London Common Law & Commercial Bar Association RECTIFICATION

London Common Law & Commercial Bar Association RECTIFICATION

London Common Law & Commercial Bar Association RECTIFICATION FOR MISTAKE His Honour Judge David Hodge QC 18 January 2017 Contents Introduction Sources of mistake Rectification by construction

Common mistake rectification Unilateral mistake rectification The objective approach to common mistake rectification Criticisms of the objective approach Introduction Where the terms of a document fail to reflect the true agreement between the parties it may be rectified so as to make it correspond to their 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 Rectification does not mend bargains; it mends the expression of bargains. The court should ask itself: is this a case of mending a document or mending a bargain?

Rectification claims are highly fact specific. In Daventry DC v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333, 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. 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, [2013] 3 EGLR 42 per Arden LJ (with the agreement of Lloyd Jones and Fulford LJJ) at [28-29]. Sources of mistake 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 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: 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: East v Pantiles [1982] 2 EGL 111 approved in Chartbrook v Persimmon [2009] UKHL 38, [2009] 1 AC 1101 at [22 25] 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 Arnold v Britton [2015] UKSC 36, [2015] AC 1619

A court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight:[20] A court is not entitled to re-write a contractual provision simply because a factor which the parties catered for does not seem to be developing in the way in which they may well have expected: [41] The requirements for common mistake rectification 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. This classic statement was approved by the Lord Hoffmann 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 the subjective intentions) of the parties but rather 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 second of Peter Gibson LJs

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 LJs clear and helpful analysis of the law In NHS Commissioning Board v Silovsky [2015] EWHC 3141 (Comm) at [31] Leggatt J agreed with Lord Neuberger in Daventry that Lord Hoffmanns view in Chartbrook that, in determining whether parties had a continuing common intention, it was not their actual states of mind which counted but what a reasonable observer would have thought their intentions to be, might need to be reconsidered at some point; but for now Lord Hoffmanns truly objective approach had to be treated as authoritative by judges at first instance. There was, therefore said to be no need for present purposes to investigate the parties' subjective intentions.

However, a party can always give evidence that the wording of the document was the result of a mistake. Since rectification requires proof of a mistake in failing accurately to record the parties true intention, mistake is an essential part of the cause of action. In that sense, the parties subjective intentions must still be relevant. 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. 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: see Daventry per Etherton LJ at [82] and Toulson LJ at [158]. Three further points of principle

Evidence of a partys 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 [8184], 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 a claim based on unilateral mistake, the parties subjective states of mind are relevant In the case of unilateral mistake, the claimants conduct (such as its own carelessness in reading the document carefully) may preclude the remedy if the claimants own deficiencies rather than the defendants unconscionable conduct 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 claimants 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 claimants 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: Thomas Bates & Son Ltd v Wyndhams (Lingerie) Ltd [1981] 1 WLR 505 at 515H 516C per Buckley LJ The objective approach to common intention rectification In HFI Farnborough LLP v Park Garage Group PLC [2012] EWHC 3577 (Ch) at [69] Judge Behrens accepted counsels summary of Etherton LJs 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 At [227] Lord Neuberger expressly agreed with this clear and helpful analysis of the law, which therefore forms part of the ratio of the Court of Appeals decision

Whilst Etherton LJ clearly approved of Lord Hoffmanns 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 reformed 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 Hoffmanns 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. In Scottish Widows v BGC International [2012] EWCA Civ 607, 142 Con LR 27 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 Hoffmanns 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 laws 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. 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 Criticisms of the objective approach

While the objective approach should be regarded as representing the law, at least below the level of the Supreme Court, the present state of the law of rectification is unsatisfactory. The objective approach is not consistent with the function of rectification as an equitable remedy founded upon principles of good conscience which exist to supplement, and not merely to complement, the common law rules governing the formation and interpretation of contracts The objective approach can produce unfortunate results in practice, eroding the protection afforded to the primacy of the final, written document as the embodiment of the parties agreement Treats a prior objective consensus as a superior statement of the parties true agreement than the terms of their final written contract

May unfairly penalise a party who subjectively intended the consensus reflected in the final written contract May unfairly reward a party who subjectively intended the final written consensus but who now seeks rectification to accord with a prior objective consensus he may never have subjectively intended Creates a sharp, unsatisfactory and historically dubious division between the kinds of mistake required for common and for unilateral mistake rectification Judicial reservations Crossco No 4 Unlimited v Jolan Limited [2011] EWHC 803 (Ch) at [234 - 255] per Morgan J: see Hodge on Rectification, 2nd edn (2016) para 3-99 Tartsinis v Navona Management Co [2015]

EWHC 57 (Comm) at [87 99] per Leggatt J: see Hodge on Rectification, 2nd edn (2016) para 3101 An alternative principled approach Subject to the courts discretion, and provided the other conditions for such a claim are satisfied, rectification for common mistake should be available on satisfactory proof of either (1) a prior concluded oral contract, objectively ascertained, which has not been varied or superseded, provided such agreement is not contrary to the claimants own actual subjective intention, or (2) an actual, subjective consensus between the parties: see Hodge on Rectification, 2nd edn (2016) paras 3-104 and following

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