The boundary between construction and rectification, where does it lie and does it matter?

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1 The boundary between construction and rectification, where does it lie and does it matter? Or: The temptation to try and slip favourable terms in during drafting. Guy Adams, St John s Chambers Published on 24 th June When I was asked for a topic for this session in early March this year, I perhaps did not appreciate just how topical or difficult this subject is. I have been dealing with a case that raises some of these issues and I therefore thought it would be relatively easy to expand some of my submissions into a talk. Between then and now the Chancellor, Terence Etherton, has given an important speech on rectification: Contract Formation and the Fog of Rectification 1 in which he has said that this area of jurisprudence is "marred by uncertainty and complexity and needs the attention of the Supreme Court". I therefore doubt that I am going to make matters much clearer, but I hope I can at least offer you a viewpoint. 2. This talk is concerned with the boundary between construction or interpretation and rectification. As to whether it matters, the short answer is yes for the reasons recently given by Lord Neuberger in the rectification of wills case Marley v Rawlings [2015] AC 129 at [40]: " At first sight, it might seem to be a rather dry question whether a particular approach is one of interpretation or rectification. However, it is by no means simply an academic issue of categorisation. If it is a question of interpretation, then the document in question has, and has always had, the meaning and effect 1 24th April available at Page 1 of 12

2 as determined by the court, and that is the end of the matter. On the other hand, if it is a question of rectification, then the document, as rectified, has a different meaning from that which it appears to have on its face, and the court would have jurisdiction to refuse rectification or to grant it on terms (e.g. if there had been delay, change of position, or C third party reliance)." 3. In other words rectification is a discretionary equitable remedy, whereas interpretation is not. What then is construction or interpretation? 4. Again per Lord Neuberger in Marley v Rawlings at [19]: " When interpreting a contract, the court is concerned to find the intention of the party or parties, and it does this by identifying the meaning of the relevant words, (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known or assumed by the parties at the time that the document was executed, and (v) common sense, but (b) ignoring subjective evidence of any party's intentions." 5. This passage naturally refers to the well known principles of establishing the meaning and effect of a document, as any questions of rectification strictly only arise in the context of documents. Rectification is only concerned with correcting mistakes in documents and involves '"correcting a written instrument which, by a mistake in verbal expression, does not accurately reflect the [parties'] true agreement": Agip SpA v Navigazione Alta Italia A SpA (The Nai Genova and The Nai Superba) [1984] 1 Lloyd!s Rep 353, 359' - per Lord Neuberger in Marley v Rawlings at [27]. 6. I do however think it is key to an understanding of this area to bear in mind that the process of interpretation or construction is not limited to documents. Indeed it is perhaps rather loose language to describe the process of interpretation or construction as determining the meaning and effect of a document at all. Rather, for reasons I will expand on, it is a process by which the intentions of the parties are deduced from their words and actions. This is because it is the promises, which the parties intended to be bound by, which the court enforces, not the document itself. Such promises are made by persons and merely recorded in documents. 7. Indeed there is generally no requirement that a contract be reduced into writing at all, unless there are applicable statutory limitations on the effect Page 2 of 12

3 of the parties' agreement at law, if it is not recorded or concluded in a particular manner. 8. Per Halsbury's Laws the most commonly accepted definition of a contract is "a promise or set of promises which the law will enforce" - Pollock Principles of Contract. It is a question of fact as to whether the parties have reached an agreement with the intention of creating legal relations. The effect in law of their agreement is a question of the construction or interpretation of their agreement. 9. In considering whether the parties have reached an agreement and when determining what the parties have agreed, the court is concerned with "what an objective reasonable observer would believe was the effect of what the parties to the contract, or alleged contract, communicated to each other by words and actions, as assessed in their context: see e g Smith v E Hughes (1871) LR 6 QB 597, 607." - per Lord Neuberger in VTB Capital plc v Nutritek International Corpn and others [2013] 2 AC 337 at para The parties may not in fact be ad idem, indeed very often may not be in subjective agreement, rather will be taken to have agreed what the parties objectively appear to have agreed. Per Lord Blackburn in of Smith v Hughes (1871) LR 6 QB 597 at 607: "I apprehend that if one of the parties intends to make a contract on one set of terms, and the other intends to make a contract on another set of terms, or, as it is sometimes expressed, if the parties are not ad idem, there is no contract, unless the circumstances are such as to preclude one of the parties from denying that he has agreed to the terms of the other. The rule of law is that stated in Freeman v. Cooke (1). If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms." 11. A contract can be concluded in a variety of ways orally or partly orally and partly in writing or by an exchange of documents or the signature of a document. As part of its objective exercise the court will look at the communications between the parties - i.e. those that "crossed the line" - that are not mere negotiations, but which were objectively intended by the parties to form part of their agreement. Page 3 of 12

