I am increasingly certain that most problems can be solved or explained by examining the sayings of one of last century’s finest philosophical minds: Winnie-the-Pooh. The great bear’s famous thoughts on when the written word goes wrong – “My spelling is Wobbly. It’s good spelling but it Wobbles and the letters get in the wrong places” – neatly encapsulate the difficulties to be overcome when considering a contract which, because of a mistake or mistakes, fails to reflect what the parties had meant it to say. However, when the letters in a contract get in the wrong places, or the wrong letters are used, the parties cannot turn to Christopher Robin or Owl for help. Instead, they ask the courts to consider the equitable remedy of rectification.
Until recently, litigants could do so with a degree of certainty that their letters would be put in the right places. As Leggatt LJ (with whom Flaux and Rose LJJ agreed) explained in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361, “for many years and, indeed, centuries”, the law on rectification was relatively clear. The court had to identify the common intention of the party or parties. The test was subjective and depended on evidence from the parties as to what they had intended the contract to say.
Key point
In an important judgment, the Court of Appeal has clarified the two different tests to be applied to the rectification of written contracts for mutual mistake
However, at least so far as contracts in writing were concerned, that approach seemed to change following the decision of the House of Lords in Chartbrook Ltd v Persimmon Homes [2009] UKHL 38; [2009] 3 EGLR 119. In what was an obiter comment (albeit one with which each of the other judges agreed), Lord Hoffmann proposed that the test for rectification of written contracts was objective and not subjective. His approach was analogous to part of the test he established for contractual interpretation more generally in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 1 EGLR 57 and Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28. According to Lord Hoffmann, a written contract would be rectified to show the terms which a reasonable observer with knowledge of the background facts and prior communications between the parties would have thought reflected their common intention at the time the contract was executed.
That decision has been controversial. Leggatt LJ acknowledged the problem. On the one hand: “Great weight has… naturally been given to a unanimous statement of opinion by the UK’s highest court.” On the other: “the view expressed…runs contrary to a very substantial body of learning and authority,” with criticism from both academia and the judiciary. The court in FSHC had to decide the controversy.
The facts
The dispute related to the terms of one of the security documents used in a private equity investment in a care homes group. The claimant (F) argued that it had inadvertently taken on more onerous obligations than the parties had intended and applied for the contract to be rectified. At first instance, Henry Carr J agreed with F, a decision he would have reached irrespective of whether a subjective or objective test was applied. On appeal, the defendant (G) argued that the Chartbrook approach was the only correct one and there was no evidence which would suggest to an objective observer that the parties had ever intended that F would not be bound by the more onerous obligations.
The Court of Appeal disagreed with G (holding that the Chartbrook approach was wrong) and upheld Henry Carr J’s order for rectification.
The decision
After an exhaustive review of all of the relevant authorities, Leggatt LJ concluded that rectification of a written contract as a result of a common mistake of both parties can happen in one of two ways.
First, where the parties have made a binding agreement to execute a document containing certain terms, but they actually enter into a contract containing different ones, the courts will rectify the contract because, as a matter of policy, the law requires agreements to be kept. The terms to be incorporated into the amended contract will be determined according to the ordinary (and entirely objective) rules of contractual interpretation.
Second, rectification may also be available where there is no binding prior agreement. In this scenario (which applied in both Chartbrook and FSHC), there must be “a common intention in respect of a particular matter which, by mistake, the document did not accurately record.” Not only must the court be satisfied that there is a common intention (which is to be assessed subjectively), but there must be some sort of expression or communication of that intention between the parties.
In Chartbrook, Lord Hoffmann mistakenly applied the principle that agreements must be kept to cases where there was no prior contract. The law does not require parties to be bound by agreements reached in negotiations which are not intended to be binding. For example, reaching an agreement on heads of terms which are still subject to contract simply reflects a stage in negotiations from which either party is free to walk away.
Leggatt LJ stressed that there is no anomaly in applying an objective test where there is a prior concluded contract and a subjective test where there is a common continuing intention. The objective test is used in cases where there is, or should be, certainty based on the prior agreement. However, where the parties have an agreed understanding or common intention about what a particular provision in their contract requires, that should take precedence over the meaning that a hypothetical (albeit reasonable) observer would have attributed to the words used.
Stuart Pemble is a partner at Mills & Reeve
