In FSHC v GLAS Trust, the Court of Appeal has set out a new test for common mistake.
The trial judge had found, as a matter of fact, that the parties had a “common continuing intention” to execute a document which satisfied an obligation that FSHC had to grant security over a shareholder loan, and do no more than that. This intention was established by reference to what an objective observer would have thought the intentions of the parties to be. The parties’ subjective intentions were held to be the same as their common intention objectively assessed. By mistake the documents executed did not reflect the common continuing intention so the judge ordered rectification.
GLAS appealed on the basis that the test for rectification was purely objective and that the communications between the parties would not have led an objective observer to conclude there was a mistake.
After an extensive review of the case law, the Court of Appeal held that before a written contract may be rectified on the basis of a common mistake, it is necessary to show either:
- that the document fails to give effect to a prior concluded contract; or
- 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 case of 2., 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 the findings of fact made by the trial judge, the parties intended to execute a document which satisfied FSHC’s obligation to grant security over the shareholder loan and did no more than this. Although the judge did not say so in terms, it was implicit in his findings that this common intention was shared. Accordingly the rectification stood.