Court of Appeal considers legal basis for contract rectification

The judges, in a long and comprehensive judgment including review of a range of legal authorities from a number of jurisdictions, tied themselves in intellectual knots endeavouring to determine the correct basis for rectification to be permitted. They ultimately concluded that a finding of 'common intention' between the parties required some sort of 'outward expression of accord', or communication between them, in order to show that the parties understood each other to share that common intention - a subjective, rather than objective, test.

In doing so, the Court of Appeal concluded that comments on rectification made by Lord Hoffman in the leading case on construction – the 2009 House of Lords decision in Chartbrook Ltd v Persimmon Homes Ltd (Chartbrook) - were incorrect. Lord Hoffman had suggested that the common intention test was a purely objective one, which only required the party seeking rectification to demonstrate what a reasonable observer with knowledge of the background and communications between the parties would have believed their common intention to be.

The Court of Appeal's decision acts as a warning that, for a rectification action to succeed, careful consideration will need to be given to the precise sources from which the alleged common intention emerges, given what has been said.

But what is rectification? Imagine a not uncommon problem. Some considerable time after a contract has been entered into, an issue arises. When the parties dig out the contract, it does not answer their question. In this case, the holding company of an elderly care services provider claimed that it had agreed to provide security in connection with a 2012 corporate acquisition. However, the documents that it actually signed committed to undertake additional, onerous obligations, which the trial judge found that neither party had intended.

In these circumstances, the parties have two courses of action available to them. They may be able to persuade the court that the contract can be interpreted in such a way as to resolve the confusion. Where, as here, this is not possible, they may seek to apply for rectification, as the parent company did in this case.

As the name suggests, rectification means fixing matters after the event. Broadly, the objective is to ensure that if a document does not accurately reflect the common intention of the parties, it can be altered so that it does. While cases of rectification are more often threatened than followed through, it remains a useful remedy, particularly given its flexibility.

Lord Hoffman's view that the relevant test of intention is a purely objective one has been interpreted by the Court of Appeal as allowing it to draw its own conclusions from the evidence of common intention presented to it. However, his comments were 'obiter', rather than forming part of the judgment in the Chartbrook case, and have proven controversial, not least because they run contrary to previous authority.

In coming to their own conclusions, the judges in this case referred to numerous academic writings and lectures given by leading judges following the Chartbrook case. They also concluded that there were good reasons of "policy" for enforcing a more demanding test before rectifying the wording of a contractual document. In the view of the judges, such a test "affords appropriate respect to the primacy of the final, agreed, written terms" of the contract, and ensures that the "certainty and security" of commercial transactions is adequately protected.

The judges picked up on criticisms that adopting a subjective test would make rectification of contracts more difficult, but concluded that this was "not an objection ... but a positive merit of such a test". On this point, they agreed with leading academic professor Paul Davies, who said: "Formal, written contracts should be presumptively upheld and instances of rectification should be rare. Any other approach would undermine the importance commercial parties put on the final written agreement".

That is not to say that parties should give up on rectification applications - far from it. In the real world, what will sometimes be found to have occurred is that parties will have exchanged communications, usually emails, from which their intention on a particular point was perfectly apparent, whether subjectively or objectively. If that is the case, there ought to be no bar to rectification, whatever the Court of Appeal suggests.

Craig Connal QC is a commercial litigation expert at Pinsent Masons, the law firm behind Out-Law.