Common Mistake: Take Two! What happens when the contractual documentation does not read how the parties meant it to?

Insights - 30/08/2019

The Court of Appeal in the case of FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361 takes a fresh look at the test for the rectification of contracts.

The “rectification” process enables a court to amend a contract if, due to a ‘common mistake’, it doesn’t accurately reflect the intention of the parties. This is a go to piece of law for litigators in cases where there is a struggle to make sense of the parties’ obligations after the fact. The first job is to look at the intention of the parties but this is not as straight forward as you might believe.

Back in 2009, a judgment in the case of Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, stated that the intention of the parties was not to be established according to their own ‘state of mind’ but what an impartial observer would conclude, once presented with all facts. That may surprise you: what does an impartial third party know about your business?

Fast forward ten years, and the Court of Appeal in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] has paved the way for a departure from the 2009 guidance based upon the intention of the parties being judged subjectively rather than objectively in certain instances.

In this case, upon appeal, the court decided that the judge’s remarks in the Chartbrook case were an incorrect statement of the law and highlighted two differing set-ups based on altogether different principles:

Contract to execute: If the parties agree to enter into a contract containing certain terms however the contract they actually end up executing contains different terms, then the court can rectify the executed document and the usual contractual test should be applied, which is an objective test.

No prior contract: If a contract is executed and due to error, the parties’ intentions are not reflected in the terms, then the court can rectify based upon ‘good faith’, which is a subjective test.

The court accepted that proving the parties’ state of mind (“the subject test”) could make rectification problematic. After all, such a test is all well and good until you factor in the googol of differences offered up by the human mind and its perceptions, a significant proportion of which cannot be read in to written or oral communications passed between the parties. The court considered this “new” way of thinking as positive in any event as “the plain terms of the documents create a strong presumption that, in executing them, the parties meant what they said” and should only be departed from in exceptional circumstances.

The appeal court therefore held there was no prior contract, hence the test should be a subjective one. The appeal was dismissed.

Commercial Litigation

As can be seen, this is an important judgment and it shows the tests that should be applied for rectification can be more commercial in certain circumstances. The takeaway is that both parties to a contract should check the wording in detail, not just sign what they think has been written.

If you have an issue or dispute surrounding the enforcement of a contract then please get in touch to discuss your case. Kellie is contactable by phone on 020 8971 1031 or email [email protected]

Other articles from August's newsletter

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.