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Peter Robinson discusses the rectification of contracts

  • October 14, 2019
  • By Peter Robinson, Partner

Horsebeans and Housing Associations – Rectification for common mistake finally decided?

Rectification as a remedy

“Rectification is an equitable remedy by which the court may amend the terms of a legal document which, because of a mistake, fails accurately to reflect the intention of the parties to it” [1]

The following decisions illustrate the basic principle of the remedy (and explain the alliterative title):

Frederick E.Rose (London) Limited v William H.Pim Junior & Co Limited [1953] 2 QB 450

Rose, a London merchant, placed an order with Pim for Moroccan horsebeans, having discussed and agreed with him that this commodity would be accepted by Rose’s Egyptian buyer as “feveroles”. Both parties were mistaken, in Egypt horsebeans were not feveroles. Rose sought rectification of the contract on the basis that both parties had intended to buy and sell feveroles. The Court of Appeal  dismissed the claim. The contract meant what the parties had said in it (horsebeans) not what they had intended to say in it (feveroles).

Daventry District Council v Daventry & District Housing Association Limited [2012] 1 WLR 1333

The District Council agreed to transfer its housing stock and Housing Department employees to the Housing Association. The linked staff pension fund being transferred had a £2.4 million deficit. At one stage it appeared that the parties had agreed that the Housing Association would take over responsibility for the deficit but, in finalising the contract, this was amended so that the Council  remained contractually responsible. The Council applied for rectification of the contract which was, initially, denied but then allowed (by a majority) in the Court of Appeal.

Common Mistake and continuing common intention

Rectification based on common mistake is based on showing “that at the time of executing the written contract the parties had a common intention (even if not amounting to a binding agreement) which, as a result of mistake on the part of both parties, the document failed accurately to record” [2].

Until the decision in Josecelyne v Nissen [1970] 2 QB 86 decided otherwise, the courts had concerned themselves with deciding whether there had to be a prior concluded contract for rectification of subsequently mistaken documentation of that contract to be rectified. But in Britoil plc v Hunt Overseas Oil Inc [1994] CLC the Court of Appeal (Lord Hoffman dissenting) rejected an argument that the parties’ subjective states of mind were irrelevant for the purpose of determining whether a written contract should be rectified and a wholly objective test should, instead, be applied

The Chartbrook case – Lord Hoffman’s final decision

In Chartbrook Limited v Persimmon Homes Ltd [2009] UKHL 38,  the House of Lords had to decide on the interpretation of a formula in a contract which had been entered into after detailed negotiations for calculating the financial payment under an overage agreement by Persimmon to Chartbrook in respect of a completed development. The respective parties’ interpretations of the amount payable under that formula were £900,000 (Persimmon) and some £4.4 million (Chartbrook).

The court held in favour of Persimmon but on the basis that Chartbrook’s interpretation of the formula made no commercial sense. A claim for rectification raised in the alternative by Persimmon did not , therefore, need to be decided. Nevertheless Lord Hoffman, giving his final decision in the House of Lords, expressed an opinion on the issue of rectification which the other members of the appellate committee either “agreed or saw no reason to differ from[3] .

Lord Hoffman’s agreed with an argument advanced by Persimmon based on an article in which it was said that

“…the prior consensus or ‘continuing common intention’ which must be shown in order to found a claim for rectification 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” [4].

Post Chartbrook, what the continuing prior consensus/continuing common intention actually would have to be decided objectively. That would be so even where the ‘mistaken’ party had understood the terms agreed in pre-contract negotiations as well as the wording of the contract to mean something else).

Critically, however, Lord Hoffman’s decision, being academic given the decision made by their lordships, was obiter dictum. Therefore, it would not be binding on lower courts in the future.

FSHC – Chartbrook revisited

A considerable amount of juridical soul searching over the correctness of Lord Hoffman’s decision in Chartbrook ensued. In the Court of Appeal in Daventry, LJs Neuberger and Toulson expressed “considerable reservations about the correctness of Lord Hoffman’s analysis[5]. Outside the courts, academics and judges (including Lord Hoffman himself) debated the issue in a number of articles and lectures [6] .

In the recent decision in FSHC the the Court of Appeal unanimously, for the present at least, the judicial approach to the issue of how continuing common intention should be established.

The litigation emanated from the documentation of the financing, in which Barclays (and its successor Glas acted as security agents) of the acquisition of a majority shareholding in FSHC by its parent company (‘Parent’).

