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My contract doesn’t say what it should – what can I do?

Business people are exchanging document Print publication

12/12/2019

Louise Norbury-Robinson, Commercial Dispute Resolution specialist, comments on a Court of Appeal case that has clarified the law on rectification, and offers ‘prevention’ and ‘cure’ advice in connection with contractual mistakes.

Why is FSHC Group v Glas Trust Corp of interest?

At the outset of any commercial arrangement, parties are keen to get on with doing business together.  That can mean that contracts can be prepared and completed too hastily or without due care and attention.  Mistakes can arise – whether that be as a result of a last minute rush to complete, misunderstanding, miscommunication, drafting error or oversight, or the like – even in cases where arrangements are meticulously documented in formal, written contracts.  That can result in a contract not accurately representing a party’s intentions which, in turn, can produce unfavourable commercial consequences.

The law of rectification may enable a contract to be retrospectively corrected by the court.  However, the law of rectification is complex and, until recently, has been unclear and difficult to apply.

In FSHC Group Holdings Ltd v Glas Trust Corporation Ltd [1] the Court of Appeal undertook a detailed analysis of the law of rectification, and formulated a new test for the establishment of a claim.

What are the key takeaways?

  • Rectification allows the retrospective correction of a written contractual document which does not reflect the terms of the true contract at the time it was made.
  • The failure to correctly record the parties’ agreement must be as a consequence either of a mistake common to both parties whereby the written agreement does not record the terms as both intended (known as ‘common mistake’), or where one party is mistaken as to the failure to incorporate the true agreement in the documents and the other party is aware of the mistake and fails to draw attention to it (known as ‘unilateral mistake’).
  • Common mistake can arise in two scenarios: (1) ‘common agreement mistake’ – where a contract document fails to give effect to a prior concluded contract (for example, where a binding contract has been agreed orally or informally in correspondence, but then that is not accurately reflected in the subsequent formal written contract document); or (2) ‘common intention mistake’ – where the parties had a common intention in relation to a contractual provision which, by mistake, was not accurately recorded in the written contract.
  • FSHC Group v Glas Trust Corp confirms:
    • In common agreement mistake claims, an objective test applies. The rectification is required to give effect to a prior agreement, the terms of which can be objectively determined by reference to what the reasonable business person with knowledge of the facts at the time the contract was entered into would conclude.
    • In common intention mistake claims, a subjective test applies. This type of mistake is concerned entirely with the parties’ intentions/states of mind at the time the contract was completed.
  • To obtain rectification for common intention mistake a claimant must establish:
    • The parties had a subjective common intention in respect of the provision now alleged to be incorrect;
    • There was an outward expression of accord as to that subjective common intention;
    • (The outward expression of accord need not be an express declaration of a shared understanding, but will arise somehow as a result of communication between the parties)
    • The common intention was continuing at the time of completion; and
    • By mistake, the document did not reflect the common intention.
  • Rectification claims are (and, the Court of Appeal noted, should be) notoriously difficult, not least because convincing proof is required to counteract the very strong, primary evidence of the parties’ intention as displayed by the written contact itself. The Court of Appeal acknowledged that, for important policy reasons, appropriate respect should be afforded to the primacy of final, agreed, written terms of contract [2], and it is likely that the new subjective test for common intention mistake will represent an even higher bar for claimants to overcome than ever before.
  • Finally, rectification is an equitable remedy. It is therefore discretionary and, when exercising its discretion, the court will also apply certain principles of fundamental justice, including the equitable maxim of ‘clean hands’ (that is, anyone looking to equity for a remedy must be free of wrong doing him/herself); and the doctrine of ‘laches’ (that is, delay can cause unfairness in itself and so an equitable claim may be barred if it is not brought within a timely manner).

Practical advice

Prevention: The best advice for contracting parties and their advisers is, of course, to take the greatest possible care to ensure that they read, and fully understand the implications of, all of the terms of any contract, and to ensure that the terms accurately reflect their intentions prior to signing and completing.

In addition, as a matter of good practice, parties and their advisers should routinely create and retain [3] records of contractual negotiations, the commercial context, and their requirements, intentions and understanding in relation to the deal that is being done.  Such records may be relied upon in future to avoid, resolve or support any rectification claim.

Cure: For all practical purposes, however, what should you do if you discover a mistake in any of your contracts?

  • Start with the wording in the contract itself. Is there actually a mistake, or is there is genuine uncertainty as to the meaning of the provision? A mistake may lead to a rectification claim, whereas uncertainty may give rise to a question of contractual interpretation.  The latter may be more straightforward to resolve and, in some circumstances, commercial common sense may be taken into account and may assist [4].
  • Is there any scope for settlement? It is rare for any contractual mistake or interpretation dispute to be clear cut. Even if the odds are against you, the chances are that any grey area and inevitable litigation risk can be exploited in negotiations to encourage a commercial compromise.
  • In any event, it is good to talk. Disputes as to the meaning and effect of contractual provisions often arise by virtue of the fact that there is an ongoing business relationship between the parties. It can be in the interests of all concerned for the parties to behave in a reasonable and commercially sensible manner.
  • If the wording in the contract is clear and represents a mistake in the drafting of the contract, check whether there are any clauses relating to amendment or variation of contractual terms, and consider the potential to amend the offending provision going forward. Alternatively, take specialist legal advice in relation to a claim for rectification.
  • Another option which may, in some circumstances assist, is to ask whether the particular provision was entered into in reliance on any misrepresentations? If so, the contract could be set aside and financial compensation could be payable. Again, specialist advice will be required.
  • Finally, consider whether you were properly advised when the contract was completed. It may be possible that any losses could be recouped via a professional negligence claim.

For further advice or assistance, please do not hesitate to contact Louise Norbury-Robinson or any member of Walker Morris’ Commercial Dispute Resolution team.

[1] [2019] EWCA Civ 1361
[2] Ibid para 173
[3] probably for the life of the contract plus a period of 6 of 12 years thereafter (depending on whether the contract is made by deed), to take account of any applicable limitation period
[4] For further information and advice in relation to contractual interpretation, see our earlier briefings: Contractual interpretation: Literal meaning v commercial common sense and Overage and contractual interpretation: Another recent development dispute

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