A common mistake to make: update on the remedy of rectification of mistakes in contracts

18 September 2018

Author: Helen Boyle
Practice Area: Corporate - M&A

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In contracts, as in life, people often think that they have agreed one thing when, in fact, the contract reflects that they have agreed something else entirely. This can lead to significant, and often catastrophic, consequences for one or both parties. In certain limited circumstances, as in the case discussed below, the law will step in and permit the contract to be rectified to reflect what both parties had intended to agree.

In a recent decision by the High Court in Persimmon Homes Ltd v Hillier [2018] EWHC 221 (Ch), an order for the rectification of warranties and of the corresponding specific disclosures was given by the court in order to ‘fix’ a mistake which the court determined had been made by both the Seller and the Buyer.

The transaction involved the sale of the entire issued share capital of two property holding companies by the defendants (the Sellers) to the claimant (the Buyer). The Buyer mistakenly believed that, through the acquisition, he was acquiring a portfolio of six pieces of land. Unfortunately for the Buyer, two of the pieces of land were owned by a third group company that was not captured by the share purchase agreement and, as a result neither the third group company nor the relevant pieces of land were, in fact, included within the scope of the transaction.

In addition, it so happened that one of the pieces of land which was not included was the access way to the site which meant the Buyer had essentially acquired a landlocked site with a ‘ransom strip’ of land running through it. The result being that the Buyer was unable to develop the site he had acquired in accordance with his development plans.

It was notable that the definition of “Properties”, and the terms of the warranties given by the Sellers in the share purchase agreement, were drafted such that it extended to the whole site, including the plots owned by the third company.

The Buyer brought a claim against the Sellers (a) for breach of the warranties in the share purchase agreement on the basis that the true construction of the share purchase agreement was that they extended to the whole site and (b) in the alternative, for rectification of the share purchase agreement to include the two plots owned by the third company, on the basis that it was clear that the intention of the parties was that the Buyer would acquire the entirety of the site.

Although the court rejected the Buyer’s claim based on the construction of the warranties, it held that the Buyer was entitled to an order for rectification on the basis of common mistake.On that latter claim, the court noted:

  • An objective construction of the relevant documents suggested that the Buyer would acquire ownership of all of the site, regardless of the identity of the registered proprietor of its constituent parts.
  • The Sellers would have understood that the Buyer intended to acquire the entirety of the site.
  • The Buyer’s offer had clearly disclosed that the Buyer wanted to acquire all strategic land interests.
  • The course of correspondence made it clear that both the Buyer and the Sellers understood that the acquisition would carry with it all of the relevant component parts of the site.

Accordingly, the court ordered that the suite of warranties in the share purchase agreement be amended to include warranties which captured the excluded pockets of land. The court also ordered the amendment of the corresponding disclosures to ensure that the Sellers’ liability could not be excluded on the matter. On that basis, the warranties (so amended) had been breached and the Buyer was therefore entitled to bring a claim for breach of warranty.

It is notable that the Court did not force the Seller to sell the excluded sites to the Buyer but instead, gave the Buyer a contractual remedy in the form of a warranty claim. This would allow the Buyer to claim damages for its loss of bargain on the purchase of the shares in the holding companies.

Traditionally, the courts have been hesitant to interfere with the terms of legal agreements, particularly where both parties have had legal representation and negotiated on an equal footing. In order to ensure the courts do not have an unfettered discretion, the common law has established a difficult evidential burden which a party seeking rectification must satisfy.

Despite this difficult evidential burden, the presiding Judge emphasised that the Buyer had made out his case for rectification based on a common mistake to the ‘high standard of proof required’ and that the Sellers had entered into the share purchase agreement under the same mistaken apprehension as did the Buyer, and sought to take advantage of the situation when the mistake was discovered.

This outcome will no doubt have come as a great relief to the Buyer and the case serves as an important reminder for the rest of us of the importance of thorough due diligence and accuracy in contractual terms to avoid these types of mitigatable and costly errors in our own transactions.

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