Court of Appeal clarifies test for rectification

Rectification is a discretionary remedy granted by a court which allows a contractual document to be corrected with retrospective effect if a mistake means that it does not reflect the intention of the parties. This may arise, for example, where a scheme provides for greater benefits than intended by the employer and trustees due to a mistake in the drafting of the trust deed and rules. The claimant must be able to demonstrate that the parties had a common intention in respect of the particular issue to be rectified. Following comments made by the House of Lords in the 2009 case of Chartbrook Ltd v Persimmon Homes Ltd, the courts have tended to use an objective test for establishing intention, looking at what an impartial observer with knowledge of the background facts and communications would have thought the parties’ common intention to be. However, in the recent case of FSHC Group Holdings Limited v Glas Trust Corporation Limited, the Court of Appeal held that this is not the correct test, ruling that intention must be established subjectively, not objectively.

The dispute arose out of the execution of two deeds by which FSHC Group Holdings Ltd was to provide security to a security agent. The deeds also imposed additional and more onerous obligations on FSHC, which no one involved in the transaction had realised at the time of their drafting and execution. FSHC sought to rectify the deeds on the basis of common mistake.

The Court of Appeal clarified the legal test for assessing whether there was a common mistake in two scenarios. Firstly, where a document failed to give effect to a prior concluded contract, the terms of the prior contract must be objectively determined. Secondly, where a document failed to give effect to a common intention, the existence of that intention must be established subjectively by looking at evidence of the parties’ actual state of mind. It must also be shown that the parties understood each other to share that intention. On the facts of this case, the court granted rectification on the basis that the deeds did not reflect the parties’ shared subjective intention.

 The Court of Appeal has provided welcome clarification of the test for rectifying a contractual document on the grounds of common mistake. Although this was a commercial case, it will also be relevant to applications for rectification of mistakes in pension scheme documents. Claimants will now have to prove not only that they had a particular intention which was shared by the defendant, but also that they understood one another to share that intention. This will require substantial documentary evidence of the parties’ intentions at the time of drafting the document, such as contemporaneous meeting minutes, emails, heads of terms, notes of telephone conversations and professional advice. Although this means that successful claims are likely to be rare, the Court of Appeal also stressed that, as a matter of policy, rectification should be difficult to prove, since there must be a presumption that written contracts will be upheld. This case also highlights the importance of checking all contractual documents before signing to ensure that they reflect the intended agreement between the parties. It is not yet known if the decision will be appealed to the Supreme Court.