A $100 Million Drafting Mistake? Supreme Court Of NSW Clarifies Principles On Rectification Of Contracts

This decision clarifies how the subjective intention of an individual is attributed to a corporation or similar entity for the purpose of determining whether there is a 'mistake' in a contract which the Court will rectify.

Introduction

The modern complexity of payment and financing arrangements for major construction projects and commercial transactions has given rise to increasingly complex contractual payment mechanisms.

As these mechanisms dictate how much is paid and to whom it is paid, the risk of drafting 'mistakes' and disputes as to these critical terms – a risk elevated by their complexity – is significant.

It is often the case that a 'drafting mistake' in a payment mechanism does not come to light until, on one party's understanding, an entitlement to payment arises – which could be months or years after contract execution. If parties agree there is a 'drafting mistake', correcting the 'mistake' can be quite straightforward. If one party asserts there is a $100 million 'drafting mistake' and accuses the other party of 'commercial treachery'¹while the other party denies it, a complex question arises: will the Court order rectification of the contract to fix the 'mistake'?

This issue arose in FX Group Holdings Pty Ltd v Perpetual Trustee Co Ltd as trustee of the CPEC 8 Trust A (formerly the CHAMP IV Trust A) (No 3) [2025] NSWSC 1055 (FX Group Holdings). The first section of this article considers the FX Group Holdings decision and the second section considers the test for attribution of intention for rectification in equity.

Background

In FX Group Holdings, a private equity firm agreed to wholly fund Ms Lock's purchase of the private equity firm's investment in a foreign exchange and financial products trading platform 'Pepperstone' (providing some $150 million in vendor finance). A fundamental plank of the deal was the 'super returns' concept – the vendor finance was to be repaid to the vendors within five years from Pepperstone dividends, and, among other things, Ms Lock agreed that after the firm was repaid, she would share half of 'super returns' over $25 million with the vendors, for a period of 4 years.

The parties first entered into a 'Heads of Agreement' which reflected the parties' understanding of how the 'super returns' concept was to work.

The 'super return' concept was incorporated into the share sale agreement (SSA) (in a clause titled 'Uplift Payment') and embedded definitions, including 'Equity Proceeds'.

The other key transaction document that gave effect to the agreement to repay the 'vendor finance' was the 'Vendor Loan Note Deed Poll.²

What went wrong?

A number of years after execution of the SSA which was prepared and executed to give effect to the Heads of Agreement,³ the defendant vendors sought confirmation as to whether an Uplift Payment was payable. Ms Lock confirmed that no Equity Proceeds had been retained by the plaintiff buyer and there was no Uplift Payment payable to the defendant vendors.

The key issue in dispute revolved around the calculation of the 'super returns' under the SSA. In essence, whether after the total principal and interest payments of the vendor finance was repaid, Ms Lock (as she contended) was entitled to offset not only $25 million, but the total principal and interest repayments (being some $210 million), effectively double counting repayment of the vendor finance,⁴ before splitting any 'super returns'.⁵

Proceedings were commenced in the NSW Supreme Court, and the Court had to principally consider:

• the proper construction of the Uplift Payment clause and associated definitions in the SSA; and
• if Ms Lock's interpretation was correct, whether the SSA should be rectified in equity for either common mistake or unilateral mistake?

Decision in FX Group Holdings

Proper construction of the SSA – Uplift Payment and embedded definitions

The final form of the relevant 'super return' provisions and their embedded definitions (including the definition of 'Equity Proceeds') was 'complex'.⁶

In order to determine the proper construction of the Uplift Payment clause and its embedded definitions, Rees J had to first consider the definition of 'Equity Proceeds'.

Part of the definition of 'Equity Proceeds' relevantly referred to 'all amounts including ... (i) dividends' ... 'and in the case of (i)... to the extent retained by the Purchaser following repayment of the Vendor Loan Note Deed Poll' (the latter text being referred to as the 'tail piece').

The drafting of the 'tail piece' is significant, as it was the text relied on by the plaintiff and was alleged by the defendant to be a 'drafting mistake' (if the plaintiff's construction was correct).

The plaintiff contended that:

• the 'tail piece' meant that dividends only counted as 'Equity Proceeds' if they were received by the plaintiff after it had paid all amounts due under the Vendor Loan Note Deed Poll;⁷
• the plaintiff was then required to pay half the 'Equity Proceeds' to the defendant vendors less the total vendor finance under the Vendor Loan Note Deed Poll, less the $25 million and less reasonable costs.

