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When Can You Rectify a Mistake in a Contract?

on Friday, 18 October 2019.

Businesses enter into commercial agreements all the time. Sometimes after having done so, one party may argue that a document did not adequately reflect what had really been intended.

The party can then apply to the court for the document to be rectified to reflect the intention.

There has been varying case law about whether it should be rectified according to what the parties actually wanted and agreed (ie subjectively), or based on an objective interpretation (ie based on what a hypothetical reasonable observer would have decided had been intended).

In the case of FSHC Holdings Ltd v Flas Trust Corporation Ltd, the Court of Appeal has clarified the position. It has ruled that the subjective test is to be used, unless there is a prior binding agreement.

Where there is no prior binding agreement, a document can be rectified on the basis of a mistake, where the parties had a common consensus on an issue and they then execute a document containing different terms. The document should not operate in a way that is inconsistent with what the parties had actually intended. There is a subjective test here in ascertaining what the parties had actually intended.

In contrast, where there is an existing agreement in place already, then the terms would be construed objectively (ie what a hypothetical reasonable observer would have attributed to the words used) based on what had been previously agreed.

The reason for this distinction is that an objective test would create more certainty for an existing agreement. And in other situations, it would be a demanding threshold to prove the parties' common intentions. The higher threshold would hinder the ability to override the formal document. This would respect the primacy of what appears to be the final agreed written contract (unless it can be proved that both parties intended something else to have happened).

Comment

This decision is a common sense one and adds clarity to the law. It respects existing agreements, and it makes it harder to change formal agreements that have been entered into. If someone wants to get out of a bad bargain because they later change their mind, they cannot rely on whether it was objectively wrong to have entered into one with those words. They need to prove that it incorrectly reflected what both parties had actually intended.

This decision reinforces the need for parties to keep adequate records of their contract negotiations, in case they either want to challenge the actual words used later or in case they need to defend a challenge.

Far better, though, to get the words in the contract right!


If you would like help with drafting and negotiating contracts, please contact Paul Gershlick in our Commercial Law team on 01923 919 320, or complete the form below.

 

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