9.01  Rectification always seemed so simple. If a document did not reflect what the parties had agreed, then it was amended.¹ For a long time, there was little new authority on rectification because the principles seemed so clear. And then, in 2009, the House of Lords gave judgment in Chartbrook v Persimmon Homes,² and all of a sudden we realized that we had not really understood rectification at all.³

9.02  The result is that the law is in a state of flux. The extent to which the approach in Chartbrook will be followed is still not entirely clear in England, and whether it will be followed at all in jurisdictions such as Australia and New Zealand has yet to be decided.

9.03  There is a further complication. Rectification is also available in a different type of case—where one party has made a mistake about the contract and it would be unfair of the other party to rely on the contract terms.

9.04  The discussion of this Principle is mainly concerned with the circumstances in which a contract will be rectified because it does not reflect the common intention of the parties. Although the court is rectifying (in other words amending) the words of the contract, rather than interpreting them, it is performing the basic function of interpretation—to establish the common intention of the parties. And there is a (p. 172) clear link with Principle 7, which allows words to be given an unnatural meaning if the parties cannot have intended them to have their natural meaning.

9.05  At the end of the chapter, there will be a brief discussion of the circumstances in which a contract can be rectified where one party is mistaken and it would be unfair for the other party to rely on the contract terms. Here, rectification is performing a very different purpose, which has little to do with interpretation.

9.06  The first type of mistake will be described as common intention rectification, the second as unilateral mistake rectification.

9.07  At a very basic level, the principle of common intention rectification is clear. If a written contract does not record the parties’ common intention at the time it was entered into, it will be amended to reflect that intention. The key question is whether that intention is determined subjectively or objectively. This, in turn, is determined by establishing why the courts rectify contracts. And here, the approach tends to divide down common law/equity lines. Those with a common law approach take one view; those looking at it in equitable terms take the other.

9.08  Rectification is an equitable remedy, and so it is hardly surprising that one approach is to look at the requirements for rectification in the light of general equity jurisprudence. Equity acts on the conscience, and the underlying question is therefore whether it would be unconscionable for one party to refuse to allow the contract to be altered in the way in which the other party wants. It would be unconscionable to do so if both parties had reached a common subjective intention which was not reflected in the document. But it would not necessarily be unconscionable to do so where the document did not reflect the objective common understanding of the parties.

9.09  At common law, the question is ultimately one of the objective intention of the parties. The guiding principle of contractual interpretation is to establish the objective intention of the parties, and all that rectification is doing is giving effect to that. If the document does not reflect the objective common intention of the parties, then it is wrong and needs to be changed, regardless of what the parties subjectively thought.

9.10  Because rectification is an equitable remedy, the natural starting point is to look at the subjective intention of the parties—not their individual intentions, but their common intention. But the problem with this approach is that it sits very uneasily with the basic principle of objective interpretation of contracts. It would mean that a written contract is subject to a different regime from an oral contract. The (p. 173) meaning of both depends on the objective intention of the parties, but a written document could be amended to reflect their subjective common intention, rather than their objective common intention.

9.11  There are normally said to be four requirements of common intention rectification:

1. (1)  The parties reached a common intention.

2. (2)  It was objectively manifested.

3. (3)  It continued at the time the written contract was entered into.

4. (4)  The written agreement does not reflect that intention.

If these requirements are satisfied, the written agreement will be amended to reflect the intention. As we will see, the first two requirements may just be different ways of saying the same thing.

9.12  These requirements are described in two cases in the Court of Appeal—the judgment of Slade LJ in The Nai Genova⁴ and that of Peter Gibson LJ in Swainland Builders v Freehold Properties.⁵

9.13  In The Nai Genova, Slade LJ said:⁶

9.14  In Swainland Builders v Freehold Properties, Peter Gibson LJ expressed the requirements in this way:⁷

(p. 174) This formulation was cited with approval by Lord Hoffmann in Chartbrook v Persimmon Homes.⁸

9.15  The fourth requirement is obvious, but the first three need to be elaborated on.

9.16  Like any equitable remedy, rectification is discretionary, and so it may be refused, or granted on terms.⁹ There are also specific protections for third parties, which are discussed in paras 9.92–9.97 below.

