Rectification in Contract
© His Honour Judge David Hodge QC
A Specialist Chancery Circuit Judge
Bencher of Lincoln’s Inn
17th October 2013
Rectification for Common Mistake (1)
•
Where the terms of a document fail to reflect the true accord between the parties, the
document may be rectified to make it correspond to their true common agreement or
understanding
•
The proper function of rectification is to correct a mistake in the way in which a
document has purported to record the parties’ transaction: it is about putting the record
straight, and it cannot alter the bargain itself
•
In deciding whether there has been a relevant mistake, evidence of the parties’ actual
understanding and intention is admissible. In most cases it would be impossible for a
court to know whether the execution of the document involved a mistake on the part of
one or both parties without such evidence: Daventry District Council v Daventry &
District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333 per Toulson LJ at
[158], reversing, by a majority (Lord Neuberger MR and Toulson LJ; Etherton LJ
dissenting), Vos J at [2010] EWHC 1935 (Ch)
•
“Rectification claims are highly fact specific”: per Etherton LJ in Daventry at [2]. In
Daventry, Lord Neuberger MR (in common with Toulson LJ) came to a different
conclusion from Etherton LJ “not because of a significantly different view of the law,
but because of a different assessment of the application of the law to the unusual facts of
this case”: at [227]
Rectification for Common Mistake (2)
• “The remedy of rectification entitles the court to give effect to the
reasonable expectations of contracting parties as to the meaning of
their executed agreement. Rectification is, in a sense, an instance of
English and Welsh law applying a concept of good faith (that is, fair
dealing) without actually calling it such.
• However, rectification obviously involves interfering with the sanctity
of a contract. So there must be an outward expression of accord
continuing down to the making of the agreement”:
Ahmad v Secret Garden (Cheshire) Ltd [2013] EWCA Civ 1005 per
Arden LJ (with the agreement of Lloyd Jones and Fulford LJJ) at [2829].
Sources of mistake (1)
•
•
•
•
Greater complexity of legal documentation
Reduced time-frames for completion
Rising pressure on legal costs
Expanding resort to multiple drafts and computergenerated documents
• “Gamesmanship” or “setting a trap”– But “lawyers who
are instructed to draft documents do it for the purpose of
avoiding litigation, not creating it”: BDW Trading Ltd v J
M Rowe (Investments) Ltd [2010] EWHC 1987 (Ch) at
[65] per Peter Smith J; affirmed (without reference to this
point) at [2011] EWCA Civ 548
Sources of mistake (2)
“Where someone makes a mistake it is often difficult, or even
impossible, to explain the mistake or expand on its nature, beyond
identifying it as such. Misreading, muddle, carelessness, failure to
engage, confusion are all possible explanations, but they do not take
matters much further forward. As, for instance with an act of
negligence, one knows it when one sees it (at least sometimes), but
it is often impossible to explain or expand on it. Often the mistake or
negligent act is almost by definition inexplicable, even by the person
guilty of the negligent act or mistake - consider the familiar
statement after the event along the lines ‘I simply cannot understand
how I could have done/ not done/ thought/ not thought that’.”: per
Lord Neuberger of Abbotsbury MR in Daventry at [217]
Rectification by construction
• The equitable remedy of rectification starts from the
premise that, as a matter of construction, the relevant
document does not bear the meaning for which the party
seeking rectification contends
• Rectification is neither necessary nor appropriate if a
mistake in a document can be corrected as a matter of
construction by interpreting the document in its context
Rectification by construction: the two
conditions
•
Before a mistake in a document can be corrected by construction, and without resort to
an order for rectification, (1) there must be a clear mistake and (2) it must be clear what
correction must be made to cure the mistake
•
In deciding whether these conditions are satisfied, the court may have regard to the
admissible background and the context of the document – but this does not extend to
evidence of the parties’ previous negotiations, or declarations of their subjective intent
•
In Scottish Widows v BGC International [2012] EWCA Civ 607 the trial judge (Norris J)
was said to have fallen into error in holding that “the correction of a mistake was
justified where ‘it looked as though’ BGC was to receive £10m and in return take over
the rent payable under the Barings lease. As explained in Chartbrook, it had to be clear
from the Relevant lease and the admissible background both that there was a mistake
and how it ought to be corrected before the court could proceed to interpret the contract
as he did. In any event, the judge’s construction is inconsistent with the Relevant lease
when read with the supplemental agreement”: see [38] per Arden LJ
The requirements for rectification for
common mistake (1)
•
The classic statement of the requirements for rectification for common mistake is
contained in the judgment of Peter Gibson LJ in Swainland Builders Ltd v Freehold
Properties Ltd [2002] 2 EGLR 71 at [33]. 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 sought to be
rectified;
•
(4) by mistake, the instrument did not reflect that common intention.
