Developments in contract: construction and rectification

The principles

When the Court is asked to consider a contract which, it is said, contains an error:

• construction is used to interpret the agreement when a reasonable person would see that an obvious mistake has been made in drafting and the mistake should be disregarded, and
• rectification is used to correct mistakes made within a written instrument where that instrument does not reflect the terms of the true agreement at the time it was made.

The main requirements for rectification are that:

• the parties had a continuing common intention (whether or not amounting to an agreement) as to the relevant provision, reflected in “an outward expression of accord”
• the intention continued at the time of the execution of the instrument sought to be rectified, and
• by mistake, the instrument did not reflect that common intention.

Evidence of the parties’ negotiations is inadmissible for the purposes of construction but highly relevant for rectification.

Recent developments

LSREF III Wight Limited v Millvalley Limited illustrates where the ability to interpret a contract ends and where the need to rectify it begins.

Here, the Claimant sought a declaration as to the construction of a Restructured Swap Confirmation, alternatively rectification of it. It was common ground that an Original Swap Confirmation referred to a 1992 ISDA Master Agreement. However, no 1992 ISDA Master Agreement or Schedule were executed. Later, in 2011, a 2002 ISDA Master Agreement and Schedule were executed. When the related loan facility was later renegotiated, a Restructured Swap Confirmation was entered into which referred to an ISDA Master Agreement 1992. This dispute centred on whether the 1992 or the 2002 ISDA Agreement governed the Restructured Swap Confirmation.

The Court looked at the parties’ objective intentions by considering the historical and commercial context of the conclusion of the Restructured Swap Confirmation. It found that as a matter of construction it could not be concluded that the parties' objectively expressed intention had been for the restructured swap to be governed by the 2002 ISDA Master Agreement, and it could not be said that something had gone so wrong with the language used in the Restructured Swap Confirmation that there was a clear mistake that required correction.

The Court then considered the negotiations of the parties regarding the Restructured Swap Confirmation. It found that the document had been sent out as a result of an administrative mistake and therefore did not reflect the common intention of the parties. The whole purpose of the 2002 ISDA Master Agreement was to apply to all dealings between the parties for the future, and this had been the parties’ continuing common intention when executing the Restructured Swap Confirmation. Therefore, the Restructured Swap Confirmation should be rectified accordingly.

The Court dismissed the Defendant’s argument that entire agreement clauses in the 2002 ISDA Master Agreement and the Restructured Swap Confirmation precluded the Claimant from claiming rectification of those documents. The agreement which constitutes the “entire agreement” is to be found in the rectified contract, not in the instrument that does not reflect the true position.

What this means

Standard form documents are less susceptible to interpretation by reference to background circumstances or negotiations due to the importance of maintaining certainty, consistency and predictability.

Entire agreement clauses do not preclude rectification of a document, if the document does not reflect the parties’ true agreement.