In FSHC Group Holdings v Glas Trust Corporation,  EWCA Civ 1361, the Court of Appeal has clarified the legal test for rectification of a contract due to a common mistake.
What is rectification?
Mistakes sometimes happen when contracts are created. This results in a disparity between what the parties intended and what is recorded. In this situation, the court may order rectification of the contract. If rectification is granted, the court will substitute the original wording with corrective text that reflects what the parties really wanted the agreement to say.
To be successful in obtaining rectification, it is necessary to show that either:
- the document fails to give effect to a prior concluded contract (this is determined objectively); or
- when the parties executed the document, they had a common intention in respect of a particular matter which, by mistake, the document did not accurately record. Here, 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." In other words, as a result of communication between them, the parties understood each other to share that intention (this is determined subjectively).
The claimant was a parent company that claimed rectification of two deeds, the purpose of which was to provide security in connection with a corporate acquisition. The case involved a large and complex transaction. The missing security was an assignment of the benefit of a shareholder loan. This was a small detail, and the missing documentation went unnoticed for a number of years. When the missing security was eventually discovered, new deeds were executed. However, the deeds not only provided the missing security over the shareholder loan but also placed more onerous obligations on the claimant.
The trial judge found as fact that when the deeds were executed, both parties understood and intended the deeds to provide the missing security. They intended them to do no more or no less than this. This was both their subjective and objective intention, and the additional obligations were an oversight that were not intended by either party. The trial judge therefore granted rectification of the deeds to exclude the additional onerous obligations that they placed on the claimant.
The appeal judge agreed with the trial judge that as a matter of fact, the parties shared a common intention. He found that they made a common mistake about the legal effect of the executed deeds. Based on the evidence at trial, he found that the parties intended (and understood each other to intend) that the deeds did no more or less than assign the missing security. Although not strictly necessary, the judge also held that an objective observer would have concluded that the parties held a common intention. In these circumstances, the appeal judge granted the remedy of rectification.