The defendant vendors contended for an alternative construction, being that:

• all dividends were captured by the definition of 'Equity Proceeds', and the 'tail piece' made plain that the dividends received after repayment of the Vendor Loan Note Deed Poll were included in the defined term;⁸
• the tail piece wording was present to clarify and avoid doubt; and
• the same vendor finance amount was not to be deducted once because of the tail piece and then deducted again when 'Equity Proceeds' was read into the other definitions.

The defendant vendors submitted that the plaintiff's construction was contrary to the commercial purpose of the transaction, and altered the method for calculating when 'super returns' would be paid.

Rees J considered the competing constructions were 'available and contestable',⁹ and appeared to consider that the first or initial reading of the Uplift Payment clause (and associated definitions) supported Ms Lock's construction of the 'super return'.¹⁰ Rees J then considered whether context, purpose and extrinsic material could be used to resolve the competing constructions.

Even though the relevant terms were susceptible of more than one meaning, Rees J found the Heads of Agreement to be admissible as part of the surrounding circumstances irrespective of whether ambiguity first arose from the terms of the SSA noting that 'the commercial context may be considered from the outset'.¹¹ Her Honour referred to various other authorities in which Heads of Agreement formed part of the objective factual matrix and surrounding circumstances.¹²

By considering the text, context and purpose of the SSA, including the unlikelihood the parties intended to double count the Loan Note repayments/obligation and in light of the Heads of Agreement, Rees J found in favour of the defendant vendor's construction of the SSA. Rees J, among other things, made declarations as to those amounts which met the definition of 'Equity Proceeds' based on the proper construction of the SSA.¹³

Rectification in equity for common mistake

While Rees J resolved the matter in favour of the defendants based on the proper construction of the SSA, she went on to consider the defendants' alternative claims for common and unilateral mistake in equity.¹

The defendant vendors sought, in the alternative, that the SSA be rectified to delete the 'tail piece' so that the drafting of the payment provision and associated definitions conformed to the parties' common subjective intention as at the time of executing the SSA. That is, 'super returns' over $25 million were to be shared after the vendor finance had been repaid for a period of four years (and it was a mistake for the total amount under the Vendor Loan Note Deed Poll to be deducted twice before any returns were shared, if that was required by the 'tail piece' when read into the other provisions). As to the claim for rectification for common mistake, there were two issues:

• can the intention of the manager for the trustees be attributed to the trustees?
• did Ms Lock have the same understanding as the trustee vendors (and therefore were the elements for a claim for rectification for common mistake satisfied)?

Attribution of intention – whose intention was relevant?

In FX Group Holdings, the SSA was:

• negotiated by Ms Lock and the manager of the defendant trustees (specifically, Mr Haddock) and each party's external legal and taxation advisers; and
• executed by Ms Lock as sole director of the plaintiff (a SPV) and by the attorneys for the defendant trustees (being Mr Tran and Mr Lee), who were required to comply with any direction of the manager of the trustees under the trust deeds.

Ms Lock contended that:

• while the SSA was negotiated and finalised by the manager for the defendant trustees, the manager's intention could not be imputed to the defendant trustees (and therefore the manager's state of mind was not relevant);¹⁵ and
• the trustees did not hold an intention in relation to the 'super return' concept.

Rees J observed she was bound by the New South Court of Appeal decision in SSABR Pty Ltd v AMA Group Ltd (SSABR)¹⁶which considered the test for attribution of corporate intention in a claim for rectification.

Rees J stated that in SSABR, the Court of Appeal considered the test for the attribution of a corporation's intention in a claim for rectification where 'the board of directors of the company approved a deal negotiated by management':

Rees J considered that the facts of this case were similar to the case of Hawksford Trustees Jersey Ltd v Stella Global UK Ltd.¹⁸ In Hawksford, the trustee of a company authorised an individual, Mr Begg (the beneficiary), to negotiate a deal, but Mr Begg did not have any 'formal authority to negotiate on behalf of the trust'. The trustee did not give the terms of the agreement negotiated by Mr Begg any independent thought and was content to contract on the terms proposed by Mr Begg. Accordingly, the trustee entered the agreement with the intention it would give effect to the terms Mr Begg had negotiated and agreed and so Mr Begg's intention was attributed to the trustee.

