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Rectification: the Court of Appeal restates the law on common mistake

The Court of Appeal has recently clarified the test to be applied in deciding whether the written terms of a contract may be rectified.

FSHC Group Holdings Limited (‘Holdings’) was the holding company of the Four Seasons Health Care Group, which provides elderly care services. In 2012, a private equity investment fund acquired a controlling interest in the group. The acquisition finance included a shareholder loan made by Holdings, which was intended to be subordinate to loan notes issued by other companies in the group. To effect the subordination, Holdings was required to assign its interest in the shareholder loan, so that it would not receive any repayment until other creditors had been paid. By oversight, however, no such assignment was executed.

The omission came to light during a restructuring of intra-group debts in 2016. To rectify matters, it was decided that Holdings and Barclays Bank, the security agent, should execute deeds of accession to certain existing assignments of security which other companies in the group had already entered into. Those assignments, however, contained obligations that were more onerous than a simple assignment of security over loans. By entering into the deeds of accession, Holdings inadvertently made itself a primary obligor to pay the debts of other companies in the group.

Holdings discovered this in 2017 and applied to the court for rectification of the deeds of accession. Barclays resisted the application, arguing that Holdings had undertaken the additional obligations intentionally. The High Court granted Holdings’ application, and Glas Trust Corporation Limited (which had in the meantime replaced Barclays as the security agent) appealed.

Giving judgment in the Court of Appeal, Leggatt LJ considered Lord Hoffmann’s obiter dicta in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, which have been followed in subsequent cases. In Lord Hoffmann’s view, the court could order rectification of a contract for common mistake in circumstances where a reasonable observer would have understood the wording of the contract to be mistaken, even if one of the parties had actually believed the wording to be correct.

Disagreeing with Lord Hoffmann’s approach, Leggatt LJ (with whom Rose and Flaux LJJ joined) held that it was necessary for the parties to have ‘a common intention in respect of a particular matter which, by mistake, the document did not accurately record’. Further, for an application for rectification to succeed, it would be 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 . . . as a result of communication between them, the parties understood each other to share that intention’.

Since it was found that Holdings and Barclays each intended to execute documents which did no more than grant security over the shareholder loan, and had communicated that understanding to each other, it followed that the High Court’s order for rectification would be upheld.

In this case, it was the party resisting rectification (Barclays) which argued that the party seeking rectification should have to show that there was an objective consensus at variance with the documents in question. The Court of Appeal’s rejection of that approach, however, is likely in most cases to make rectification harder to achieve. Applicants for rectification will now have to prove that there was a subjective consensus between the parties, that is to say, an actual common intention inconsistent with the document to be rectified.

Commenting on the reasons for the decision, Leggatt LJ said: ‘As a matter of policy, rectification should be difficult to prove.’ The requirement to prove an actual common intention ‘is rightly a demanding test to satisfy and one which affords appropriate respect to the primacy of the final, agreed, written terms of a contract’.

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

For more information about the above please contact Brendan Biggs from the Corporate Team.

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