The requirements for rectification for
common mistake (2)
•
This statement was approved by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd
[2009] UKHL 38, [2009] AC 1101 at [48], subject to the qualification (at [60]) that the required
“common continuing intention” is not a mere subjective belief but rather what an objective observer
would have thought the intention to be
•
In relation to proof of the common intention, the court does not look to the inner minds (ie subjective
intentions) of the parties but to their outward acts (what they said or wrote to each other in reaching
their agreement) and compares them with the document which it is sought to rectify: HHJ Waksman
QC in Notiondial Ltd v Beazer Homes [2009] EWHC 3333 (Ch) at [40]
•
In other words, the requirements of “an outward expression of accord” and “common continuing
intention” are not separate conditions, but two sides of the same coin, since an uncommunicated
inward intention is irrelevant
•
This has led Etherton LJ in Daventry to rephrase the 2nd of Peter Gibson LJ’s requirements in terms
of a “common continuing intention to be established objectively, that is to say by reference to what
an objective observer would have thought the intentions of the parties to be”. Lord Neuberger MR at
[227] expressly agreed with Etherton LJ’s “clear and helpful analysis of the law”
The requirements for rectification for
common mistake (3)
•
Peter Gibson LJ’s “classic” statement has recently been cited and applied by
the Court of Appeal in (1) Scottish Widows v BGC International [2012] EWCA
Civ 607 at [43], (2) Lloyds TSB v Crowborough Properties [2013] EWCA Civ
107 at [79-80] and (3) Ahmad v Secret Garden (Cheshire) Ltd [2013] EWCA
Civ 1005 at [25-26]
•
In Scottish Widows the claim to rectification failed because the parties’
consensus on the transaction was never “granular” enough to amount to
agreement on the particular matter at issue [45]. The “shape of the transaction
… remained fluid until a late stage” [61]; and “the meeting of the minds was in
the engrossed document” [75]
•
In the other two cases, claims to rectification succeeded
Three further points of principle
•
Evidence of a party’s subjective belief or understanding is admissible and may have
some evidential value as to what was actually said and agreed (although, where the prior
consensus is expressed entirely in writing, it is likely to carry very little weight)
•
A party can always give evidence that the wording of the document was the result of a
mistake; but whether or not the mistake is such as to give rise to a right of rectification
will depend on the objective assessment of whether there was a common continuing
intention to which the document failed to give effect
•
Rectification is a discretionary remedy; but carelessness may preclude relief, not on
some general ground of discretion, but because an applicant cannot be allowed to rely on
its own carelessness in failing to observe that the respondent objectively no longer
continued to adhere to the prior common intention at the date of the document to be
rectified:
Daventry per Etherton LJ at [81–84], with the agreement of Lord Neuberger MR at
[227]
The limits of rectification
• Rectification is not available to change the substance of the
transaction, or to correct an error in the transaction itself
• It is not available merely to save a party from the
consequences of an improvident bargain
• It is not available where the parties had no intention at all
as regards a particular matter, even if they clearly would
have done so had that matter been brought to their minds
• Rectification cannot be invoked to re-write the course of
history
• An erroneous assumption cannot justify an order for
rectification
Mistake in expression
• A mistake in expression is an essential ingredient of a claim for
rectification
• Thus rectification will not be ordered if a party executes a document
knowing that it does not reflect the terms of the prior accord
• Nor may rectification be invoked to correct a mistake as to the
consequences of the transaction, or the advantages of entering into it
• But rectification is available to correct a mistake in the language,
terms, meaning or effect of a document
• Thus, relief may be available even where the actual words of the
document were deliberately chosen by the parties, provided they were
