In an important judgment, the Court of Appeal has confirmed the test to be applied for rectification of a contract for common mistake. In this insight, we look at the judgment in FSHC Group Holdings Limited v GLAS Trust Corporation Limited and, in particular, whether it could affect pension schemes.

What is rectification?

Rectification is a discretionary remedy which the court can grant if, because of a mistake, a legal document does not accurately reflect the parties’ intentions. If the court grants rectification, it will ‘rewrite’ the document to correct the mistake.

Rectification is used in a number of different situations. The FSHC Group Holdings case relates to a contract. However, it is also possible to apply for rectification of other documents, including deeds relating to a pension scheme.

What was the FSHC Group Holdings case about?

FSHC Group Holdings Ltd executed two deeds. The purpose of executing the deeds was to accede to two pre-existing security agreements, in order to give a security that it had agreed to provide in connection with a corporate acquisition which had been completed several years earlier.

The other party to the deeds was later replaced by GLAS Trust Corporation Limited.

Neither party to the deeds realised at the time of execution that, in acceding to the pre-existing security agreements, FSHC Group Holdings Ltd was not only providing the missing security, but was also was taking on “additional onerous obligations”.

When FSHC Group Holdings Ltd discovered the mistake, it applied to the court for rectification of the deeds.

The trial judge found that when the deeds were executed, the representatives of both parties “understood and intended the deeds to do no more than provide the missing security”. The judge also found that “it was both ‘objectively’ and ‘subjectively’ the common intention of the parties to execute a document which satisfied the … obligation to provide security … and which did no more than this”. In view of this, he granted rectification of the deeds to exclude the additional obligations.

On appeal, GLAS Trust Corporation Ltd did not dispute the judge’s findings of fact. Instead, it submitted that the test for rectification is purely objective, and argued that an objective observer would have understood the common intention of the parties to be for FSHC Group Holdings Ltd to accede to all of the terms of the pre-existing security agreements, including the additional obligations.

It was therefore necessary for the Court of Appeal to decide which legal test should apply: the objective test or the subjective test.

What did the Court of Appeal decide?

The Court of Appeal found that, for a written contract to be rectified on the basis of common mistake, it is first necessary to show either:

  1. “that the document fails to give effect to a prior concluded contract”; or
  2. that, when the parties executed the contract, they “had a common intention in respect of a particular matter which, by mistake, the document did not accurately record”.

In the second type of case, “it is necessary to show… that each party to the contract had the same actual intention with regard to the relevant matter …[and]… 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.”

In other words, in the second type of case, the test for rectification is subjective and looks at what the parties actually intended. However, the parties need to have understood each other to share that intention as a result of communication between them.

The Court of Appeal found that the test was met in this case: at the time that the parties executed the deeds, they intended to put the missing security (and nothing more) into place; and the communication between the parties’ solicitors in the run-up to execution established a common understanding that the deeds would provide the missing security.

Osborne Clarke comment

In giving its judgment, the Court of Appeal noted that a subjective test of common intention is likely to be harder to satisfy than an objective test. However, it also confirmed that “[a]s a matter of policy, rectification should be difficult to prove” (the Court’s emphasis), and agreed that “[f]ormal written contracts should be presumptively upheld and instances of rectification should be rare. Any other approach would undermine the importance commercial parties put on the final written agreement”.

In other words, in the case of contracts, the test to be applied should be a difficult and demanding one, so as to adequately protect the certainty and security of commercial agreements.

It will be interesting to see whether the judgment will affect the courts’ approach to the rectification of pension scheme deeds. The Court of Appeal referred to the current approach in pensions cases in the course of its judgment. In cases where the trustees of a scheme have the power to alter the rules provided they obtain the consent of the employer, it has been found that it is sufficient that the intentions of the trustees and the employer coincide, in that they both independently have the same intention regarding the effect of the amendment.

As the Court of Appeal explained: “[i]t is not necessary to show that the trustees and the employer had a common intention as a result of communication with each other because the validity of an amendment does not depend on the parties having mutually agreed it – only on one having approved what the other has done”.

We do not expect the approach to common intention in pensions cases to change. However, if a ‘subjective’ test (of what the parties actually intended), instead of an ‘objective’ test (what a reasonable person would say the parties had intended) of intention is to be applied, we wait to see whether this will make much difference to the evidence needed in practice.