4 12. If the parties have appeared to have recorded their agreement in writing there is a strong implication or presumption that the parties intended to record all the terms of their contract in writing - per Lord Russell of Killowen CJ in Gillespie Bros & Co v Cheney, Eggar & Co [1896] 2 QB 59 at 62 - and a court of law will require some persuading that that was not the parties intention, but it is strictly not conclusive, logically even if there is an all agreement clause. If satisfied that the writing is not complete or even does not represent what was actually agreed, then as part of the process of construction, the court can determine what were the true terms of the agreement and what was their meaning and effect. 13. This is not a process of rectification, but rather of construction. A good example is Thinc Group v Armstrong and another [2012] EWCA Civ 1227, where it was held at first instance that that the oral explanation of the agreement amounted to a contractual warranty that overrode the express terms of the agreement. In the Court of Appeal Rix LJ held that it was ultimately a question of construction of the contract taking account of both the oral exchanges and the writing, so that on the true construction of the contract the express written term could not be relied upon as forming part of that contract. 14. In all cases the court is concerned to determine the meaning and effect of the contract, using its strict meaning, namely the terms by which the parties intended to be bound. 15. Further as a matter of logic the parties agreement must precede, even if only instantaneously, the recording of the agreement. When a party places his signature on a document recording the terms he is, on the face of it, generally signifying that the writing accurately records the terms with which he or she is in agreement (leaving corporations on one side for the moment) and which strictly form the contract and is thereby communicating his acceptance of such terms. Furthermore he or she is carrying the agreement into effect by ensuring that the terms of the contract are accurately recorded in writing. 16. If either or both the parties is making a mistake because the writing does not record what the parties intended to agree, then there are two possibilities either there was no contract because the parties were not in fact ad idem (when viewed objectively they were in fact at cross-purposes) or the parties objectively intended to reach an agreement on certain terms, which includes the situation where due to their words and conduct the parties must be taken to have intended such an agreement. The Page 4 of 12

5 parties signatures indicate the acceptance of such terms (believing them to be accurately recorded in the document) even if the writing is wrong and may need to be corrected. 17. If the writing is wrong and one of the parties afterwards seeks to rely on it as a true record of the agreement to his advantage, then in effect he is seeking to use it as an instrument of fraud. If the true agreement can be proved in a court of law, then this can be prevented by a process of construction. Indeed as between the original parties, it will often not matter (except for the purpose of avoiding disputes) whether the writing is correct or not, as they both presumably know what was agreed and if necessary the terms and effect of the agreement can be finally determined in proceedings between them. It may however be difficult in a court of law, without going into all the evidence which is admissible in a court of equity, to prove that the terms, which the parties intended to be bound by, were not the terms set down in writing and the document may need to be rectified in order to prevent such unconscionable conduct. 18. Looked at in this way, it may be that some of the debate in the 20th Century cases as to whether it was necessary for there to be an antecedent contract in order to obtain rectification or whether proof of the terms upon which the parties objectively intended to contract was sufficient appears somewhat arid, as the terms upon which the parties intended to contract, if sufficiently certain, are the parties contract in its disembodied sense, which should have been recorded in the document. 19. It is trite that a court determines the terms of a contract on the basis of what the parties intended them to be having regard to the totality of the admissible evidence, as pointed out by Lord Moulton in Heilbut Symons & Co v. Buckleton [1913] AC 30 at It is not therefore obvious that James V-C was that wide of the mark in Mackenzie v. Coulson (1869) L.R. 8 Eq. 368 when he said: "Courts of Equity do not rectify contracts; they may and do rectify instruments purporting to have been made in pursuance of the terms of contracts. But it is always necessary for a plaintiff to show that there was an actual concluded contract antecedent to the instrument which is sought to be rectified; and that such contract is inaccurately represented in the instrument. In this instance there never was any contract other than this policy which the plaintiffs have so signed 2 following Holt CJ in Crosse v Gardner (1689) Cart. 90 Page 5 of 12

