court took care to set out the basis of the law the underpinning theories, and the relevant precedents which can be reviewed in detail at the above link.

The Court of Appeal rejected the Appellant’s case that the test should be an objective one and found that there was an unfairness to the approach in Chartbrook, which incorrectly stated the law in Lord Hoffman’s obiter remarks. The Court found instead that

‘before a written contract may be rectified on the basis of a common mistake, it is necessary to show either (1) that the document fails to give effect to a prior concluded contract or (2) that, when they executed the document, the parties had a common intention in respect of a particular matter which, by mistake, the document did not accurately record. In the latter case it is necessary to show not only that each party to the contract had the same actual intention with regard to the relevant matter, but also that there was an “outward expression of accord” – meaning that, as a result of communication between them, the parties understood each other to share that intention.’

There is, therefore, no further requirement to establish under an ‘objective’ test and on the basis of evidence before the Court and objective intention.

The Court of Appeal found no reason to interfere with the decision at first instance to order rectification.

The principles that agreements must be kept and that written agreements will prima facie set out that agreement are important ones, and rectification is not a easily obtainable or common remedy. Indeed the Appellant cited Lord Walker’s dicta in Pitt v Holt [2013] UKSC 26 in its submissions, which I repeat in part, that ‘rectification is a closely guarded remedy, strictly limited to some clearly established disparity between the words of a legal document, and the intentions of the parties to it’. If it is to be sought though it is important to understand the test that will be applied, to remember that it is not the objective one set out by the Appellants in this case, and to note that Lord Hoffman’s comments in Chartbrook should not be applied in the future.