9.17  The parties must have reached a common intention, and that intention must continue up to the time the written contract is entered into.

9.18  Rectification is commonly thought of as a way of amending a written contract in order to bring it into line with what the parties actually agreed. This is correct, but that agreement does not need to take the form of a legally binding contract. What is required is that, at the time the document was entered into, the parties had a common intention about a matter which was to form part of that contract.

9.19  This point was made by Simonds J in Crane v Hegeman-Harris Co:¹⁰

9.20  This raises the question as to the nature of the common intention which has to be proved—is it subjective or objective?

9.21  One view is that the purpose of rectification is to mitigate the harshness of the principle that the law is concerned with the objective intention of the parties, rather than their subjective intention. This is, of course, the classical approach to the way (p. 175) in which equity impinges upon the common law. It is expressed very clearly by Lord Wright in The Commissioners of Inland Revenue v Rafael:¹¹

9.22  According to Lord Wright, rectification is therefore concerned with the parties’ subjective intention. In Joscelyne v Nissen,¹² the Court of Appeal qualified this approach by saying that ‘some outward expression of accord is required’ for rectification. This was criticized by Leonard Bromley QC in an article in the Law Quarterly Review in 1971.¹³ He argued that what rectification requires in the case of a contract is the establishment of the common subjective intention of the parties, and that outward expression of accord is not a requirement of rectification, but simply goes to the proof of the subjective common intention.

9.23  One view of rectification is therefore that it requires—and only requires—that the document does not reflect the common subjective intention of the parties. But this is not generally accepted, even by those who favour a subjective interpretation of rectification. The cases indicate that an outward manifestation of that intention is required.¹⁴

9.24  This was the view taken by Campbell JA in the New South Wales Court of Appeal in Ryledar v Euphoric after a detailed discussion of the cases and articles.¹⁵ Campbell JA distinguished between the types of intention relevant to the formation and interpretation of contracts, and that required for rectification. Although the former type of intention is objective, the latter is subjective—the actual intention of the parties. As Mason J had said in Codelfa Construction v State Rail Authority of New South Wales:¹⁶ ‘Rectification ensures that the contract gives effect to the parties’ actual intention.’

(p. 176) 9.25  But, unlike Leonard Bromley QC, Campbell JA took the view that there must be some outward expression of that intention. This was because the purpose of rectification was to prevent unconscionable conduct:¹⁷

9.26  It is suggested that the position in New Zealand is similar. The leading case is Westland Savings Bank v Hancock¹⁸ in 1987. Tipping J in the High Court said that a single corresponding intention must exist in the minds of both parties and this must be objectively apparent from what was said and done. This has consistently been followed by the courts in New Zealand.¹⁹

9.27  The other view is that what is required is that the document does not reflect the objective common intention of the parties. This view is most clearly expressed by Denning LJ in Frederick E. Rose v William H. Pim Jnr & Co:²⁰

9.28  This approach was taken up by Marcus Smith in an article in the Law Quarterly Review in 2007.²¹ He put forward two related propositions. The first was that one party’s subjective intentions are irrelevant if the other party is not aware of them. The second was that the requirement for a common intention is not a distinct (p. 177) requirement from the need for an outward manifestation of that intention. As a result, what is actually required is to establish the common objective intention of the parties.

9.29  The first of these propositions is consistent with the view of Campbell JA in the Ryledar case, and with the concept that what is required is subjective common intention—albeit with some outward manifestation. But the second proposition is inconsistent with Campbell JA’s approach. It is applying the purely objective approach of Lord Denning.

