Rectification of contract: Whether contract terms can be rectified where a mistake was made during a transaction (FSHC Group Holdings Limited v Glas Trust Corporation Limited - 2019)

In large, complex transactions, it can be easy to miss a small piece of detail which is only noticed later on. This case discusses the Court’s approach to rectification of that mistake, and lays down useful tests as to when rectification may be granted.

Rectification of contract: Whether contract terms can be rectified where a mistake was made during a transaction (FSHC Group Holdings Limited v Glas Trust Corporation Limited - 2019)

The background

FSHC Group Holdings Limited v Glas Trust Corporation Limited [2019] concerned an application to rectify two deeds which had originally been executed in 2016 and omitted the assignment of the benefit of a shareholder loan as part of a much wider corporate transaction. The omission was not immediately noticed, and was picked up later, upon a review by the claimant’s solicitor. The claimant applied for rectification.

At first instance it was found that, although the effect of the agreements implied onerous obligations on the claimant, this was not intentional and that, at the time the deeds were executed, no party had appreciated that this would be the effect. They had only intended to grant security over a shareholder loan; the judge allowed the rectification of the deeds to remove the onerous obligations.   

The defendant appealed on the grounds that the judge looked both objectively and subjectively at the intention of the parties. The defendant felt that rectification should be only objective, and that if an objective viewpoint was taken, it would be found that the parties had agreed to all of the terms, including those which were onerous.    

The decision

The Court of Appeal dismissed the appeal, finding in favour of the claimant. The contract may be rectified in circumstances where either:

  1. The document does not reflect the terms of a previously-agreed contract between the parties. This is an objective test, where the terms of the document are determined in the same way as any other contract and agreements are upheld.

Or:

  1. Although the parties may have had a common intention at the time the documents were executed, the documents mistakenly did not contain provisions to reflect the agreement. Entirely subjective based on the parties’ intentions, the parties should also have communicated intentions in order for this test to succeed.

In this case, the second test was relevant and therefore the shared subjective intentions of the parties applied, albeit that these were mistakenly omitted.

Advice and action 

Fundamentally, it is always essential to ensure that all aspects of an agreement are documented, however small in the context of a larger transaction. However, mistakes are made and matters missed, and this case is a useful reference point as to how a Court may interpret an agreement and parties’ intentions which have not been documented.  

Courts will refer to the communications made between the parties at the time in determining their common intention rather than making an assessment on what might reasonably be the case, so parties are advised to keep good records of communications, meetings and discussions which will enable clearer analysis of intentions further down the line.

The Court of Appeal dismissed the appeal, finding in favour of the claimant. Applying the subjective test and assessing the parties’ intentions at the time the agreement was made, the shared subjective intentions of the parties applied and the judge made an order for rectification.

Author

Katie Edwards
Katie Edwards
Associate

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