In this case, Rees J similarly found that the manager of the trustees was the 'decision maker' and negotiator in respect of the transaction and the manager's state of mind should be attributed to the trustee. In coming to this finding, her Honour:

• had regard to the terms of the trust deed and that the arrangements between the trustees and the manager were well documented. The manager was expressly 'authorised to negotiate the sale of the Pepperstone investment' and the trustees were obliged to contract on terms negotiated by the manager, making the manager the decision maker;¹⁹
• further and in any event, her Honour was satisfied that the attorneys who executed on behalf of the trustees also held the same intention as to the super returns as the manager because:
  • Mr Tran (one of the two attorneys who executed the SSA on behalf of the trustees) reviewed and relied upon the direction letter provided by the manager which set out the manager's understanding of the 'super returns' concept)';²⁰
  • Mr Tran intended to give effect to the document negotiated and finalised by the manager; and
  • Mr Lee (the other attorney, who did not give evidence) likely similarly reviewed and relied on the direction letter and likely had the same intention as Mr Tran.

Did the parties' share a common understanding?

Rees J found that both Ms Lock for the plaintiff and the defendant vendors shared a common (or identical) understanding as to how the super returns were to operate at the time of executing the SSA. Even though Ms Lock contended otherwise in giving evidence, Rees J essentially found that her evidence was 'self-serving' and contradicted by contemporaneous documentary evidence as to what she intended at the time of execution. Accordingly, after looking at all the evidence, Rees J considered that Ms Lock had the same understanding as the vendors at the time of executing the SSA, and the SSA should be rectified to reflect the subjective common intention of the parties (but ultimately did not make orders to this effect as her Honour granted declarations based on the proper construction of the SSA).

In summary, and in answer to the question posed at the outset, had her Honour not decided the case based on the proper construction of the clause, she would have found there to be a $100 million drafting mistake (based on a common mistake) and ordered the 'tail piece' drafting in the relevant part of the definition of 'Equity Proceeds' to be deleted.²¹

Unilateral mistake

Rees J also would have found, if she was wrong as to their being a common understanding, and if Ms Lock's evidence as to her intention was accepted, that the contract should be rectified for unilateral mistake as:

• Ms Lock would have executed the SSA with the knowledge that the defendant vendors understood the SSA reflected the commercial deal in the Heads of Agreement, yet Ms Lock, on her account, knew it contained a significant departure in relation to the 'super return' concept (which would have had a significant financial benefit to Ms Lock);
• Ms Lock's conduct would have constituted 'sharp practice'; and
• the elements of unilateral mistake were satisfied in that it would have been 'unconscionable' of Ms Lock to 'knowingly take advantage of another party's mistake'.²²

Discussion – Attribution of subjective intention

The FX Group Holdings decision is significant in that it illustrates how subjective understanding of complex payment mechanisms by relevant persons will be decisive where there is alleged to be a mistake. In FX Group Holdings, her Honour considered that where a trustee executes a contract through its attorneys, and the documents demonstrate that the trustees were required to negotiate and finalise a contract on terms with which the manager was content, it is (relatively) straightforward to attribute the manager's subjective intention to the trustee.

But, in cases where there are protracted commercial negotiations for complex contracts or transactions, it may not be as clear whose intention can be attributed to a corporate entity. For example, could it be the contract manager, the executive with authority to sign the contract, a subcommittee of the board or the board of directors?

Kiefel J has stated, when negotiating a contract, parties do not usually express themselves in terms of their intentions in the negotiations.²³ It is likely therefore, in proving a subjective intention in relation to a clause, a party must rely only on witnesses at trial and inferences from words and conduct during the negotiations. But whose intention can be attributed to a corporate entity and which witnesses are likely to be needed?

There is no set of universal rules as to attribution of state of mind.²⁴ The principles relating to attribution of corporate state of mind depend on the context in which the issue of attribution arises.²⁵ It is necessary to identify the relevant rule of attribution,²⁶ which varies depending on whether the attribution is for the purpose of a statutory offence, rectification, or vicarious liability for a tort.²⁷

In a claim for rectification in equity, the 'relevant enquiry is as to the actual subjective state of mind of a corporation in entering into a particular contract, namely the relevant decision-maker.'²⁸ But how does one determine who the 'decision maker is'?

As McDonald J found in Fonterra Brands (Aust) Pty Ltd v Bega Cheese Ltd,²⁹ another case cited in FX Group Holdings, the 'decision maker' is the person 'whose job it was to make the required business judgment as to whether to enter into the contract'. For a company, the Court will usually in the first instance consider a company's constitution and any delegated authority to ensure the relevant person had the authority to not only enter into negotiations, but also finalise and execute the contract.³⁰ In many cases, this 'person' will be the board of directors or a director of a company.³¹

The Courts have found that the relevant intention may not be that of the person or entity with formal authority to bind the company. This may occur in a situation where:

• the person or entity (for example, a board) has in reality delegated the negotiation and finalisation of a contract to a contracts manager (or a third party) and that person is, in reality, the actual decision maker; or
• the 'technical decision maker' (with authority) has adopted the intentions of the negotiator (by intending to enter the contract on the terms proposed by that person).³²

Finally, if there is no evidence that the person who negotiated the contract constitutes a 'decision maker' or that the decision maker adopted that person's state of mind, that person will be a 'mere negotiator', whose intention will not likely be imputed to the company.³³

What this means for you?

