Common mistake: a new test for contract rectification laid down by Court of Appeal

Rectification is the correction of an apparent mistake in a contract so that it accurately reflects the parties’ actual agreement.

A contract can be rectified if a party can show that it doesn’t reflect the common intention of the parties at the time they entered into it: a so-called “common mistake”. Though it can be tempting to argue this, often in defence to a breach of contract claim, it can be extremely difficult to prove in practice.

The recent Court of Appeal decision in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd has clarified the test for rectification on the grounds of common mistake. The Court held that the parties’ common intention should be judged subjectively rather than objectively, unless the intended terms are specified in an earlier binding contract.

Background: Chartbrook Ltd v Persimmon Homes Ltd (2009)

In the 2009 case of Chartbrook Ltd v Persimmon Homes Ltd, Lord Hoffmann stated that the relevant test for rectification was “wholly objective”. In other words, it was what a reasonable observer with the background facts would’ve thought the parties’ common intention at the time of contracting to be. But this view wasn’t widely agreed and led judges to make both an objective and subjective assessment.

FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd (2019)

In this recent case, the parties entered into a private equity financing transaction which required the claimant to provide security over a shareholder loan. But an oversight meant part of the intended security was left out of the documentation. As a result, FSHC had agreed to enter into two pre-existing security agreements which contained various onerous obligations.

The Court of Appeal identified two scenarios and the legal tests it should use when determining whether there was a common mistake:

1. If there’s a prior concluded contract: the test is objective. The Court can rectify the executed document if it’s decided that the terms of the prior contract reflect the parties’ common intention in entering into a second contract.
2. If there’s no prior concluded contract: the test is subjective. The Court can rectify the executed document if there’s evidence that the parties’ common intention at the time of the contract’s execution isn’t reflected in its actual terms.

In this case, there was no prior contract – which meant the applicable test was subjective. The Court found that the onerous obligations in the executed document didn’t reflect the parties’ common intention to only grant the relevant security. So, the Court rectified the deeds.

What does this mean for parties to a contract?

This case makes it clear that whether both parties are mistaken as to a contract’s terms is a subjective test, unless there’s a prior concluded contract. This may seem like a logical conclusion, and one that’s perhaps fairer.

But it means it’s now likely to be harder to prove there was a common mistake, because a party seeking rectification will need to provide evidence of the other party’s intentions.

This decision is an example of a trend in the Court of Appeal to move away from undermining the importance of final written agreements. The new focus on subjective intentions shows the importance of:

1. Keeping records of any pre-contractual negotiations, like Heads of Terms
2. Precision and accuracy when drafting contracts