6 It is impossible for this court to rescind or alter a contract with reference to the terms of the negotiation which preceded it." In other words a document necessarily records a prior agreement, but in that case there was no evidence that it was anything other than the terms contained in the document. 21. Or even Sir Herbert Cozens-Hardy M.R. in Lovell and Christmas Ltd. v. Wall 104 L.T. 85 (described in Jocelyne v Nissen as a lost cause) at p. 88: "The essence of rectification is to bring the document which was expressed and intended to be in pursuance of a prior agreement into harmony with that prior agreement. Indeed, it may be regarded as a branch of the doctrine of specific performance. It presupposes a prior contract, and it requires proof that, by common mistake, the final completed instrument as executed fails to give proper effect to the prior contract." If it is part of the parties' agreement that the terms should be recorded in writing, but the document fails to do that, then it is in a sense carrying the agreement into effect to correct the document. 22. It is perhaps better expressed by Buckley L.J at p. 93: "In ordering rectification the court does not rectify contracts, but what it rectifies is the erroneous expression of contracts in documents. For rectification it is not enough to set about to find out what one or even both of the parties to the contract intended. What you have got to find out is what intention was communicated by one side to the other, and with what common intention and common agreement they made their bargain." 23. Any argument that it was necessary to have to prove a prior enforceable contract, was laid to rest in Jocelyne v Nissen [1970] 2 QB 86, where it was argued that even though it was common ground that the parties had expressly been in agreement on one aspect of the matter, which was not recorded in the writing, then as there was no prior enforceable contract there could be no rectification. The argument had originally arisen in cases concerned with corporate bodies, which it was provided by statute could only contract by affixing a seal to a document, but had been rejected in Shipley UDC v Bradford Corporation [1936] 1 Ch 375. There the basis of the argument was that as the corporation could only contract by affixing its seal to a document, logically there could not be a prior enforceable contract. Clauson J accepted the logic of that position, but in obiter remarks rejected it on the basis that he was concerned to discover Page 6 of 12

7 what the parties intended and whether the document accorded with their intentions, or at least the intention that would be attributed to the corporation through the acts of its agents as a corporation cannot of course act by itself. Shipley was followed in Crane v. Hegeman-Harris Co. Inc. [1939] 1 All E.R. 662; [1939] 4 All E.R. 68 and in Jocelyne v. Nissen, after a full review of the authorities, it was confirmed that it was not necessary to find that there was a prior enforceable contract at law. Rather only that there was convincing proof that there was a common continuing intention in regard to a particular aspect of the agreement which continued up to the time the formal document was executed. Further that there had to be an outward expression of that accord. This further requirement, which has been the subject of some criticism, was taken from Denning LJ's judgment in the "horsebeans" and "feveroles" case, Frederick E. Rose (London) Ltd. v. William H. Pim Jnr. & Co. Ltd. [1953] 2 Q.B As Denning LJ put it: "It is not necessary that all the formalities of the contract should have been executed so as to make it enforceable at law (see Shipley Urban District Council v. Bradford Corporation [1936] Ch. 375); but, formalities apart, there must have been a concluded contract.... There could be no certainty at all in business transactions if a party who had entered into a firm contract could afterwards turn around and claim to have it rectified on the ground that the parties intended something different. He is allowed to prove, if he can, that they agreed something different [Denning L.J.'s italics]: see Lovell & Christmas v. Wall (1911) 104 L.T. 85, per Lord Cozens-Hardy M.R., and per Buckley L.J. at pp. 88, 93, but not that they intended something different." 24. More recently it has been held by Mummery LJ in Munt v Beasley [2006] EWCA Civ 370 that "an outward expression of accord" is not a strict legal requirement for rectification and the trend in recent cases to treat the expression "more as an evidential factor " and there is considerable academic debate as to whether rectification ought to be available if both parties subjectively intend to contract in a particular way, but do not communicate their intentions. 25. As matters stand, however, Denning LJ's approach was affirmed by Lord Hoffmann in obiter comments in Chartbrook v. Persimmon Homes Ltd [2009] 1 AC 1101 that "the question is what an objective observer would have thought the intentions of the parties to be" and not what their subjective intentions were - at [60], citing a passage from Denning LJ's judgment in Rose v Pim: " You look at their outward acts, that is, at what they said or wrote to one another in coming to their agreement, and then Page 7 of 12