labouring under a mistake as to their true meaning and effect
Rectification for unilateral mistake
•
Where only one party to a document is acting under a mistake, rectification
would have the result of imposing on the defendant a bargain which he did not,
and did not intend to, make, and relieving the claimant from a bargain which
he did, albeit did not intend to, make
•
Thus, rectification for unilateral mistake is a “drastic” remedy which is
available only in limited circumstances; and the conditions for the grant of
such relief must be strictly satisfied
•
In the case of unilateral mistake, the claimant’s conduct (such as its own
carelessness in reading the document carefully) may preclude the remedy
because it was the claimant’s own deficiencies rather than the defendant’s
unconscionable conduct which caused the mistake: Daventry per Etherton LJ
at [83], with the agreement of Lord Neuberger MR at [227]
Requirements for unilateral mistake
rectification
• By mistake, the document did not represent the claimant’s true
subjective intention at the time it was executed
• The other party “knew” of the mistake
• The non-mistaken party omitted to draw the mistake to the claimant’s
attention
• It would be unconscionable for the non-mistaken party to stand by and
insist upon the document taking effect according to its strict terms
Recent issues
•
Recent cases raise five areas of interest:
•
(1) The objective approach to common intention rectification
•
(2) The limits to “corrective construction”
•
(3) The continuing utility of rectification as a discrete remedy
•
(4) The blurred line between erroneous assumptions and drafting errors
•
(5) Non-contract cases, such as voluntary settlements
1 Objective consensus
•
•
•
•
•
Whilst Etherton LJ clearly approved of Lord Hoffmann’s analysis in Chartbrook,
Toulson LJ considered that Daventry highlighted “some real difficulties in the present
state of the law about rectification”: [117]
For the reasons set out at [173-177], Toulson LJ had difficulty in accepting, as a general
principle, that a mistake by both parties as to whether a written contract conformed with
a prior non-binding agreement, objectively construed, gave rise to a claim for
rectification
Where the application of the Chartbrook principle would result in holding the
respondent to a contract which he never intended to make, and never misled the
applicant into believing that he had intended to make, Toulson LJ found it hard to see
why the written contract should not prevail. Rectification should not bind a blameless
party to a re-formed contract which he did not intend
Toulson LJ thought it unlikely that Chartbrook would be the last word on rectification:
[181]. Lord Neuberger MR considered that Lord Hoffmann’s analysis might have “to be
reconsidered or at least refined”: [195]
However all three members of the Court of Appeal in Daventry considered that it would
not be appropriate to depart from the principle of the decision in the Chartbrook case on
the rectification issue.
Objective consensus (2)
•
In Scottish Widows counsel for the party claiming rectification accepted (at [46]) that the court had to
apply an objective test to the parties’ communications and ask whether a reasonable observer would
have concluded that the parties had the common continuing intention alleged
•
In HFI Farnborough LLP v Park Garage Group PLC [2012] EWHC 3577 (Ch) Judge Behrens said
(at [68]) that it was now clear (at least below the Supreme Court) that the common intention of the
parties must be judged objectively, in accordance with Lord Hoffmann’s obiter dicta in Chartbrook
•
In Ahmad v Secret Garden the Court of Appeal stated that in the case of common mistake at least, the
existence of the parties’ common intention was to be ascertained on an objective basis: [30]. Arden
LJ considered the quality of the evidence at [43]: “The evidence must meet the requirement for the
outward expression of accord. This stems from the law’s concern that parties should not be able to
disassociate themselves from their agreement simply because it has become commercially
undesirable. They have to show clear evidence of a consensus on some issue which the executed and
unrectified agreement does not reflect. The agreement has to be objectively ascertained by reference
to what they both did and said, and not to what each of them may have thought.”