9.30  In England, it is the objective approach which has won the day, as a result of the decision of the House of Lords in Chartbrook v Persimmon Homes²²—although the ramifications of that case have yet to be fully worked out, as can be seen from the decision of the Court of Appeal in Daventry District Council v Daventry & District Housing.²³

9.31  Chartbrook v Persimmon Homes²⁴ is one of the key cases on interpretation of contracts, and is discussed under Principles 4 and 7 (see particularly paras 7.125–7.132). The case was decided as a matter of interpretation of the contract, but the House of Lords did consider the question of rectification in some detail. Although its judgment on the rectification issue was strictly obiter, it was a considered judgment given after full discussion and is therefore likely to be followed in the future, as it was by the Court of Appeal in the Daventry case.²⁵

9.32  By exchange of letters, the parties had agreed the basis for the calculation of an ‘additional residential payment’, and those provisions were then drafted into the written contract. Persimmon argued that rectification was not possible because the document as drafted represented their understanding of the exchange of letters. The House of Lords would nevertheless have ordered rectification if it had been necessary. What was important was not the subjective intentions of the parties, but their objective intentions as set out in the exchange of letters. If the written contract did not accurately reflect how a reasonable person would read the exchange of letters, then it should be rectified in order to reflect that objective agreement.

9.33  Lord Hoffmann said that the case was argued at trial on the assumption that rectification required both parties to be mistaken about whether the written agreement (p. 178) reflected what they believed their prior consensus to have been. This was incorrect. He approved the submission of counsel for Persimmon that:²⁶

The question is what an objective observer would have thought the intentions of the parties to be.²⁷

9.34  This issue had to be considered again by the Court of Appeal in Daventry District Council v Daventry & District Housing.²⁸ A housing authority was negotiating with a company which had been set up as a registered social landlord for the authority to sell its housing stock and transfer its housing department staff to the company. One particular problem in the negotiations concerned what would be done about the deficit on the authority’s pension scheme in respect of the staff being transferred to the company. The authority proposed to the company that the company should pay the deficit, with a corresponding reduction in the purchase price, and with the authority being compensated for this in a different way. The company’s negotiator told the company that the outcome would be that the authority would pay the deficit, and the proposal was therefore agreed. Negotiations continued, and the contract as signed contained an express clause providing for the payment of the deficit by the authority. The authority then tried to get the contract rectified on the basis that it did not represent the earlier agreement.

9.35  At first instance, Vos J refused to rectify the contract on the basis that the amended wording in the written contract was an intentional variation of the earlier agreement, and therefore that the earlier common intention of the parties had not continued up to the time of the contract being signed. By a majority, the Court of Appeal overruled this decision and granted rectification. It would seem that the majority took the view that the parties had agreed that the company should pay the deficit, and that a reasonable person would not consider that what subsequently happened signalled a departure from that agreement.²⁹ So, at the time the contract was executed, the parties intended that the company should pay the deficit, but the document provided for the authority to do so. It would therefore be rectified.

(p. 179) 9.36  The difference of view between, on the one hand, Vos J at first instance and Etherton LJ (who dissented in the Court of Appeal), and on the other Lord Neuberger and Toulson LJ, was largely on the facts. Although Lord Neuberger and Toulson LJ reached the same decision on the facts, Lord Neuberger expressly agreed with the legal analysis of Etherton LJ which, in some respects, differed from that of Toulson LJ. It is therefore Etherton LJ’s legal analysis which, it is suggested, is currently binding, at least to Court of Appeal level.

