When considering whether or not a contract should be rectified because it does not reflect the parties’ common intention, the Court of Appeal has ruled that intention is to be judged subjectively rather than objectively, unless the intended terms are specified in an earlier binding contract.

This differs from the previous case law of Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 where it was stated that the intention of the parties was to be established objectively, by deciding what an impartial observer would have concluded with knowledge of the background facts and communications between the parties.

In FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361 part of the intended security to be provided by FSHC was omitted from the documentation. When this was spotted, FSHC agreed to correct the omission but the agreements entered into to resolve this contained onerous additional obligations. The Judge at first instance held, as a matter of fact, that no-one had reviewed the security agreements and, therefore, no-one had realised that the additional agreements contained additional obligations. The Judge held that the additional obligations were both objectively and subjectively unintended, so that it did not matter whether the objective or subjective test was correct. He granted rectification of the agreements so as to exclude the additional obligations.

GLAS appealed on the basis that the test for rectification was purely objective and that the communications between the parties would not have led an objective observer to conclude there was a mistake.

After an extensive review of case law, the Court of Appeal concluded that Chartbrook did not correctly state the law. The court set out two scenarios where rectification should be ordered:

1. That the document fails to give effect to a prior concluded contract. In this instance, the court can rectify the executed document. This is akin to an order for specific performance of the agreement to execute the document. As such, the usual contractual test should be applied, which is objective.

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 this instance, the court can rectify the document based on the equitable principle of good faith. The test in this case is subjective, However, the parties must have communicated that same subjective intention to each other.

In FSHC, the Court held that there was no prior contract, so the applicable test was the subjective test set out in the second scenario. Applying the first instance Judge’s findings of fact, there had been a shared subjective intention as to the legal effect of the agreements that had been communicated between the parties. As a result, the judge’s order to rectify the contract would stand and the appeal would be dismissed.

The court acknowledged that the need to prove the parties’ state of mind in the second scenario will make seeking rectification on this basis challenging. However, the court considered this to be acceptable, as the written words of a contract should have primacy except in rare circumstances.