Objective consensus (3)
•
In Forstater v Python (Monty) Pictures Ltd [2013] EWHC 1873 (Ch) at [87]
Norris J accepted the requirement of an “objectively ascertainable common
intention”, and said that by that term he meant no more than that the common
intention had to be established objectively, that is to say by reference to what
an objective observer would have thought the intentions of the parties to be
from what they said and did in the light of their shared knowledge
•
At [93] Norris J said that since subsequent conduct of the parties (such as the
rendering and payment of invoices and the summary of current arrangements)
was relevant to the testing of recollection of an oral contract, logically he also
considered it to be relevant to the objective ascertainment of any common
intention which preceded the making of a contract that was itself recorded in
writing even if subsequent conduct had no real part to play in the construction
of the written agreement
Objective consensus (4)
•
In HFI Farnborough at [69] Judge Behrens accepted counsel’s summary of Etherton LJ’s analysis of the difference
between subjective and objective intention in Daventry (at [85-88]) as follows:
•
(1) Where the parties are subjectively and objectively in agreement but the formal documentation as executed fails to
give effect to that prior agreement, rectification should be granted to bring the documentation into line with their prior
accord
•
(2) Where the parties never subjectively had the same intention, but the communications crossing the line show that
objectively there was a continuing common intention, and the formal documentation reflected those prior
communications, rectification should be refused
•
(3) Where there was objectively a prior accord, but one of the parties subjectively changed their mind, but objectively
did not bring that change of mind to the attention of the other party (a) if the documentation reflects the prior accord,
it should not be rectified, but (b) if the documentation reflects the changed but uncommunicated subjective intention it
should be rectified
•
(4) Where there was objectively a prior accord (whether or not a subjective common intention) and one of the parties
then objectively changed their mind, that is to say, made apparent to the other party that they intended to enter into the
transaction on different terms, if the documentation as executed gives effect to the objectively-indicated change of
mind, rectification should be refused
•
That analysis was said by Etherton LJ (at [89]) to show “why it is good policy to favour objective accord or objective
change of accord over subjective belief and intention in cases of rectification for mutual mistake”
2 Corrective construction
•
“Corrective construction” was refused in Scottish Widows (and a claim for
rectification failed) where, objectively speaking, there was no lack of
commercial sense in giving the words under consideration the precise meaning
they ostensibly and explicitly conveyed
•
Arden LJ emphasised (at [21-23]) that the mistake must be one of language or
syntax; and that it was not enough that “the parties have mistakenly failed to
provide for a particular circumstance. For the court to correct that error would
be to rewrite the parties’ contract and to step beyond the permissible limits of
interpretation.”
•
It could be said that “something must have gone wrong with the language” if a
literal construction produced an interpretation that made the document
ineffective in law, or irrational and arbitrary, or made the provision in question
inconsistent with some other provision which it was clear must have
precedence
Corrective Construction (2)
•
“…Statements made in the course of negotiations are often no more than statements of a
negotiating stance at that point in time, thus shedding more heat than light on issues as
to interpretation of the final deal. The reaction of one of the witnesses in this case to a
statement made in the course of negotiating the sub-sub-underlease vividly illustrates
this point. At being shown a statement that SW would not agree to any outlay beyond
£10m, he said that he did not know whether SW meant that. He added: “They would say
that, wouldn’t they?”