Notwithstanding there can be difficulties in making out a claim for rectification in equity, it can be necessary to consider a claim for rectification for common mistake or unilateral mistake, which may accompany a claim based on the proper construction of a clause.

Complex payment clauses are more likely to give rise to a risk of mistake or to claims alleging a mistake and so present a serious financial risk to parties. Accordingly, where a complex payment mechanism is required, corporations and similar entities can best manage these risks by carefully considering and documenting:

1. delegated authorities – if a key person has management and control of the negotiations, ensure that person has approval to not only enter into negotiations, but also to finalise the negotiations (conversely, if a negotiator does not have authority, that should be similarly documented and communicated);
2. how the payment mechanism works, potentially with worked examples for different scenarios, so it is clear to the 'decision maker' how the mechanism is intended to operate; and
3. that the ultimate decision maker (for example, the board of directors) approves the contract based on that documented understanding of the payment mechanism.

By way of illustration, in another recent case decided by Rees J, her Honour gave significant weight to board papers and contemporaneous documents (including models graphically demonstrating how the clause would work), without which she would not have considered rectification appropriate (based only on the oral evidence before the Court).³⁴

Corporations should also consider whether such documentation as to how the mechanism was intended to work is properly protected by legal professional privilege (or whether it is appropriate for it to be), so that a decision can later be made as to whether or not to waive privilege and rely on that advice as to how the terms were subjectively understood.

Footnotes

1. FX Group Holdings Pty Ltd v Perpetual Trustee Co Ltd as trustee of the CPEC 8 Trust A (formerly the CHAMP IV Trust A) (No 3) [2025] NSWSC 1055, [3] ('FX Group Holdings').

2. Under the Vendor Loan Note Deed Poll, Ms Lock's company agreed to 'issue loan notes to the Trustees inconsideration for the shares acquired': FX Group Holdings, [54].

3. FX Group Holdings, [2].

4. FX Group Holdings, [254], [264] and [267].

5. FX Group Holdings, [3].

6. X Group Holdings, [239]. The final form of the relevant provisions and the embedded definitions are set out in FX Group Holdings, [199]-[205].

7. FX Group Holdings, [213].

8. FX Group Holdings, [242]–[243].

9. FX Group Holdings, [251].

10. FX Group Holdings, [255].

11. FX Group Holdings, [234]–[236].

12. FX Group Holdings, [235].

13. FX Group Holdings, [497].

14. Her Honour also would have corrected the SSA by construction, considering it would have been 'absurd' to inexplicably double count the vendor finance and increase the threshold at which the profit-sharing arrangement would begin by some $200 million: FX Group Holdings, [274].

15. FX Group Holdings, [387].

16. [2024] NSWCA 175 ('SSABR').

17. FX Group Holdings, [388] citing SSABR, [152].

18. [2012] 2 All ER (Comm) 748.

19. FX Group Holdings,[392].

20. FX Group Holdings,[192]

21. FX Group Holdings, [385] and [424].

22. FX Group Holdings, [425]–[433].

23. Simic v NSW Land and Housing Corporation (2016) 260 CLR 85, [43].

24. The Hon. Justice A Payne, 'How do companies think' (2024) 38(2) CLQ 1, 4.

25. Environment Protection Authority v Wollondilly Abattoirs Pty Ltd & Davis [2019] NSWCCA 312, [20]('EPA v Wollondilly'). See also SSABR, [151]; Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd [2021] VSC 75, [79] ('Fonterra'); Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, [506]–[512].

26. EPA v Wollondilly, [20].

27. EPA v Wollondilly,[20].

28. SSABR, [152].

29. [2021] VSC 75, [86].

30. Thiess Pty Ltd v Arup Pty Ltd [2012] QSC 185, [198]–[199].

31. See, e.g., Expert Group International Pty Ltd v TransAction Solutions Ltd [2025] NSWSC 575 ('Expert Group International').

32. Fonterra, [85] applying Murray Holdings Ltd v Oscatello Investments Ltd [2018] EWHC 162 (Ch) at [198].

33. Fonterra, [85].

34. Expert Group International, [236].

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.