UK: Decision Makers Important In Relation To Rectification

Last Updated: 27 April 2011
Article by Mark Alsop

Hawksford Trustees Jersey Limited v Stella Global UK Limited & Another [2011] EWHC 503(Ch)

The facts are complicated. In essence, Hawksford was a professional trust company that owned 98% of the shares in GTG Plc (known as Global) which carried on business in the independent travel sector. Global was effectively a vehicle for Mr Begg who provided consultancy services to it in return for substantial remuneration. The company owned various "toys" such as jet planes and a helicopter which were placed at the disposal of Mr Begg. The 98% shareholding was held on trust for Mr Begg and his family. The shares were sold to a UK company which was part of the Stella Group at a valuation based on 2007 EBITDA. In meetings concerning the acquisition of shares in Global, Stella agreed that it had no interest in retaining Mr Begg's "toys" and that the costs associated with them and Mr Begg's consultancy fees should be excluded from the calculation of the relevant EBITDA. The exclusion of these costs was not reflected in the share purchase agreement which was executed. After the acquisition of Stella had gone through, the investment bank owner of The Stella Group sold its interest in Stella to CVC, so negotiations took place to vary the SPA to take account of CVC; both parties proposed other changes and Begg mentioned that the EBITDA definition was wrong. The varied SPA merely added one item to the list of toys, but did not otherwise change the definition. In due course, Hawksford sought rectification claiming that there had been a common mistake, with both parties wrongly believing that the SPA was executed accorded with their continuing common intention that Mr Begg's 2007 consultancy payments should be excluded when determining the relevant EBITDA.

The High Court (HHJ Stephen Davies) ordered rectification on the grounds of common mistake by all the parties, i.e. Hawksford, Stella UK and Stella's holding company. In order to determine whether a party to a document had been operating under a mistake, the relevant mind had to be that of the decision maker, if different to the person who had negotiated or executed the agreement. For these purposes, the court needed to identify the person or persons who had constituted the directing mind of the party in relation to the transaction. Here, the evidence was clear that Mr Begg had both actual and ostensible authority to negotiate and agree in principle the terms of the SPA and the amended SPA; Hawksford would agree the terms negotiated by Begg provided it was satisfied that its own interest would not be prejudiced. Accordingly, Begg was regarded as the Claimant's decision maker. In relation to Stella, the Judge found that Stella UK and its holding company had the same management and ownership and that Stella UK was able to negotiate and commit on behalf of the holding company. He was therefore satisfied that the decision makers were the same for each company and they shared the same common intention.

On the evidence, Begg had clearly conveyed his intention as to the definition of 2007 EBITDA and there was no evidence of any change of intention. He therefore had a mistaken belief that the contracts accorded with his expressed continuing intention that his 2007 consultancy costs should be excluded from 2007 EBITDA. The Judge went on to hold that Stella's decision makers had the same common intention.

CVC were affected by the rectification, but that did not affect the conclusion. CVC was aware of Begg's intention to amend the definition of 2007 EBITDA in the renegotiations and there was no evidence of CVC having any contrary intention. But even if it had not been aware, CVC had allowed the parties to enter into the amended SPA even after having exchanged contracts to buy Stella UK. Therefore it could not complain if the amended SPA was subsequently rectified.

Stella had raised the argument that the court should be cautious about ordering rectification where there was a complex commercial agreement that had been negotiated by experienced businessmen and drafted by experienced commercial lawyers, where there was no apparent ambiguity, there was an entire agreement clause and where the agreement had already made changes to flaws in a previous agreement. The Judge stated that these arguments were not strong enough to militate against a rectification order. Even complex commercial agreements were not immune from error. The fact that there was no ambiguity in the terms did not mean that they were not genuinely misunderstood by the parties.

This is another example where the court has chosen to change the clear words of a contract negotiated by experienced businessmen and lawyers – in contrast to the court's action in ING Bank v Ros Roca above where the parties were kept to the precise wording. In that case, there was no evidence that the parties had agreed otherwise. In this case, there was the necessary evidence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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