The English Court of Appeal in FSHC Group Holdings Limited v GLAS Trust Corporation Limited  EWCA Civ 1361 has revised the test of rectification, finding that an objective assessment of the circumstances will only be relevant where there is a prior concluded contract between the parties.
Previously, the test for rectification (as provided in obiter by Lord Hoffman in Chartbrook Limited v Persimmon Homes Limited  UKHL 38) in all cases was objective, requiring assessment of 'what a reasonable observer would have understood the intentions of the parties to be'.
The Court considered this test appropriate in circumstances where the parties had entered into a prior agreement that conflicts with the agreement at issue. The parties’ intentions should be assessed objectively by reference to the prior agreement, and rectification may be appropriate where those intentions are not reflected in the contested written contract.
However, where no prior agreement exists, the Court found that a subjective test is more appropriate to meet the threshold for rectification. The subjective test requires that:
- The parties shared a subjective intention in relation to a part of the agreement
- An 'outward expression of accord' existed, so that the parties knew they shared this intention
- The intention was shared at the time of execution
- The terms of the agreement did not reflect that intention.
This approach is derived from the equitable principle of good faith, which prevents a party from enforcing the terms of a contract that are inconsistent with the parties’ common intentions at the time of execution.
The case brings the English position on rectification into line with that of New Zealand and much of the Commonwealth. The test employed by the Court of Appeal has been settled law in New Zealand since 1987.
See the Court's decision here.