•
These factors mean that judges should exercise considerable caution before treating as
admissible communications in the course of pre-contractual negotiations relied on as
evidencing the parties’ objective aim in completing the transaction. Parties could agree
in the course of negotiations that, come what may, the aim of their transaction will be to
do X, but in that situation their communications are likely to be enforceable as a
collateral contract”:
Scottish Widows at [34-35] per Arden LJ
Corrective Construction (3)
•
In Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, [2013] 2 WLR
481, a majority of the Court of Appeal (Longmore and Lewison LJJ, Arden LJ
dissenting) declined to construe a registered charge of land as if it included the extended
power of sale contained in a contemporaneous facility agreement
•
Nothing had gone wrong with the language of the charge so far as concerned the power
of sale, which made perfect sense as it stood. What had arguably gone wrong in that
respect was that the parties had failed to include in the charge a provision extending the
statutory power of sale that they had agreed it should have contained
•
In view of the public nature of a registered charge, the reasonable person with all the
background knowledge of the parties would conclude that matters which the parties had
chosen to keep private should not influence those parts of the bargain which they had
made public in the register and so could not influence the process of interpretation
Corrective Construction (4)
• In the context of a charge intended to be completed by
registration, the insertion of a whole missing clause ought
to have been effected, if at all, by way of a properly
pleaded and proved claim for rectification, which would
mend the expression of the bargain and not the bargain
itself. The case should not have been decided summarily as
a pure question of interpretation of the charge
• To treat the registered charge as including the extended
power of sale that was included in the facility letter alone
was “a step too far”: [137]
3 Utility of rectification
• In his leading judgment in Cherry Tree Lewison LJ posed the question
(at [90]) whether the remedy of rectification served any useful purpose,
or had it been subsumed into the modern approach to the interpretation
of contracts
• In Lewison LJ’s judgment the instant case demonstrated that there
“was still a useful role for rectification to play”: [98]. He did not
“consider that the Chartbrook case abolished the remedy of
rectification”: [120]
• If the missing clause were inserted by means of interpretation, then the
“interpreted” charge would rank in priority from the date of its
registration. A contract could not mean one thing when it was made
and another thing following court proceedings
Utility of rectification (2)
•
If, on the other hand, the missing clause was inserted into the charge by
rectification, it would take effect in accordance with the priority provisions of
the Land Registration Act 2002 rather than being fully retrospective
•
Thus, the insertion of the missing clause by way of interpretation rather than
by way of rectification would bypass the carefully calibrated rules of priority
which were an essential feature of the modern law of land registration
•
On the facts of the instant case, that did not arise; but the question was one of
principle, and hard cases made bad law:
Lewison LJ at [122]
Utility of rectification (3)
•
At [134] Lewison LJ recorded that counsel for the respondent purchaser had
struggled to give examples of cases in which a mistake could not be
corrected by interpretation yet could be corrected by rectification. In the
end, he was said to have managed two. One was where the final instrument
was in the form that the parties had in fact agreed but where the parties had
misunderstood the legal effect of what they had agreed. The other was
where recourse to the background was precluded. So far as the first example
was concerned, Lewison LJ doubted (though he did not decide) whether put
in those general terms it fell within the scope of rectification at all.
Rectification did not mend bargains; it mended the expression of bargains.
That is why the rectification claim failed in Frederick E Rose (London) Ltd
v William H Pim Jnr & Co Ltd [1953] 2 QB 450. So far as the other was
concerned, that was the very point at issue in the instant case. For the
reasons Lewison LJ had given, the role of background in a case such as the
present was extremely limited.
4 Erroneous assumptions
•
In Lloyds TSB v Crowborough Properties [2013] EWCA Civ 107 (reversing
[2012] EWHC 2264 (Ch)) the claimant bank sought to rectify the schedule to a
Tomlin Oder compromising proceedings in which the bank had sought to
enforce charges over development land. The developer company had borrowed
money from the bank guaranteed by two individuals, who had given charges
over land they owned to secure their own liability as sureties, but not the
company’s obligations as principal debtor. One of the scheduled terms was that
in return for a money payment, the individuals would be released from their
guarantees. Shortly after the order was made, the bank realised that the release
of the guarantees would entail the discharge of the charges over the
individuals’ land because there would no longer be any liability on their part in
respect of the company’s borrowings. The bank sought rectification of the
order on the basis that the parties’ common intention was that the bank was to
be entitled to look to the security over the individuals’ properties even after the
settlement sum had been paid
Erroneous assumptions (2)
•
Before Judge Purle QC the claim for rectification failed. He found that the objectively ascertainable
intention of all the parties was that the bank was to retain such rights as it had. But that would not be
enough because the rights that it had were over the properties to secure the indebtedness of the
individuals. What it needed was a new charge to secure separately the indebtedness of the company
over the individuals’ properties. However, in drafting the Tomlin order, the bank assumed that there
was already such a charge which would remain in place. As the flaw in the drafting was not
perceived, the need for a new charge was not an issue to which anyone ever turned their mind
•
The question the judge posed for himself was whether or not there ever was a sufficiently clear
common intention that the bank was to have a separate charge over the individuals’ properties to
secure the company’s debt. The agreement had been entered into upon the basis of a mistaken shared
assumption that the bank already had such a charge. That might have given rise to some claim for
estoppel by convention, but no claim for rectification; and the judge therefore refused to rectify the
schedule to the Tomlin order
•
There was a mistaken assumption that that charge was wide enough to survive the discharge of the
guarantees, but no intention (because of that mistake) to grant a wider charge. Judge Purle reached
that conclusion with undisguised unease. It seemed to him, however, that where parties mistook the
effect of their contract upon the basis of a common assumption that turned out to be wrong, what they
had not done was to record their agreement incorrectly; they had made a bad deal. In those
circumstances, it seemed to the judge that the rectification claim fell to be dismissed.
