FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019]

In FSHC Group Holdings Limited v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361, the Court of Appeal overturned the precedent set by Chartbrook v Persimmon [2009] and established a new test for the rectification of a common mistake. The court differentiated between cases where rectification is based on a prior contract and those based on a common continuing intention, asserting that the test is objective in the former and subjective in the latter.

The facts of the case involved FSHC providing security for a transaction to GLAS, the security agent of the creditors. Due to a mistake, FSHC failed to assign a security interest to GLAS. Subsequently, FSHC and GLAS entered into two security deeds, believing them to provide no greater security to the creditors than the original missing security. However, the deeds ended up imposing more onerous requirements on FSHCC, leading to FSHC seeking rectification.

The Court of Appeal, led by Legatt LJ, granted rectification, highlighting a common mistake in the deeds based on the continuing common intention of the parties, assessed subjectively. Legatt LJ outlined the doctrine of rectification for common mistake, stating that it could be granted when the document fails to give effect to a prior concluded contract or when the parties had a common intention that the document did not accurately record. In the former case, the meaning of the prior contract is objectively assessed, while in the latter case, the common intention must be actual, with an outward expression of accord demonstrated through communications between the parties.

The court disagreed with Lord Hoffmann’s observations in Chartbrook v Persimmon [2009], stating that the approach in Chartbrook v Persimmon should be abandoned based on principles, precedents, and policy reasons. Legatt LJ argued that different principles are at play, justifying an objective test for rectification based on a prior concluded contract and a subjective test for rectification based on a common continuing intention.

Legatt LJ justified the subjective test by emphasising the equitable principle of good faith when there is no prior contract. The court should not hold parties to the terms of an objective consensus reached during negotiations but never intended to be binding. The conscience of a party to enforce the formal agreement is contrary to what the parties intended to be the terms, justifying an exception to the objective test for interpretation.

The court's policy considerations included the importance of certainty in commercial transactions, asserting that rectification should be difficult to prove as a matter of policy. Legatt LJ argued that the potential unfairness of the objective approach in Chartbrook v Persimmon was demonstrated by the case's facts.

Legatt LJ also addressed rectification for unilateral mistake, stating the requirements for such a claim. One party must have made an actual mistake reflecting the parties' actual common intention, and the other party must have knowledge of this mistake.

In the broader legal context, the decision in FSHC can be seen as a correction to the judicial trend favouring certainty and the finality of formal contracts. The court's emphasis on actual common intention for rectification sets a higher evidential bar, aligning with a pushback against expansive approaches to interpretation seen in more recent cases.

In summary, the decision provides a clearer framework for assessing claims for rectification in cases of common mistake, and it emphasises the importance of good faith and mutual intentions in contractual agreements. Overall, the decision signifies a correction in favour of fidelity to the express words of contracts and a higher threshold for allowing corrections based on ambiguity or common sense.