Where a mistake has been made during the course of formalising commercial contractual arrangements, when will the court be prepared to rectify it and on what basis?
Rectification takes place when the court amends the terms of a legal document which does not accurately reflect the parties' intention because of an 'actual common mistake' – i.e. there has been an inadvertent failure to give effect to what was actually intended by the parties. The Appeal Court has provided important guidance1 in a recent case where this issue unfortunately arose.
What's the background to the case?
The claimant company executed two deeds under which it was to provide security in connection with a corporate acquisition as per a previous agreement. The original defendant was the other party to the deeds, Barclays Bank, who acted as security agent for various lenders.
However, an assignment of the benefit of a shareholder loan was mistakenly missing and remained unspotted until a review of the security documentation was later carried out by lawyers. The claimant applied to court for rectification of the deeds.
GLAS Trust Corporation Limited (Barclays' successor as security agent, and the appellant in the case) agreed a way in which to resolve the error – by acceding to two pre-existing security agreements. However, this had the additional effect of imposing additional, onerous obligations on the appellant.
What did the Court decide?
The appeal judges gave a detailed analysis of the legal framework on rectification, particularly on the issue of the objective and subjective intentions of the parties concerned. Noting that the traditional objective test has its limits, the court found "no anomaly in applying an objective test where rectification is based on a prior concluded contract and a subjective test where it is based on a common continuing intention".
Therefore, in this case where the facts showed that the parties shared a common intention – adopting an objective test was the correct approach. The court concluded that an objective observer would have understood – just as Barclays did – that the accession deeds were not intended to do any more than fill the gap in the security.
The appeal judges therefore agreed with the trial judge's decision to order rectification of the deeds.
What does this mean?
Businesses must, of course, always be careful to ensure their commercial agreements are concluded effectively and that all required provisions and documentation are included. The court made clear that the court's power to rectify a contractual document is not a power to make an agreement for the parties, rather a power to correct mistakes in recording what the parties have actually agreed.
When rectification is ordered, the effect is not merely to prevent a party from enforcing the written terms of a contract but to alter them, thus establishing legal rights and obligations different from those within the original contractual document. However, this is only justified if they are founded on mutual agreement.
The court set out important guidance stating that for a written contract to be rectified on the basis of a common mistake, it is necessary to show either:
- the document fails to give effect to a prior concluded contract; or
- when they executed the document, the parties had a common intention in respect of a particular matter which the document mistakenly failed to accurately record. The parties must be shown to have understood each other to share that common intention.
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.