Home > Rectification Rectified – FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd

Rectification Rectified – FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd

12th August 2019

Rectification Rectified – FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd

In this key decision, the Court of Appeal gives detailed consideration to the principles underpinning various doctrines in contract to ascertain the correct test for rectification of a written instrument because of the presence of a common mistake.

Background

The Claimant-Respondent (“the Parent”) was the holding company of a large corporate group. In 2012, the Parent had agreed to provide security in connection with a complex transaction for a corporate acquisition in which the Defendant-Appellant was the security agent.Such security was intended to be by way of assignment of the benefit of a shareholder loan.  It transpired in 2016, however, that, by an oversight, the Parent had not actually executed the relevant assignment.  Thus, two deeds were executed on 18 November 2016 with the intention that they would provide the missing security.

The mechanism chosen to provide the security was accession by the Parent to two other security agreements, executed by other subsidiaries as part of the transaction, and to which the Defendant-Appellant was also party as security agent.  These other security agreements, however, did not merely provide for the missing security, but also imposed additional, and more onerous, obligations on the Parent. The Parent therefore claimed rectification of the 2016 deeds.

In the court below, the judge found that: (i) no one involved in the transaction realised before or at the time of execution of the deeds that their effect went far beyond provision of the missing security; (ii) 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. The judge therefore granted rectification of the deeds so as to exclude from their scope the additional obligations.

The security agent appealed on the basis that, following the speech of Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, the common intention of the parties is to be determined objectively in a test analogous, if not identical, to that applicable to the interpretation of contracts.

The Law

The Court of Appeal began with the traditional jurisdiction of equity to correct mistakes in written instruments by rectification.  The old cases clearly showed it was settled law that the alleged mistake in the written instrument was to be considered against what the parties had subjectively intended that instrument to record.  The parties were, therefore, expected to give evidence as to what had been in their minds and what they had intended when the instrument was executed.

In the 19th century, however, a new line of authority emerged which held that a contractual document could only be rectified to bring it into conformity with a pre-existing contract which the subsequent document had, owing to a mutual mistake, failed to record accurately.  Rectification was, therefore, akin to specific performance of the prior contract.

Dicta in subsequent cases cast some doubt on this so-called ‘antecedent contract’ theory.  These cases suggested that it was not necessary to find a binding contract antecedent to the document sought to rectified; it sufficed to show there was a ‘common continuing intention’ between the parties regarding a particular provision or matter recorded in the document.  Alternative terms for what was required were: “concurrent intention”; “common agreement”; “real agreement”; “true consensus of the parties”; and “true consensus of their minds.”

The controversy was finally resolved in Joscelyne v Nissen [1970] 2 QB 86. In this case, the Court of Appeal clearly and authoritatively established that a prior concluded contract is not necessary for rectification; a common intention continuing at the time when a contract is made is sufficient, subject only to the qualification that some “outward expression of accord” is required.  Thus, it is not sufficient that each party privately and independently had the same intention as the other; there must be some outward communication and agreement of such subjective intentions between the parties.  Such outward expression of accord, however, need not be an express declaration; the shared understanding may be tacit.

The law was thus apparently settled, until Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38.  As the House of Lords allowed this appeal on the issue of contract interpretation, the issue of rectification did not arise. Nevertheless, while acknowledging that the question was “academic”, Lord Hoffmann, with whom the other members of the Appellate Committee agreed, expressed the opinion that, had it not succeeded on the issue of interpretation, the appellant would have been entitled to an order for rectification and that the test, essentially, was the same.  

The argument was that the requisite “continuing common intention,” though not required to be a legally binding contract, need not involve any concurrence of the parties’ actual subjective intentions. Its existence must be ascertained objectively by asking what a reasonable observer would have understood the intentions of the parties to be.

Although this part of Lord Hoffmann’s opinion was expressly acknowledged as obiter dicta, the principles have been applied in subsequent cases.  Noting, however, that in those cases, the correctness of the approach was not in dispute, the Court of Appeal in the present case considered it necessary to decide whether the dicta in Chartbrook was correct in law.

The Decision

As a matter of principle, the Court of Appeal recognised that rectification may be granted in two circumstances: (i) where there was an antecedent contract which the subsequent document sought to be rectified failed to record accurately; and (ii) where the parties had not made a binding prior contract but had a continuing common intention in respect of a particular matter in the document sought to be rectified.

The key finding was that the juridical bases for granting rectification in each case differ.  Where there is a prior contract, rectification is analogous to specific performance of this antecedent contract and the remedy is granted on the principle that agreements must be kept.  The matter for the court therefore is to ascertain the intentions of the parties, expressed in the prior contract, according to the objective standard applicable to ordinary contractual interpretation.

Where there is no prior legally binding contract, however, the principle differs. Here, the basis for granting rectification is the equitable doctrine that a party will not be allowed to enforce the terms of a written contract, objectively ascertained, when to do so is against conscience because it is inconsistent with what both parties in fact intended (and mutually understood each other to intend) those terms to be when the document was executed. The mistake effectively operates as a fraud, and the jurisdiction for equity to intervene is ultimately based on the principle of good faith and conscience.

In the absence of a binding contract, therefore, provided that the common intention is clearly demonstrated, the Court of Appeal considered that

there is no sound justification for giving effect to the meaning that a hypothetical reasonable observer would have attributed to the words used in preference to what the parties actually intended the effect of their contract to be.”

Given the distinct bases for the grant of rectification, the Court of Appeal further did not consider it anomalous to apply an objective test where rectification is based on a prior concluded contract and a subjective test where it is based on an actual consensus ad idem as to a common continuing intention.

Applying this analysis to the present facts, as found by the judge below, the Court of Appeal considered it was a ‘classic case for rectification’ and dismissed the appeal.  Other factors the Court considered relevant were: (i) the fact that the Parent could have executed a unilateral instrument assigning the benefit of the loan to provide the missing security, and if rectification had been sought, the court would have undoubtedly been concerned with the Parent’s subjective intentions; and (ii) on the findings of the judge below, this was clearly a case in which the parties had been mistaken as to the legal effect of the deeds, not their commercial consequences.

Commentary

This closely reasoned case provides insights into several different issues of legal principle.  Not only does it provide much-needed clarification on the law of rectification, the judgment also merits reading in full for its discussions of other doctrines of contract law, notably mistake and contractual interpretation; the similarities and differences between bilateral documents and agreements, such as contracts, and unilateral documents, such as wills; and the doctrine of binding precedent.

In respect of rectification, the case clarifies that there are two different tests for rectification, depending on whether or not there is an antecedent contract.  Where there is such contract, the test is objective.

Where there is not, the subjective test for the parties’ actual intentions, coupled with the requirement that there be some form of outward expression of accord raises the threshold for the grant of the remedy. Although it has been suggested in academic commentary that the outward expression of accord is more a question of evidence, not of the substantive law, the Court of Appeal expressly held that such proposition was not supported by authorities.  Furthermore, the Court of Appeal also rejected the academic criticism of the subjective test as likely to result in fewer contracts being rectified.  In the view of the Court of Appeal, such criticism was in principle wrong, and rather endorsed the alternative position, which practitioners should bear in mind:

“formal, written contracts should be presumptively upheld and instances of rectification should be rare. Any other approach would undermine the importance commercial parties put on the final written agreement.”

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Sally Wollaston
Sally Wollaston
Business Development and Marketing Director
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