9.37  Etherton LJ³⁰ accepted that, although the decision on rectification in Chartbrook was not strictly binding, it should be followed. He said:³¹

9.38  Toulson LJ, although in the majority in the result, took a rather different view of the law from the other judges in the Court of Appeal. He was concerned about the correctness of the principle of the decision in the Chartbrook case. He said:³³

9.39  This seems to be a common concern of judges in rectification cases. In Tartsinis v Navona Management Company³⁴ in 2015, Leggatt J considered that the purpose of rectification was to avoid the injustice that would otherwise be caused when the objective principle of interpretation leads to a result which fails to reflect the parties’ real intention.³⁵ He was bound by Chartbrook, but clearly did not like it. He said:³⁶(p. 180)

9.40  This concern was reflected by Cooke J in 2016 in LSREF III Wight v Millvalley.³⁷ In both cases, the judges rectified the contract concerned but, in each case the rectification reflected what they considered to be the parties’ actual subjective common intention as well as their objective common intention.

9.41  It is hard to overestimate the passions which have been aroused by the decision in Chartbrook.³⁸ There has been an unprecedented number of extra-judicial comments by members of the judiciary. Lord Toulson found it surprising that rectification should be available when the parties have not actually agreed something different from what the written contract said.³⁹ Similarly, Sir Nicholas Patten was puzzled why Chartbrook was held to be bound by the objective effect of a prior accord which had no legal effect, when Chartbrook itself believed that accord to have the same meaning and effect as the contract it eventually signed.⁴⁰

9.42  Not all judges take this approach. Perhaps unsurprisingly, Lord Hoffmann has justified the objective approach.⁴¹ So has Sir Terence Etherton⁴² who considers that there are strong policy objections to giving contractual force to the uncommunicated subjective beliefs and intentions of the parties.

9.43  As a matter of precedent, the position in England is that an objective common intention is required. How other common law jurisdictions will react to this approach is not yet clear, but it is likely that in Australia and New Zealand a more subjective approach will prevail. Since Chartbrook was decided, the New Zealand Court of Appeal has continued to require subjective common intention, albeit objectively manifested.⁴³ Even in England, it is unlikely that Chartbrook will be the last word. The issue will eventually need to be re-examined in the Supreme Court.

9.44  The issues involved can be clarified by a series of examples. A and B agree on the terms of their contract, and they are then put into writing and signed. How might the writing not reflect what was agreed? There are a number of possibilities, three of which will be discussed.

9.45  A and B agree on the terms of their contract, and they are then put into writing. The document reflects the parties’ subjective common understanding of the agreement, but not their objective common intention. Should the writing be rectified?

• •  The common law approach is that the writing does not reflect the objective common intention of the parties, and therefore must be rectified. That is necessary to give effect to the underlying principle of objectivity in contract law.

• •  The equitable approach would be to say that if A now wants to give effect to the objective intention, but B does not, B’s conscience is not affected because the document simply reflects what the parties had subjectively agreed. So the writing cannot be rectified.

Both approaches are possible, and each has something to recommend it.

9.46  A and B agree on the terms of their contract, and they are then put into writing. The document reflects the parties’ objective common intention, but does not reflect their subjective common understanding of the agreement.

• •  The common law approach would be to say that there is no right to rectify here because the contract reflects the objective common intention of the parties.

• •  The equitable approach would be to allow rectification because the written document does not reflect what the parties have subjectively agreed—at least if there has been some outward manifestation of that subjective agreement. And if A asks for the document to be amended to reflect that agreement, it would be unconscionable for B to refuse consent.

Here, it is suggested that the equitable position creates a curious result. If the contract had not been put into writing, it would have been the objective common intention of the parties which would have determined what the contract meant. But if the contract is then put into writing, should it be possible for one of the parties to go back to the parties’ subjective common intention?

9.47  A and B agree on the terms of their contract, and they are then put into writing. The document does not reflect either the common objective intention of the parties, or their common subjective intention.

Here, it is clear that rectification is available. The contract does not comply with either the objective or the subjective common intention of the parties.

9.48  If the parties have reached a common intention, both subjectively and objectively, and the contract does not reflect that, then it should be rectified. That is clear.

