Mistakes sometimes occur when contracts are created with the result that there is a discrepancy between what the parties intended and what is actually recorded.
In such a scenario the Court may order rectification of the contract. Rectification is a discretionary remedy available to the Court whereby the Court will substitute the original wording with the corrective text that reflects what the parties really wanted the agreement to record.
In order to obtain rectification, it is necessary to show that either:-
• the document in question failed to give effect to a prior concluded contract (which is objectively determined); or • when the parties executed the document, they had a common intention in respect of a particular matter (subjectively determined) which, by mistake, the document did not accurately record.
In the case of FSHC Group Holdings Limited v Glas Trust Corporation Limited, FSHC was a parent company that claimed rectification of two deeds, the purpose of which was to provide security in connection with a corporate acquisition.
The case involved a large complex transaction.
The missing security was an assignment of the benefit of a shareholder loan. This was a small detail, and the missing documentation went unnoticed for a number of years.
When the missing security was eventually discovered, new deeds were executed. However, the deeds not only provided the missing security of the shareholder loan but also placed more onerous obligations on FSHC.
The Judge in the first instance found that when these were executed both parties understood and intended the deeds to provide the missing security. They intended them to do no more or no less than this. This was both by their subjective and objective intention and the additional obligations were an oversight that was not intended by either party.
The Judge therefore granted rectification of the deeds to exclude the additional onerous obligations.
Glas appealed arguing that the common intention of the parties must be determined objectively and in doing so, the proper conclusion was that the parties intended and agreed that FSHC would take on the additional obligations.
However, the Court of Appeal upheld the trial judge’s decision finding that FSHC and Glas held a common intention to do no more and no less than fill the security gap which FHSC had identified and which had been communicated to and understood by each party.
This decision sets out the tests to be applied in claims for rectification and provides clarification for this complex area of the law. With its focus on the parties’ actual intention in any case where there was no formal prior contract, it is likely to lead to a more commercial approach by the courts. However, the parties should still carefully check not only the contract that they intend to sign but also any other documents which the contract refers to.
If you are involved in any contractual dispute or require assistance in having a contract drawn up then Blacks Solicitors can assist. Please contact Luke Patel on 0113 227 9316 or by email at “LPatel@LawBlacks.com”.