8 compare it with the document which they have signed. If you can predicate with certainty what their contract was, and that it is, by a common mistake, wrongly expressed in the document, then you rectify the document; but nothing less will suffice." 26. It has been suggested that Lord Hoffmann's comments are not binding in lower courts and that the issue can be revisited, particularly in light of the judgments in the Court of Appeal in Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561 in which Hoffmann LJ dissented. But for all practical purposes and unless and until the Supreme Court re-state the law, it appears that Chartbrook should now be taken to be authoritative. 27. This is particularly so as in Daventry District Council v Daventry & District Housing Ltd [2012] 1 WLR 1333, Etherton LJ held that the parties were right to proceed on the basis that Chartbrook correctly stated the law at [78] and Lord Neuberger MR agreed with Etherton LJ's analysis of the law at [227], even though Etherton LJ was in the minority as to the outcome of the appeal and Lord Neuberger expressed the view that Lord Hoffmann's analysis might need to be " may have to be reconsidered or at least refined" - at [195]. 28. In Chartbrook Lord Hoffmann at [48] approved Peter Gibson LJ's succinct summary of the requirements for rectification for mutual mistake in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71, 74 at [33] "The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention." 29. In Daventry Etherton LJ slightly re-phrased the requirements as follows: " (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) which existed at the time of execution of the instrument sought to be rectified; (3) such common continuing intention to be established objectively, that is to say by reference to what an objective observer would have thought the intentions of the parties to be; and (4) by mistake the instrument did not reflect that common intention. " Page 8 of 12

9 30. He then went on to give four factual examples at [85] - [88]: "The first one is where the parties subjectively and objectively (that is to say in their communications passing between them or crossing the line ) are in agreement but the formal documentation as executed fails to give effect to that prior agreement. The documentation should be rectified to bring it into line (retrospectively) with their prior accord. Subject to such matters as delay and prejudice to any third party interests, there is no good reason not to do so. The second scenario is where the parties never subjectively had the same intention, but the communications crossing the line show that objectively there was a common continuing intention at all relevant times prior to the execution of the final documentation, and the formal documentation reflected those prior communications. In that situation, whether or not rectified, one or other of the parties will be bound by a contract which they did not subjectively intend to enter into. It is right that the claimant should not be entitled to rectification to bring the documentation into line with a subjective intention and belief that was never communicated to the defendant and to which the defendant never agreed. The third scenario is where there was objectively a prior accord, but one of the parties then subjectively changed their mind, but objectively did not bring that change of mind to the attention of the other party. It is right that, if the documentation gives effect to the objective prior accord, the formal documentation should not be rectified to reflect the changed but uncommunicated subjective intention; and if the documentation as executed reflects the changed but uncommunicated subjective intention, it should be rectified to give effect to the objective prior accord. To do otherwise would be to force on one of the parties a contract which they never intended to make on the basis of an uncommunicated intention and belief. The fourth scenario is where there was objectively a prior accord (whether or not a subjective common intention), and one of the parties then objectively changed their mind, that is to say objectively made apparent to the other party that they intended to enter into the transaction on different terms. Leaving aside rectification for unilateral mistake (the requirements for which are quite different), it is right that, if the documentation as executed gives effect to the objectively indicated change of mind, a claim for rectification to give effect to the earlier prior accord should be refused. Once again, to do otherwise would force on the defendant a contract which they never intended to make on the basis of the claimant s uncommunicated subjective intention to enter into a contract on Page 9 of 12