9.49  What is less clear is whether the contract should be rectified where the objective common intention differs from the subjective common intention. The first approach would be to deny rectification in either case. The second would be to allow it where the writing does not reflect the objective common intention. The third would be to allow it where the writing does not reflect the subjective common intention. There are pros and cons of all three approaches. At present, the law in England would allow rectification only where the document does not reflect the objective common intention of the parties. But the law is in a state of flux, and it is by no means clear that it will remain in its current form. And the indications from Australia and New Zealand are that subjectivity is likely to have a greater part to play than in England.

9.50  One possibility would be to decide that rectification should only be available if the objective and subjective common intentions are the same, and they are not reflected in the document (in other words, Example 3). The argument here would be that to allow rectification in Example 2 would result in the parties’ contract saying something different if it is put in writing than if it is not; and to allow rectification in Example 1 would allow one party to change the document even though it reflects what they actually agreed.

9.51  Another possibility would be to allow rectification in any case in which the document does not reflect the objective consensus—in other words in Example 1 as well as in Example 3. Only by doing this, is the objective basis of contract law given effect.

9.52  In practice, there may be very little difference between these two approaches. It is generally recognized that, in the case of a contract, proof of subjective intention is really only practicable by looking at what has passed between the parties. So even if the document does not reflect the parties’ subjective intention, rectification will only be available to the extent that it has been externally manifested. This was the position in England before Chartbrook,⁴⁴ and it is the position in Australia following Ryledar.⁴⁵

(p. 183) 9.53  In this context, there is a distinction between the rectification of a contract and the rectification of a unilateral instrument such as a voluntary settlement. In the case of a voluntary settlement, what is required for rectification is that the subjective intention of the settlor is not reflected in the settlement document. As Sir Terence Etherton said in Day v Day:⁴⁶

9.54  The reason is that a common intention is irrelevant to a voluntary settlement. There is only one relevant person; and so what matters is the intention of the settlor.⁴⁷

9.55  But in the case of a contract, what the court is required to do is to establish the parties’ common intention. An intention is not really held in common merely because of the coincidence that each party subjectively and independently believes the same thing. It is only held in common if there has been a meeting of minds, and that is only possible through external manifestation of their individual subjective intentions.⁴⁸ So, by its nature, a common intention must be established objectively—by reference to what has passed between the parties.

9.56  It is therefore suggested that there is very little difference between requiring the claimant to establish the objective common intention of the parties, and requiring him or her to establish a subjective common intention which has been externally manifested. In both cases, what needs to be established is the appearance of consensus, based on what has passed between the parties. In theory, the subjective approach also requires that there is an actual meeting of minds; but, since this can only be proved by what has passed between the parties, it is not at all clear that in practice this requirement adds anything material to the requirement of objective consensus.

9.57  How might this problem be resolved in practice? It is suggested that the starting point is to distinguish between two different ways in which common intention (p. 184) rectification is used—a distinction which has been pointed out by a number of writers, but most notably by James Ruddell.⁴⁹

9.58  There are two types of case in which a written contract will be rectified because there has been a common mistake:

• •  The first type of case involves rectifying a document. If a document does not reflect the contract which it is intended to record, the document will be changed to reflect the contract.

• •  The second type of case involves rectifying a contract. If a contract does not reflect what was agreed, the contract will be changed to reflect what was agreed.

9.59  The first type of case arises where the parties have entered into a binding unwritten contract which is then put into writing. Here, the document will be rectified if, by mistake, it does not reflect the terms of the contract.

9.60  At common law, once the parties had signed the document, that was generally the end of the matter. But equity would intervene to rectify the document. It would do so in order to enforce the contract. The parties had made a contract. They intended to record it in writing. By mistake, they failed to do so accurately. The court gave effect to the contract by amending the document. It is analogous to specific performance.

9.61  What is rectified is the document, not the contract. In order to rectify a document on this basis, it must be established that:

• •  the parties entered into an unwritten contract;

• •  that contract was then put in writing; and

• •  by mistake the terms of the document do not reflect the terms of the contract.

