At the outset of any transaction, it’s important that all of the parties involved have a common purpose i.e. the outcome of their transaction should be agreed. The recent case of FSHC Group Holdings Ltd v GLAS Trust Corp Ltd  EWCA Civ 1361 offers guidance for parties who find themselves subject to an agreement which doesn’t reflect their intentions.
Knowing the outcome is normally the first step to any legal transaction and will often form the basis of a legally binding agreement drafted around this common purpose. While the terms of an agreement might be heavily negotiated, the underlying purpose will usually remain the same. For example, in a sale transaction where Party A sells a product to Party B, the sale terms may be negotiated but the end-result of Party A selling a product to Party B remains the same.
The case of FSHC Group Holdings Ltd v GLAS Trust Corp Ltd has recently been heard in the Court of Appeal offering guidance for parties who find themselves subject to an agreement which doesn’t reflect their intentions. This is known as ‘common mistake’. The remedy for common mistake is rectification and this remedy allows the Court to amend the agreement to the extent to which it does not reflect what was originally intended by the parties. The party seeking this remedy from the Court must show that:
- The parties had a common intention, whether or not it amounts to a complete prior agreement;
- The common intention continued at the time when the parties entered into the contract;
- There was some outward (express or implied) manifestation of accord between the parties; and
- Due to a mistake, the document did not reflect the common intention of the parties.
As part of a wider transaction, FSHC Group Holdings Ltd (FSHC) had agreed to provide security over a shareholder loan. Following completion, lawyers reviewing the documents could not find any document containing terms granting the security. The parties attempted to resolve the omission by FSHC acceding to two existing security agreements. This did provide the missing security, however, also placed FSHC subject to additional onerous obligations. FSHC sought rectification of the two additional security documents which went beyond what the parties had understood they were entering into.
The Courts will consider what the parties’ intentions were at the time of entering into the agreement, for which they are seeking rectification. Whether the Court should apply an objective or subjective test in deciding intention has been contested in previous cases. However, the Court of Appeal in this case held that different principles would apply depending on the reason for the rectification.
The Court stated that where the parties had a binding agreement to execute a document which they understood to contain certain terms, but the final agreement actually contained different terms, then the basis for rectification is the need to respect the parties’ original agreement. The Court held that this original agreement should be determined objectively following the general principles of contractual interpretation and granted rectification of the two documents.
If you require help and advice regarding a commercial agreement, then please contact BHW’s commercial team on 0116 289 7000 or email email@example.com.