Test for rectifying terms of written contract for common mistake: England and Wales considers subjective while Hong Kong remains objective

In an important recent decision (FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361), the English Court of Appeal confirmed that the test for rectifying a contractual document on the grounds of common mistake is a subjective one – clarifying the previous uncertain state of the law on this point.  The court confirmed that to establish a claim for rectification, a party must prove that the document failed to give effect to either:

1. a prior concluded contract, in which case the terms of the prior contract must be objectively determined; or
2. a common intention shared by the parties, in which case the existence of the intention must be established as a subjective state of mind – though it must also be shown that, as a result of communication between them, the parties understood each other to share that intention.

Notably, the court disagreed with Lord Hoffman’s (obiter) observations in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 that, even for a case with a fact pattern falling under the second limb above, the test is purely objective and subjective intentions are irrelevant. On the facts of the present case, the Court upheld a decision of the lower court granting rectification of two deeds on the basis that they did not reflect the parties' subjective common intention (and there was no prior concluded contract).

In most cases, a subjective test is likely to mean (even) greater difficulty in establishing a claim for rectification for common mistake, in the absence of a prior concluded contract. In particular, a claim will not succeed unless the claimant can establish not only that it had a particular intention but that the defendant shared that intention, and that the parties understood one another to share that intention. (There may however be a claim based on unilateral mistake, if the defendant knew the claimant believed there to be a common intention when that was not in fact the case, and knew the document did not give effect to the claimant’s intention).  Unless and until there is a further appeal to the Supreme Court, therefore, the test to be applied in England and Wales is as set out above. For a full background on the case, please see our litigation blog post.

Meanwhile in Hong Kong the objective test as clarified by the Court of Final Appeal in Kowloon Development Finance Limited v Pendex Industries Limited & Ors [2013] HKEC 704 still applies. The 2013 case involved two consent orders that had been drafted to reflect settlement terms between the parties.  The Plaintiff had loaned considerable amounts of money to the Defendant.  The Defendant fell behind with its repayments and the Plaintiff brought proceedings against the Defendant for repayment of the outstanding amount plus interest. The parties entered into two consecutive consent orders providing for payment of certain instalments.  The Defendant argued that the second consent order was in full and final settlement, whereas the Plaintiff asserted that both consent orders only documented agreements as to payments to be made by the Defendant in 2004 and 2005, with the outstanding balance to remain payable in accordance with arrangements to be reached between the parties thereafter.   The second consent order had not been drafted very well. One of the arguments advanced by the Plaintiff was that the consent order should be rectified for either a mutual or unilateral mistake to make it clear that it did not completely discharge the outstanding debt.

In respect of a mutual or common mistake, in Kowloon Development Finance, Lord Hoffman (with whom the other judges agreed) stated that for the purpose of establishing what the actual agreement between the parties is, the common law applies an objective test. This means that the proper question to ask is what a reasonable observer would have understood the parties to have agreed taking into account all relevant background facts known to the parties at the time. The subjective intentions of the parties are irrelevant. For a detailed review of the Kowloon Development Finance case, please see our previous blog post.

Going forward, however, Hong Kong courts are likely to consider the subjective test laid down in FSHC in cases with a fact pattern falling under the second limb above ie, where there is a common intention shared by the parties and no prior concluded contract/agreement.  In particular it is noteworthy that the English Court of Appeal, in FSHC, conducted a well-rounded analysis from the point of view of principle, precedent and policy. Amongst other considerations, notable ones include the following: (i) there was no discussion in Lord Hoffmann’s judgment in Chartbrook of the history of the equitable remedy of rectification for common mistake, which showed that courts of equity had always been concerned with the actual intention of the parties; and (ii) the purely objective approach endorsed in Chartbrook was inconsistent with how the doctrine of rectification was understood and applied in most other common law jurisdictions, most notably Australia.