FSHC Group Holdings Limited v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361

Key point

Overruling Chartbrook, the test for rectification of a common mistake is objective where rectification is based on a prior contract but subjective where it is based on a common continuing intention.

Facts

  • FSHC (C), agreed to provide security for a transaction to GLAS (D), the security agent of the creditors
  • By mistake, C failed to assign a security interest to D
  • When C discovered this mistake, it entered into two security deeds which the parties understood was to provide not greater security to the creditors than the original missing security
  • In reality, the two deeds created much more onerous requirements on C
  • C sought rectification of the deeds

Held (Court of Appeal)

Rectification was granted; there was a common mistake in the deeds based on the continuing common intention of the parties, assessed subjectively.

Legatt LJ

Doctrine of rectification for common mistake

  • A written contract may be rectified for common mistake where (at [176])
    • (1) The document fails to give effect to a prior concluded contract or
    • (2) The parties had a common intention, when they executed the document which, by mistake, the document did not accurately record
  • In the former case,
    • The meaning of the prior contract is to be objectively assessed: [141]
  • In the latter case,
    • The common intention must be actual
    • The must be an outward expression of accord, meaning that as a result of communications between them, the parties understood each other to share that intention: [176]

Justifications for the test of actual common intention

  • Chartbrook was wrong on rectification
    • Lord Hoffmann’s observations in Chartbrook is strictly obiter: [133]
    • The approach in Chartbrook should be abandoned on the basis of principle, precedent and policy reasons: [139]
  • Principle
    • There is no anomaly in applying an objective test where rectification is based on a prior concluded contract and a subjective test where it is based on a common continuing intention as different principles are in play:
      • Where there is a prior contract, rectification is based on the principle is that agreements must be kept: [141]
      • Where there was no prior contract, rectification is based on the equitable principle of good faith: [142]
    • Why do different principles apply?
      • Where there is no prior contract, the court should not hold the parties to the terms of an objective consensus reached during negotiations but never intended to be binding: [143]
      • It is the very nature of a formal contract that it should have priority over a previous informal agreement: [144]
      • Rather, the correct justification is that the conscience of a party to enforce the formal agreement as it is contrary to what the parties have actually intended to be the terms [146]
    • It is a justified exception to the objective test for interpretation
      • The certainty provided by objectivity in interpreting contracts is outweighed by its injustice to the mistaken party: [150] – [151]
      • 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”: [151]
  • Policy
    • Certainty
      • The test of actual common intention is rightly a demanding test to satisfy that affords appropriate respect to the primacy of the final contract
      • Allowing terms to be rectified based on objective common intention does not adequately protect the certainty of commercial transactions
      • “As a matter of policy, rectification should be difficult to prove”: [174]
    • Injustice
      • The potential unfairness of the objective approach in Chartbrook was proven by the facts of the case itself
      • There was no equity in treating Chartbrook as bound by the objective meaning of communications which were not intended by either party to be binding rather than the final document by which the parties intended to be bound: [175]

Commentary

Rectification for unilateral mistake

  • Legatt LJ also stated the requirements for rectification for unilateral mistake (at [105], [165]):
    • One party made an actual mistake that the contract reflected what it understood to be the parties’ actual common intention
    • The other party had knowledge of this mistake

Interpretation and rectification

  • Some legal commenters have argued that Lord Hoffmann’s judgments in ICS v West Bromwich and Chartbrook have led to the virtual assimilation of interpretation and rectification
    • Lord Hoffmann had developed an expansive doctrine of contextual interpretation under which the words of a contract can be corrected based on the context and commercial common sense, stating in Chartbrook there is no “limit to the amount of red ink or verbal rearrangement or correction which the court is allowed” at [25]
    • At the same time, the objective test for common continuing intention brought rectification in line with interpretation and lowered the evidential bar since it is more difficult to prove actual common intention
  • The approach in FSHC can be viewed in line with the pushback against Lord Hoffmann’s expansive approach to interpretation in the more recent interpretation cases
    • The cases Arnold v Britton and Wood v Capita emphasised greater fidelity to the express words of the contract and that correction of words should only be allowed in cases of ambiguity
    • In FHSC the court sets up a higher evidential bar to rectification by requiring actual common intention, which is more difficult to prove evidentially than objective common intention
  • Overall, it can be seen that there has been a correction to the judicial trend that favours certainty and the finality of formal contracts
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