In an important recent decision, the Court of Appeal has confirmed the test for rectifying a contractual document on the grounds of common mistake: FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd  EWCA Civ 1361. In summary, the court confirmed that to establish a claim for rectification, a party must prove that the document failed to give effect to either:
- a prior concluded contract, in which case the terms of the prior contract must be objectively determined; or
- a common intention shared by the parties, in which case the existence of the intention must be established as a subjective state of mind – though it must also be shown that, as a result of communication between them, the parties understood each other to share that intention.
Prior to this decision, there had been conflicting authority and uncertainty as to the state of the law. It is possible for financial institutions to be on either side of a claim for rectification depending on the fact pattern, and so appellate court clarification is likely to be welcomed in the sector. On the facts of the present case, the court upheld a decision granting rectification of two deeds on the basis that they did not reflect the parties’ subjective common intention (and there was no prior concluded contract).
In particular, the court disagreed with Lord Hoffman’s (obiter) observations in Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38 that, for a case with a fact pattern falling under the second limb above, the test is purely objective and subjective intentions are irrelevant. Leggatt LJ, who gave the judgment of the court, explained the doctrine as resting on an equitable principle of good faith – i.e. that a party will not be allowed to enforce the terms of a written contract when that would be against conscience because it was inconsistent with the parties’ mutual intentions at the time of contracting.
Unless and until there is a further appeal to the Supreme Court, therefore, the test to be applied is as set out above. In most cases, this is likely to mean (even) greater difficulty in establishing a claim for rectification for common mistake, in the absence of a prior concluded contract. In particular, a claim will not succeed unless the claimant can establish not only that it had a particular intention but that the defendant shared that intention, and that the parties understood one another to share that intention. (There may however be a claim based on unilateral mistake, if the defendant knew the claimant believed there to be a common intention when that was not in fact the case, and knew the document did not give effect to the claimant’s intention).
For more information, please see our litigation blog post.