By oversight, FSHC did not execute an assignment of the benefit of a shareholder loan made by FSHC as required by the funding requirements. This was discovered in 2016. To correct the oversight, and to remedy the consequent breach caused by it, FSHC was advised to accede to two agreements (‘IRSAs’). The purpose of the accession deeds being entered into (FSHC contended) being to enable FSHC to comply with its obligations by ensuring that its interests in the shareholder loan were pledged as security as part of the financing. However, the effect of FSHC acceding to the IRSAs was however, also rendered FSHC liable as a guarantor to pay the debts of other companies  and to secure that guarantee by security over the Parent’s other assets.

FSHC lodged a CPR Part 8 claim for rectification or amendment of the accession deeds so as to limit the effect of accession to pledging its interests under the shareholder loan to Barclays.

At first instance it was found that both parties subjectively had a common intention at the time of execution of the accession deeds to execute a document which satisfied the FSHC’s obligations to grant security over the shareholder loan, and which would do no more than that.

On appeal the court unanimously decided that The Parent and Barclays each intended to execute a document which satisfied the Parent’s obligations to grant security over the Shareholder’s Loan and nothing else. There had been a successful communication of that by the Parent to Barclays of the Parent’s understanding of the purpose of executing the accession deeds and, as such, they had a common intention. The Parent’s application for rectification was granted.

Lord Justice Leggatt drew a distinction between

  • a mistake in the final document which has the effect of failing to give effect to a prior concluded contract (which would be decided by objectively construing the earlier contract) ; and
  • where the parties had a common intention in respect of a particular matter which, by mistake, the document did not accurately record. In that case 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’ and that there had been an outward expression of that accord – meaning that…the parties understood each other to share that intention[7].

The second case applied in FSHC. LJ Leggatt concluded that the parties should not be held to the terms of an objective consensus reached during negotiations but never intended to be binding. To adopt this course would be to do exactly what the decisions in cases like Rose v Pim provided that the courts should not do; to rectify the contract made by the parties and not simply the document which fails to give effect to the terms of a contract.

Why this matters

In FSHC the Court of Appeal stated that the objective approach approved in the Chartbrook decision  gave rise to “potential unfairness[8]. As LJ Leggatt put it [9].

“We cannot in these circumstances see any 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 objective meaning of the final document by which the parties intended to be bound”

The demise of the objective test therefore gives the ‘wronged’ party the opportunity to rectify a contract rather than face the imposition of a result which it had not agreed to being imposed on it by an objective construction of what the parties intended. However the Court made it clear [10] that “a “subjective consensus”…is harder to prove than an “objective consensus””.

Unless and until FSHC is overruled by the Supreme Court the “potential unfairness” of the objective consensus test has been put to rest. However, the onus is firmly on those involved in documenting a transaction to do so clearly and in terms that are clearly understood by the parties to the contract. Seeking the remedy of rectification for common mistake is expensive, time consuming and difficult to approve.

 

[1] Lord Justice Leggatt in FSHC Limited v Glas Trust Corporation [2019] EWCA Civ 1361 ,  [6] (“FSHC”)
[2]  L.J.Leggatt at [44] in FSHC
[3] L.J.Leggatt at [114] inFSHC
[4] L.J.Leggatt at [110] in FSHC and based on an article by Marcus Smith (as he then was) ‘Rectification of Contracts for Common Mistake, Joscelyne v Nissen and Subjective States of Mind’ (2007) 123 LQR 116.
[5] LJ Leggatt at [119] in FSHC
[6] “Commonsense Principles of Interpretation and Rectification ?” (2010) 126 L.Q.R – Professor David McLauchlan, “Rectifying the course of Rectification” – Paul S.Davies (2012) 75 Modern Law Review, “Does the law need to be rectified – Chartbrook Revisited – LJ Patten – 2013 Chancery Bar Association annual lecture, ‘Does Rectification require Rectifying ?” – Lord Toulson – 2013 TECBAR lecture, “Contract Formation and the Fog of Rectification – Sir Terence Etherton , “Refining Rectification” – Professor David McLauchlan (2014) 130 Law Quarterly Review, “Rectification and other Mistakes” – Lord Hoffman, 2015 Lecture to the Commercial Bar Association
[7] [176] in FSHC
[8] [175] in FSHC
[9] [175] in FSHC
[10] [174] FSHC 174

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