Rectification in Contract

© His Honour Judge David Hodge QCA Specialist Chancery Circuit Judge

Bencher of Lincoln’s Inn17th 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 [28-29].

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 computer-

generated 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