FSHC Group Ltd v GLAS Trust Corporation [2019] EWCA Civ 1361

The Parent executed accession deeds intended only to provide missing security over a shareholder loan but inadvertently undertook additional onerous obligations. The Court of Appeal clarified that rectification for common mistake requires proof of actual subjective common intention, not merely an objective assessment, and upheld rectification of the deeds.

Facts

FSHC Group Holdings Limited (the Parent) was the holding company of the Four Seasons Health Care Group. Following a 2012 acquisition, the Parent was contractually obligated under an Intercreditor Agreement to assign its interest in a shareholder loan as security. This obligation was inadvertently overlooked until 2016. To remedy this, lawyers advised the Parent to accede to existing Intercompany Receivables Security Assignments (IRSAs). However, by acceding to the IRSAs, the Parent unknowingly undertook additional onerous obligations including primary liability for group debts and restrictions on its business activities. Neither the Parent nor Barclays (the security agent) realised the full effect of the accession deeds at the time of execution.

Communications Between Parties

Communications between Allen & Overy (for the Parent) and Barclays made clear the sole purpose was to provide the missing security. As the trial judge found, both parties believed and intended the deeds would do no more than this.

Issues

The central issue was the correct legal test for rectification of a contract for common mistake. Specifically, whether rectification requires proof of actual subjective common intention of the parties, or whether an objective test (what a reasonable observer would have understood the parties’ intentions to be) suffices.

Judgment

The Court of Appeal (Lord Justice Leggatt, Lady Justice Rose, and Lord Justice Flaux) dismissed the appeal and upheld the trial judge’s order for rectification.

Key Legal Principles

The Court conducted a comprehensive review of the doctrine of rectification, examining its historical development, relevant precedents including Joscelyne v Nissen [1970] 2 QB 86 and Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561, and the controversial obiter remarks of Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101.

“before a written contract may be rectified on the basis of a common mistake, it is necessary to show either (1) that the document fails to give effect to a prior concluded contract or (2) that, when they executed the document, the parties had a common intention in respect of a particular matter which, by mistake, the document did not accurately record. In the latter case it is necessary to show not only that each party to the contract had the same actual intention with regard to the relevant matter, but also that there was an ‘outward expression of accord’ – meaning that, as a result of communication between them, the parties understood each other to share that intention.”

The Court rejected the purely objective test endorsed in Chartbrook, holding that Lord Hoffmann’s observations were obiter dicta and inconsistent with binding precedent and sound principle.

“The justification for rectifying a contractual document to conform to a ‘continuing common intention’ is therefore not to be found in the principle that agreements (as objectively determined) must be kept. It lies elsewhere. It rests on the equitable doctrine that a party will not be allowed to enforce the terms of a written contract, objectively ascertained, when to do so is against conscience because it is inconsistent with what both parties in fact intended (and mutually understood each other to intend) those terms to be when the document was executed.”

Application to Facts

The trial judge’s unchallenged findings established that both parties subjectively intended the accession deeds to do no more than provide the missing security, and that this intention was communicated between them. The mistake about the additional obligations was a mistake as to legal effect, not merely commercial consequences.

Implications

This decision provides authoritative clarification of the test for rectification for common mistake. It confirms that actual subjective common intention must be proved, alongside an outward expression of accord. The purely objective approach suggested in Chartbrook was definitively rejected. This restores certainty to the law and maintains appropriate respect for the primacy of formal written contract terms while preserving the equitable remedy where genuine common mistakes occur.

Verdict: Appeal dismissed; rectification of the accession deeds upheld

Source: FSHC Group Ltd v GLAS Trust Corporation [2019] EWCA Civ 1361