10 the basis of the original accord notwithstanding the defendant s objectively communicated change of mind." 31. On the facts of the case Etherton LJ considered that there was no case for rectification because when the communications between the parties' solicitors when drafting the agreement were looked at objectively, even if there had been a prior different accord, then the parties had by their agents expressly agreed the term that was included in the final agreement, as a variation of the prior accord, even if that was inconsistent with DDC's understanding of the intended contract, and the parties were therefore bound by it. 32. Toulson LJ and Lord Neuberger however held that an objective observer would have concluded that the parties solicitors, who were only instructed to carry into effect the parties' prior accord, were mistaken and the contract should therefore be rectified. 33. In effect the difference between the majority and minority was as to whether an objective observer would have concluded that the negotiations on this particular aspect of the contract were concluded at the time of the prior accord or were continued subsequently by the solicitors. If the latter, then the prior accord was irrelevant as merely forming part of the negotiations, if the former then, on the basis that there were no further negotiations, then the prior accord continued to represent the parties' agreement until the document was signed. 34. The majority also held that this was a case of mutual mistake because DDH's actions were to be considered objectively and the fact that the knowledge of DDH's agent Mr Roebuck, knowing DDC's understanding of the prior accord, would be attributed to the company, meant that DDH were effectively estopped from denying that the prior accord was as DDC understood it, even if it could be read two different ways - see per Toulson LJ at [178] and Lord Neuberger at [202]. 35. It has been suggested that Daventry should properly be analysed as a case of unilateral mistake because the directing minds of the company understood the prior accord to mean the opposite of what it objectively meant on the advice of Mr Roebuck. The better view is however that such subjective understanding is always irrelevant to questions of rectification, which always pre-supposes a prior agreement or contract. Further that the parties subjective understanding of the situation will only ever be relevant to questions as to whether one of the parties will be Page 10 of 12

11 estopped from denying the terms of the parties' agreement in equity, where a court of equity is unable to find that the parties were in fact in agreement, and/or whether the court should grant the discretionary remedy of rectification or should only do so on terms. Indeed the principles of unilateral mistake are probably best analysed as the application of the principles of equitable estoppel. As Sedley LJ pointed out in George Wimpy UK Ltd v. VI Construction Ltd [2005] BLR 135 at [65] "sharp practice has no defined boundary" and on well established principles such estoppels are likely to arise when a duty to speak arises in circumstances according to an objective standard of honest and responsible conduct 3. As Lord Neuberger pointed out in Daventry at [194] rectification is an equitable remedy whose origins lie in conscience and fair dealing. 36. In conclusion, both courts of law and equity are concerned by the process of construction and the remedy of rectification to give effect to the parties' true agreement. If the document simply does not reflect the parties agreement objectively determined, then one would expect both courts of equity and law to reach the same conclusion as to the proper construction of the agreement and for a court of equity to intervene to enforce the parties agreement that the terms should be properly recorded, if it is necessary for the future to correct the documents - e.g. if the documents are documents of title that will be relied on for many years to come or 3rd parties need to be able to rely on the stated terms. 37. If however there is a suspicion that the contract objectively determined does not reflect the parties true agreement, a court of equity will examine a wider class of material and look at all the circumstances in order to determine whether the parties truly reached any agreement at all or if they should be taken to have done so, what their true agreement was or, perhaps more importantly, should be taken to be and grant appropriate relief, including if necessary rectification of any relevant document, if reliance upon the parties' strict legal rights would produce an unconscionable result. 38. In any case, however, there is an evidential presumption that, if the parties have on the face of it deliberately reduced their agreement into writing, then the court will require convincing proof that the agreement either does not include all the terms or contains a mistake. Per Simonds J in Crane v. Hegeman-Harris Co. Inc. [1939] 1 All E.R. 662 at 664-5: 3 per Lord Wilberforce in Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890 at 903 Page 11 of 12

12 "That is particularly the case where one finds prolonged negotiations between the parties eventually assuming the shape of a formal instrument in which they have been advised by their respective skilled legal advisers. The assumption is very strong in such a case that the instrument does represent their real intention, and it must be only upon proof which Lord Eldon, I think, in a somewhat picturesque phrase described as irrefragable that the court can act. I would rather, I think, say that the court can only act if it is satisfied beyond all reasonable doubt that the instrument does not represent their common intention, and is further satisfied as to what their common intention was. For let it be clear that it is not sufficient to show that the written instrument does not represent their common intention unless positively also one can show what their common intention was." Guy Adams St John s Chambers guy.adams@stjohnschambers.co.uk 24 th June 2015 Page 12 of 12