Tartsinis v. Navona Management Company [2015] EWHC 57 (Comm)

When a contract does not reflect the common intention of the parties, equitable relief can be sought from the Court for the contract to be rectified. Such relief is however rarely granted. This dispute provides us with an example where it was.

The background facts

Two Greek businessmen, Mr. Tartsinis and Mr. Nikolaou, had agreed to sell their shares in a company which owned a fleet of ships to Navona Management Company (“Navona”). This agreement was contained in a Share Transfer Agreement (“STA”).

The dispute arose over the price mechanism for the shares set out in the STA. According to the STA, the Net Asset Value ('NAV") of the company was to be calculated based on the value of the fleet.

Mr. Tartsinis' position was that the fleet value referred to in the STA was clearly agreed to be provisional until the delivery date accounts were issued and, therefore, a sum of over US$13 million remained payable by Navona after the completion of the sale of the shares. On a plain reading of the STA, this was a perfectly plausible position to take.

Navona’s position was that the fleet value as stated in the STA was in fact intended by the parties to be final, and not adjusted based on the delivery date accounts. Accordingly, Navona sought for the STA to be rectified to reflect the parties' true intention.

The usual approach towards contract interpretation

The approach towards contract interpretation under English law is an objective one - the Court looks at the wording of the document and assumes that the parties were reasonable people who intended the words used. The Court does not consider the parties' subjective intentions or the pre-contractual negotiations.

Using these principles to interpret the STA, the Judge concluded that Mr. Tartsinis' position was correct, unless the STA could be rectified as claimed by Navona

The approach taken in rectification

The approach the Court takes towards an application for rectification is quite opposite from that of contract interpretation - evidence of the parties' subjective intentions is admissible, as well as what was said in pre-contractual negotiations.

The party seeking rectification must show that:

  1. the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
  2. there was an outward expression of accord;
  3. the intention continued at the time of the execution of the instrument;
  4. by mistake, the instrument did not reflect that common intention.

The party seeking rectification must adduce "convincing proof" to displace what has been written in the contract. How convincing this proof needs to be would depend on the circumstances in which the contract was drafted. In this case, the Court noted that while the STA was drafted in English by a lawyer, he was not a lawyer practising in an English speaking jurisdiction or whose first language was English. Also, the principals who signed the STA spoke and read English as their second language. 

Eventually, after considering all the evidence including a lengthy cross-examination of Mr. Tartsinis, the Court allowed the STA to be rectified by the insertion of an additional sentence in the definition of the Net Asset Value to state that the fleet value was final and not subject to adjustment, unlike the other elements in the Net Asset Value.

Comment

This case is a reminder that parties need to be very careful that their intentions are fully and properly captured in their contracts, because of the objective approach taken in contract interpretation. 

While the Court does provide equitable relief, a very high standard of proof needs to be met in order to persuade the Court to rectify a contract.

A final point that may be of interest is that the Singapore Court of Appeal has, in the case of Zurich Insurance (Singapore) Pte Ltd v. B-Gold, accepted that extrinsic evidence in the form of prior negotiations could be admissible to interpret a contract. The Singapore High Court in Goh Guan Chong v. AspenTech, Inc [2009] 3 SLR(R) 590 later also admitted prior negotiations and stated that drafts of contracts could possibly be admissible as well. Given the approach taken by the Singapore courts, it may be that the need to seek equitable relief from the courts in the form of rectification is reduced.

Michelle Yong & Edgar Chin