Developments in contract: Interpretation and rectification

Principles

• Where one party alleges that there is a mistake in a document recording a contract, there are two principal means available through the courts to address this. The first is for the court to interpret the document to establish its meaning to the “reasonable person”. The second is to grant the equitable relief of rectification, so as to amend the document to reflect the parties’ contractual intention.
• The case law makes clear that contract interpretation is the application of broad principles rather than strict rules, those being: (1) Loyalty to the text; (2) the Whole contract approach; (3) Context; (4) Business common sense; and (5) Reasonableness.
• For the courts to order rectification, it must be established by convincing proof that the agreement if corrected as requested would accurately represent the true agreement between the parties at the time of execution and not leave any party prejudiced.
• In practice, the courts will consider the principles of contractual interpretation before considering rectification.

Recent Developments

• The recent case of Pathway Finance SARL v Various defendants dealt with the less common situation of correcting a mistake in a public document. The mistake was a single mistake that was repeated in the drafting of 87 finance agreements, which were each registered at Companies House. Each referred to a security agreement dated 17 November 2011, when in fact that document was dated 6 September 2011.
• When considering the construction of the deeds of accession the Court determined that the position of third parties must be taken into account when construing public documents. In this case, third parties were those who might consider granting credit to or taking security from Pathway.
• It was those third parties that needed to be considered when answering the question, what would “the reasonable person having all the background knowledge which is reasonably available to the person or class of person to whom the document is addressed” understand the document to mean (Lord Hoffman in Homburg Houtimport BV v Agosin Private Ltd [2004] 1 AC).
• The Court accepted that anyone considering granting credit or taking security from Pathway would inspect the original documents and would notice the discrepancy with the other security documents. Upon seeking clarification from Pathway, they would find out that the security agreement was in fact dated 6 September 2011. The true situation could therefore be taken into account for determining what background knowledge the reasonable person would have for the purposes of contract interpretation.
• This meant that the deeds of accession could be construed as if they had the correct date, in place of the wrong date. As an aside, the Court noted (obiter) that had it not been satisfied of this, it would have ordered rectification, as the requirements had clearly been met.

What this means

• Given it is so easy for mistakes, especially mistakes in cross-referencing and dates, to creep into late night, time-pressured drafting, this is a useful reminder of the process the courts will follow when looking to correct mistakes in publicly available documents.
• Further, it is a helpful guide as how the courts will look to establish who the reasonable person having all the background knowledge is in the case of public documents and the importance of looking to the impact of the mistake on third parties to the agreement.
• Whilst in this case the court held that the agreements could be read as referring to the correct date, it will usually be necessary to re-execute correct documents where an error of this kind is discovered. Where it is known that third parties have relied upon the incorrect originals, it would also be wise to draw the correction to their attention.