Fixing Mistakes in Contracts: Test for Rectification Clarified

The state of the English law regarding the way in which mistakes will be dealt with, or rectified, in written contracts has been the subject of significant judicial and academic commentary in recent years.

Last week, the Court of Appeal in FSHC Group Holdings Ltd v Glas Trust Corporation Ltd  [2019] EWCA Civ 1361 clarified the relevant test, holding that a written contract will be capable of rectification for common mistake in two circumstances:

1. where the parties enter into a prior binding agreement but then, by mistake, execute a contract containing different terms – in these circumstances the court will determine the correct terms by reference to the objective circumstances and will rectify the contract accordingly; and
2. where there is no prior binding agreement but the parties share a common intention which, by mistake, is not reflected in the executed contract – in these circumstances the court will determine the correct terms by reference to the parties’ subjective intention (which must have been held at the time the contract was executed and must have been the subject of an “outward expression of accord”).

This is an important case which demonstrates the relevance of subjective intention to the law of rectification for common mistake.

The decision

In this case, the claimant sought rectification of two deeds executed in 2016 between the claimant and a security agent (Barclays, later replaced by GLAS Trust Corporation Ltd). The claimant’s lawyers discovered that certain security intended for a 2012 transaction had not been provided, and the claimant acceded to two existing security agreements by deed in order to plug the gap. In fact, the agreements placed additional onerous obligations on the claimant which the parties had not intended.

The first instance judge held that it was the parties’ objective and subjective common intention that the claimant accede to the agreements only to provide the missing security. He therefore ordered rectification to exclude the additional obligations.

The Court of Appeal agreed that rectification should be ordered. Following a detailed review of the evolution of the doctrine of rectification and the relevant case law, the Court concluded that the parties’ intentions should be assessed subjectively (i.e. by reference to the actual understanding of the parties at the time the relevant contract is executed). In doing so, the Court declined to follow Lord Hoffmann’s much-quoted obiter opinion in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 that a purely objective approach should be adopted.

In respect of the requirement that there be an “outward expression of accord”, the Court observed that the shared understanding could be tacit, and did not require the parties to expressly state their intention. In this case, the parties had not expressly stated that they did not intend the claimant to take on additional obligations, but the fact that they mutually understood each other to share this intention was apparent from the communications around the missing security.

Practical implications

In practice, the test for rectification remains a demanding one to satisfy, and the Court’s acceptance of a subjective test for common mistake where there is no prior binding agreement may lead to fewer contracts being rectified. The Court of Appeal embraced this reality, noting that “rectification should be difficult to prove.”

As with all rectification cases, this case serves as a good reminder to contracting parties, and their lawyers, to take care in the drafting and reviewing of contractual documents.