Erroneous assumptions (3)
•
The Court of Appeal (Mummery, Rimer and Lewison LJJ, in an extemporary judgment
by Lewison LJ which he apparently started to deliver at 3.10 pm on the day of the
appeal) disagreed, and ordered rectification of the Tomlin order
•
The judge had characterised the rights which it had been intended that the bank should
retain in formal legalistic terms, and in a particular way, on the basis that that there was
only one legal means of achieving the solution that both parties thought was necessary
•
He had held that the bank’s right was to have a charge over the individuals’ land to
secure only their liabilities as sureties; thus what the bank needed were fresh charges
over the individuals’ land to secure the company’s debts directly
•
But it was equally valid to characterise the bank’s existing right in commercial, if to
some extent legally inaccurate, terms: to sell all the charged properties and apply the
sale proceeds towards the discharge of the company’s indebtedness. That on the
evidence, and indeed on the judge’s findings, was plainly the right that both parties
intended the bank to retain
Erroneous assumptions (4)
•
•
•
•
There were different ways of achieving the agreed objective, but those different ways
were simply mechanics. They were all directed to the same end: to ensure, as both
parties agreed, that all the charged properties could be sold by the bank and their sale
proceeds applied towards discharge of the company’s indebtedness. “As is sometimes
said, equity looks to the intent rather than to the form”: [93]
By concentrating on only one mechanism for achieving the agreed objective, the judge
had not adequately analysed the evidence of what had been agreed
“It may be that the cause of the error was a mistake in assumption that the change in
wording would not affect the Bank's ability to look to the charged properties as part of
its recovery. But in my judgment the fact that the cause of the drafting error is an
erroneous assumption does not remove the drafting error from the reach of rectification.
Erroneous assumptions and drafting errors are not in watertight compartments. Many
drafting errors are no doubt made because the drafter has assumed that the affect of
altering the wording in one respect will not affect other parts of the draft”: [94]
In focussing upon the grant of a fresh charge, the judge had taken too narrow a view
because that mechanism was not the only way in which the agreed objective could have
been achieved
5 Non-contract cases
•
In Day v Day [2013] EWCA Civ 280, [2003] 3 WLR 556 the Court of Appeal
considered the law governing the rectification of a voluntary settlement. It held
that it is not a legal requirement for the rectification of a voluntary settlement
that there is any outward expression or objective communication of the
settlor’s intention, equivalent to the need to show an outward expression of
accord for rectification of a contract for mutual mistake
•
Nothing said by Lord Hoffmann in Chartbrook touched upon the requirements
for rectification for unilateral mistake in a non-contract case
•
But although not a legal requirement, it will plainly be difficult as a matter of
evidence to discharge the burden of proving that there was a mistake in the
absence of an outward expression of intention: per Sir Terence Etherton C at
[22].
Further reading
• Hodge: Rectification: The Modern Law and Practice
Governing Claims for Rectification for Mistake, published
by Sweet & Maxwell in 2010