The Court of Appeal handed down judgment yesterday in FSHC Group Holdings Ltd v Glas Trust Corporation Limited  EWCA Civ 1361.
The decision clarifies the correct test to be applied in deciding whether the written terms of a contract may be rectified because of a common mistake.
In particular, the key question before the Court was whether Lord Hoffmann was correct in obiter dicta in Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38 that where a party seeks to rectify a written contract, the relevant test of intention is purely ‘objective’ i.e. what a reasonable observer (with knowledge of the background facts and prior communications between the parties) would have thought the parties common intention at the time of contracting to be.
The Court of Appeal concluded that it was “unable to accept that the objective test of rectification for common mistake articulated in Lord Hoffmann’s obiter remarks in the Chartbrook case correctly states the law. We consider that we are bound by authority, which also accords with sound legal principle and policy, to hold that, before a written contract may be rectified on the basis of a common mistake, it is necessary to show either (1) that the document fails to give effect to a prior concluded contract or (2) that, when they executed the document, the parties had a common intention in respect of a particular matter which, by mistake, the document did not accurately record. In the latter case it is necessary to show not only that each party to the contract had the same actual intention with regard to the relevant matter, but also that there was an “outward expression of accord” – meaning that, as a result of communication between them, the parties understood each other to share that intention.”
On a practical level, the decision means that a claimant seeking rectification on the basis of common mistake will face a more significant task than it would were Chartbook to be followed. This is because in most cases it will be harder to prove the necessary subjective consensus than it would an objective consensus (which will depend solely on the communications passing between the parties).
As a result, successful cases of rectification will be rarer.
The Court of Appeal recognised these practical consequences but made clear that as a matter of policy rectification should be difficult to prove. The presumption should be that formal written contracts are to be upheld. Successful rectification claims should be rare. Any other approach would undermine the importance commercial parties put on the final written agreement.
David Lascelles specialises in disputes relating to high-value commercial contracts. He is recommended in independent directories Chambers & Partners and Legal 500 as one of the England’s leading barristers for his expertise in this field as well as in corporate disputes.