Court of Appeal hands down key judgment clarifying the law on rectification

03 September 2019

In FSHC Group Holdings Limited v Glas Trust Corporation Limited the Court of Appeal provided welcome and much needed clarification of the test the courts should apply in deciding whether to rectify a document because of a common mistake of the parties.

The judgment will likely be of interest to employers and trustees who are considering applying to court to rectify mistakes in the legal documentation of their pension scheme. It also highlights the importance of employers and trustees promptly seeking legal advice when spotting errors in scheme documents as the evidence needed to support a rectification application is likely to become more difficult to obtain as time passes.



FSHC Group Holdings Limited v Glas Trust Corporation Limited

Background

The parties entered into two deeds in 2016, the purpose of which was to provide security which Glas Trust Corporation Limited had previously agreed to give in connection with a transaction which had taken place in 2012.

The trial Judge concluded that, when the deeds were signed, the parties intended them to do no more than provide security by means of an assignment of the benefit of a shareholder loan. However, the effect of the actual wording of the deeds was not only to provide security over the shareholder loan but to impose additional, onerous obligations on Glas Trust Corporation Limited. Accordingly, the Judge ordered that the deeds be rectified.

In reaching his conclusion, the Judge concluded that it was "subjectively" and "objectively" the parties' common intention to execute a document which did no more than grant security over the shareholder loan. In other words, the parties actually had that intention and an objective observer would have concluded that they did so intend.

What were the grounds of appeal?

FSHC Group Holdings Limited appealed. It did not deny that the common subjective intention of the parties was as the Judge had found. However, it said that the test for rectification was purely objective, in other words, it was necessary to identify the intention of the parties as an objective observer would have thought it to be. As such, it was open to the Court of Appeal to form its own opinion of what the parties must have intended. Looking at it that way, FSHC Group Holdings Limited said that the trial Judge had been wrong to decide that, objectively assessed, the parties had a common intention which had not been reflected in the deeds.

FSHC Group Holdings Limited's appeal was based on what Lord Hoffmann had said in Chartbrook Ltd v Persimmon Homes Ltd to the effect that, when ascertaining the parties' intentions for the purposes of rectification, the court should not seek to discover the parties' actual states of mind but should decide what an impartial observer would have concluded their intentions were with knowledge of the background facts and communications between them.

The Court of Appeal's decision

The Court of Appeal dismissed the appeal. After a long and comprehensive review of the case law going back almost 300 years, the court concluded that Lord Hoffmann had been incorrect to regard the common intention needed for rectification as objective rather than subjective.

The court reasoned that to apply a purely objective test of intention was inconsistent with the fact that rectification is a remedy to correct an actual common mistake in a document as the result of an inadvertent failure of the document to give effect to what the parties had intended. Moreover, insisting on the need to show the parties' actual, subjective, intentions maintained the high burden a party should satisfy to obtain rectification, thereby affording respect to the words the document had used. The Court of Appeal expressly stated that insisting on a subjective test would and should make rectification more difficult to achieve.

Whether the test to be applied is subjective or objective, the court said that it was fundamental that contractual rights and obligations should be based on the mutual assent which the parties had communicated to each other, not on uncommunicated intentions which happened, without the parties knowing it, to coincide.

However, the court contrasted the position where a party is seeking to rectify a contract with one in which a party is seeking to rectify the provisions of a pension scheme. Referring to the well-known pension cases of AMP (UK) plc v Barker, Gallaher v Gallaher Pensions Ltd and Re IBM Pension Plan, the Court of Appeal said it would often be sufficient to justify rectification of the provisions of a pension scheme that the intentions of the trustees and the employer coincided in that they both independently had the same intention regarding the provision in question.

It may not be necessary to show that the trustees and the employer had a common intention as a result of a communication with each other. This was because, in many cases, the validity of the legal provisions of a pension scheme did not depend on employers and trustees having mutually agreed it - only on one having approved what the other had done.

Potential impact of the judgment

Lord Hoffmann's insistence in Chartbrook on an objective test in establishing the relevant intention for the purposes of rectification had been controversial and the subject to critical academic comment. By insisting that the court's focus must be on the subjective intentions of the parties (rather than on what an objective observer would have concluded those intentions to be) the Court of Appeal has taken the law back to the traditional reason for rectifying a legal document, namely, that it did not reflect the parties' actual intentions.

The judgment will be of particular interest to academics. Whether as a matter of practice it has an impact on the number of rectification applications being made remains to be seen.

Rectification applications involving pension schemes continue to be made, most of them resolved by consent between the parties on the basis that the case for rectification is powerful and difficult to resist. This decision is likely to remind parties and their legal advisers when considering bringing a rectification claim of the importance of seeking to secure witness evidence from individuals involved when the documentation was executed as to what the parties had intended and of collating as much contemporaneous documentary evidence as possible to back up that evidence. It also highlights the importance of employers and trustees promptly seeking legal advice when spotting errors in scheme documents as the evidence needed to support a rectification application is likely to become more difficult to obtain as time passes.

One of the leading text books on the topic commented in 2016 that the state of the law on rectification was unsatisfactory, over-complicated, unpredictable and capable of producing unacceptable consequences. If the Court of Appeal judgment in FSHC Group Holdings Limited v Glas Trust Corporation Limited helps to put that right, it will be welcomed by lawyers and their clients alike.


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