When might rectification reduce a professional’s exposure?

Published on
3 min read

As all of us working in the world of professional indemnity insurance are acutely aware, mistakes are inevitable. No-one, however careful, is immune.

Sometimes it is possible to rectify those mistakes, which can be a significant means by which a professional’s liability might be reduced. In FSCH Group Holdings Limited v GLAS Trust Corporation the Court of Appeal has recently clarified the law on rectification. This article considers the judgment and its implications.

It is now clear that there are two scenarios in which rectification might be possible:

  • If a document fails to give effect to a prior concluded contract between the parties.
  • Where the parties shared a common intention in respect of a particular matter when they executed a document, but that matter is not accurately recorded.

Prior contract

In the first situation a binding contract between the parties already exists. If a subsequent agreement between the parties contains inconsistent terms then the court may specifically enforce the prior agreement by rectifying the latter document. This may for example be relevant where there is an existing lease or investment between the parties that is renewed or extended.

In such a scenario whether rectification is available will depend on the objective interpretation of the contractual terms, ie the usual rules on the interpretation of contracts apply. The court will consider what a reasonable person with the parties’ background knowledge would have understood the second agreement to mean.

Common intention of the parties

The second situation in which rectification might arise is where the parties negotiate an agreement on one basis, but in error the final document does not reflect the parties’ common intention. We have seen several examples of this in pension schemes where, often years after the event, it is appreciated that a deed does not have the meaning the parties believed. Often this arises where a mistake has been made by the parties’ previous professional advisers.

In this scenario the court will take into account the parties’ subjective intentions. For rectification to be obtained a party must establish what it intended the agreement to say and that such intention was shared by the other party to the agreement.

The parties must also show that they each understood each other to share the relevant intention, ie the common intention must have been communicated between the parties. Both parties having the same uncommunicated intention will not suffice.

In reaching this decision the Court of Appeal acknowledged that the test was onerous. However, it believed that rectification should be difficult to prove: formal written contracts should generally be upheld.

Discussion

Rectification can be an important means by which the consequences of a professional’s mistake might be mitigated. Invariably the professional or its insurers will need to pick up the costs of any claim for rectification. However, often these will be significantly less than the exposure if the relevant contract remains in place, particularly if the claim is brought under Part 8 of the Civil Procedure Rules. Part 8 is appropriate for claims that do not have a substantial dispute of fact and that can therefore be resolved without lengthy and complicated pleadings.

After the Court of Appeal’s decision, it seems that the cases in which rectification is a realistic option will be reduced. Those acting on claims where rectification appears potentially relevant will need to look even more closely at the evidence available to demonstrate the parties’ intentions. Otherwise rather than mitigating a loss, additional costs will simply be incurred.

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