A note on equitable rectification

Introduction

Equitable rectification provides a separate, distinct and interesting remedy that is available to cure errors in executed agreements. The availability of the remedy can often be critical in circumstances, for example, where the transaction requires registration at the Land Registry or third party rights and interests are affected by the agreements. In landlord and tenant and real estate transactions the remedy has been granted in a myriad of circumstances ranging from disputes about break clauses, rent review, real estate transfers or sale and leaseback agreements. Rectification in these is therefore of more than passing academic interest, its grant nullifying potentially disastrous consequences when an executed agreement incorrectly records the agreement made between the parties. 

The remedy is essentially founded on the well-known contractual concept of mutual mistake. It is a not distant relative to other familiar equitable principles such as estoppel. To that extent, the general rules on which the equitable remedy is founded, carries no mystical or mystifying quality.  If, having identified an error in their executed agreement, good sense or rational mediation does not lead to consensual correction, perceived defects in those instruments are capable of being corrected by judicial intervention.

In Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 A.C. 1101 the House of Lords (as was) confirmed that the remedy was available and would be granted if the requirements enunciated by the Court of Appeal in Swainland Properties Ltd v Freehold Properties Ltd EWCA Div 560 were established.  

The facts

It is perhaps useful to set out briefly the facts in Swainland. The company owned a property that comprised 39 flats.  It retained two flats (that it intended to rent on shorthold leases) but granted long (99-year) leases over the others. Swainland, intending to sell the freehold and took advice as to the appropriate ground rents and value of the property which was assessed to be £5,070 and £60,000 respectively. This was erroneous as the correct sum for ground rent was £4,875 but that was contingent on all the flats being let on that basis. All 39 flats were in due course marketed for £60,000. Swainland in error agreed to sell and ultimately executed a transfer to the Defendant. The transfer included the two flats that Swainland had intended to retain. Following the transfer Swainland marketed and executed long leases over the two flats it had retained. The Defendant claimed ground rents from Swainland in respect of the two flats.  When the error in the transfer was discovered the Defendant refused an offer that there be consensual rectification of the original transfer to exclude the two retained flats. At first instance and on appeal the court was satisfied that Swainland satisfied the test to obtain a decree of rectification.

The principles applicable for grant of decree of rectification

In the court of appeal Lord Justice Peter Gibson considered the availability of rectification and made clear that to obtain the remedy it would need to be shown on balance of probabilities that  “(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake the instrument did not reflect that common intention.” Thus, the parties’ agreement had to be crystallised but the precise words used in defining that agreement were not as relevant as establishing what the true intention was. Therefore, an applying party is likely to be successful if he is able to show that the executed agreement, the lease or transfer for example, is inaccurate though the parties to it laboured under a common mistake that their intentions were, indeed, correctly recorded in the instrument.   

Applying general principles of construction the court tries to discern and set right the terms the parties intended to be reduced into their instrument. By reason of deductive analysis the court attaches meaning to a clause or term of the agreement to give effect o their intention.  

The test is an objective one and so the subjective intentions of the parties, evident in antecedent negotiations, are inadmissible in establishing the true construction to be placed on the agreement. In essence the mere fact that a party makes a bad bargain does not entitle him to contend that the agreement is unduly unfavourable and therefore should be rectified. However, if upon consideration of the context and background it is evident that the parties true intentions are not reflected in the document and a correction ought to be made, then the power of the court is engaged to correct the error.

An illustration

In Cooperative Insurance Society v Centremoor Ltd [1983] 2 EGLR 52 the court ordered rectification on the grounds that it was established that the mutual intention of the parties was the grant of an underlease but, when executed, the agreement had been recorded as a lease that was coterminous with the head lease – and therefore, at law, would have taken effect as an assignment contrary to the true intentions of the parties.     

In fact, having regard to a line of cases that includes Tilfen Land Ltd v London Logistics Ltd [2005] EWHC 1456 and KPMG v Network Rail Infrastructure Ltd [2008] 1 P. & C.R. 11, CA, the remedy is available not just when there is a common mistake. Rectification can be decreed in instances where the mistake is unilateral or where it is the result of negligence on the part of legal advisers.

The role of good faith and fair dealing

Riaz Ahmed v the Secret Garden (Cheshire) Ltd is a case in which the Court of Appeal once again considered an application for a decree of rectification and in which, seemingly, broader principles were introduced as the foundation for grant of the remedy.  In that case, Lady Justice Arden delivering the judgment of the court said, 

“The remedy of rectification entitles the court to give effect to the reasonable expectations of contracting parties as to the meaning of their executed agreements. Rectification is, in a sense, an instance of English and Welsh Law applying a concept of good faith (that is fair dealing) without actually calling it such”.  

Both parties may undoubtedly have differing subjective expectations about their agreement.  Making the grant of the remedy dependent on those expectations does not seem entirely consistent with the requirements set out in Swainland.     Nor is the importation of concepts such as “good faith” and “fair dealing” either apt or necessary. The parties to insurance contracts are of course required to demonstrate good faith. Generally, the principles of good faith operate as a mechanism of constraint on the actions of fiduciaries particularly when dealing with trust property.  And fair dealing is a concept that would not necessarily apply unless the property the subject of the transaction was itself held under some fiduciary relationship and there was a conflict in the fiduciary dealing with that property. Therefore, such concepts seem neither technically applicable nor a pre-requisite for intervention to correct the inaccurate recording of an agreement.   

It may follow that an applicant for a decree of rectification does not need to show “sharp practice” by the other contracting party.  “A” may know that “B” has a mistaken belief but does nothing to correct that mistaken belief. If “A” benefits from the mistake that would in fact be a circumstance in which it could be said, amongst other things, that there had been sharp practice. “B” is entitled to rectification of the document without having to establish the sharp practice as, self-evidently, the agreement could not have accorded with the true intended agreement between the parties – see, for example, Thomas Bates & Sons v Wyndhams (Lingerie) Ltd [1981] 1All ER 1077.

The apparent melding of the doctrines of “fair dealing” and “good faith” serves little or no purpose in applications for rectification and their introduction may amount to an unnecessary and cumbersome development. 

The power of red ink and verbal rearrangement

Rectification is a remedy of very last resort. Rarely granted (and then only in what are described as the most  “obvious” cases), the remedy exists not to allow a disgruntled party to seek to re-write his agreement but to correct readily ascertainable errors in the recording of the agreement. To achieve that outcome the courts power is already extensive. As Lord Hoffman says in Chartbrook:

“What is clear…is that there is not so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant…”

Therefore, a decree of rectification should be available as a simple straightforward means of curing obvious errors in the recording of agreements where the parties themselves cannot resolve the matter or one party seeks to take advantage of the error. A widening of the principles on which the remedy is granted may be inappropriate and does not necessarily assist parties that are disputing whether a correction should be made or not.