Paved with good intentions? Rectification of contracts after the Court of Appeal’s decision in Four Seasons
In FSHC Group Holdings Ltd v Glas Trusr Corporation Ltd  EWCA Civ 1361, the court of appeal has given welcome clarification of when a written contract can be recƟfied because the parƟes were under a common mistake as to its effect. Following statements made by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38, the apparent scope of the doctrine of recƟficaƟon in English law had given rise to much debate and also some judicial criƟcism. RecƟficaƟon for common mistake requires the parƟes to have shared a common intenƟon as to the effect of their agreement, which they then failed to properly record in their wriƩen contract – if that is proven, the document is then recƟfied to reflect the common intenƟon, correcƟng the mistake. The quesƟon that has been vexing judges and commentators alike was whether such a common intenƟon is to be assessed using an objecƟve or a subjecƟve test. While objecƟvity is one of the hallmarks of the English law of contract, the Court of Appeal in Four Seasons has now confirmed that the test is subjecƟve when it comes to recƟficaƟon.
The corporate transacƟon giving rise to the liƟgaƟon in Four Seasons
The claimant was the parent company of the Four Seasons Health Care group which provides care to the elderly. For convenience, the claimant company is referred to as “Four Seasons” in this arƟcle. Four Seasons is presently a subsidiary of Terra Firma, the private equity fund. Terra Firma acquired a controlling interest in the Four Seasons group in July 2012. The financing arrangement for that acquisiƟon by Terra Firma was complex, and ulƟmately gave rise to the liƟgaƟon that came before the Court of Appeal. The deal involved Four Seasons issuing a shareholder loan of £220 million. These monies were then used to purchase discounted bonds in a group of companies that owned the underlying assets of the Four Seasons group (Four Seasons itself was a holding enƟty). As part of the financing arrangements and capital structure for the acquisiƟon, this asset-owning group of companies also issued notes, and assumed indebtedness under a different loan facility, in the total amount of £560 million. An Intercreditor Agreement governed the relaƟonship between all the noteholders, lenders and other relevant parƟes, including Four Seasons itself. The Intercreditor Agreement required that the benefit of Four Seasons’ shareholder loan be ‘pledged at all Ɵmes’ as security for the liabiliƟes of the assetowning companies to their noteholders and lenders. This would have required an assignment of the shareholder loan. However, Four Seasons never executed such an assignment. Apparently, this was overlooked on compleƟon amidst the plethora of documents that had to be executed.
One further feature of the transacƟon is relevant. The asset-owning companies, but not Four Seasons in its own right, entered into a contract called the Intercompany Receivables Security Assignment (“IRSA”). Under the IRSA, Barclays was appointed as security trustee. The effect of the IRSA was threefold: any intra-group payments due between the asset-owning companies could be assigned to the noteholders and lenders as security, the asset-owning companies agreed to repay all secured debts when they fell due, and they were also placed under certain restricƟons on the kind of business that they could carry out. At the Ɵme of the acquisiƟon, there had been no suggesƟon that Four Seasons would be required to take on any of these further obligaƟons imposed by the IRSA, and Four Seasons did not enter into that contract.