9.62  The purpose of rectification in this type of case is to ensure that the document accords with the terms of the contract. The terms of a contract are objectively ascertained. The question is: what would a reasonable person in the position of the parties understand the terms of the contract to have been? The subjective intentions of the parties—even their subjective common intention—are irrelevant because what the court is doing is establishing the terms of the contract and then seeing if the document states them accurately. In this type of case, therefore, the test must be objective.

9.63  In some markets, contracts are still made orally and then put into writing. An example is contracts which are made by dealers over the telephone and then put into (p. 185) writing on the basis of standard form contracts. For contracts of this kind, a document can be rectified if it does not accord with the terms of the contract, objectively ascertained.

9.64  However, where lawyers are involved, it is rare for a contract to be made before the written contract is signed. In a corporate or financial transaction, for instance, where drafts of a contract move back and forth between the parties’ lawyers, it is uncommon for the parties to intend to be bound until they have signed a written contract. In a case of this kind, it follows that the document cannot be rectified to reflect the contract. The contract is only made when it is signed, and there is therefore no prior contract, the terms of which can be inconsistent with the document.

9.65  This would in practice have restricted the availability of rectification considerably.⁵⁰ But, in the twentieth century, the courts decided that rectification is available even if there was no prior contract.⁵¹ If the parties had reached agreement on a term of the contract and that agreement continued up to the time the contract was signed, then the contract will be rectified if it does not reflect that agreement.

9.66  In order to rectify a contract on this basis, it must be established that:

• •  the parties entered into a written contract;

• •  at the time they did so, they had agreed that the contract would contain a particular term; and

• •  by mistake, the written contract does not reflect that agreement.

9.67  This is a major extension of the doctrine of rectification. The court is not rectifying a document on the basis that it does not accord with the contract it is meant to record. It is rectifying a contract because it does not accord with what the parties had agreed.⁵²

9.68  Why should equity intervene in such a case? Why should a non-binding agreement override a binding written contract?

9.69  It is often said that the document should be rectified because it is against conscience for a party to attempt to enforce the document when he or she knows that it does (p. 186) not reflect what was agreed.⁵³ But it is suggested that the real reason that equity intervenes is because the writing does not reflect the agreement. The reference to ‘conscience’ adds nothing to the analysis.⁵⁴

9.70  Equity intervenes to rectify the contract because the contract does not reflect what the parties had actually agreed. That is not a self-evident truth, but it is a reasonable position to adopt. The law enforces bargains and, if it is clear that the written contract does not reflect the bargain, then the bargain should prevail.⁵⁵

9.71  The more recent cases on rectification for common mistake tend to use the expression ‘common intention’ rather than ‘agreement’.⁵⁶ Indeed in the Swainland Builders case,⁵⁷ Peter Gibson LJ said that the parties must have ‘a common continuing intention, whether or not amounting to an agreement’. But it is suggested that, when he used the word ‘agreement’ here, what he meant was a binding contract. He was reflecting the extension of the doctrine of rectification to cases where there was no preceding contract. Indeed, in Joscelyne v Nissen,⁵⁸ the Court of Appeal clearly used the expressions ‘common intention’ and ‘agreement’ as synonyms.

9.72  The question, then, is what we mean by ‘common intention’ or ‘agreement’ in this context. There are at least three⁵⁹ possible approaches:

• •  to rectify the contract only if it does not accord both with the objective common intention of the parties and also with their subjective common intention;

• •  to rectify the contract if it does not accord with the parties’ objective common intention; and

• •  to rectify the contract if it does not accord with the parties’ subjective common intention.

9.73  The third possibility can be disposed of quickly. None of the cases warrant rectification without at least some objective manifestation of subjective intention. Indeed, (p. 187) an intention can only be held in common if each party has communicated its intention to the other. A party can individually intend something, but it is only by communicating it to the other party and reaching an apparent consensus that both parties can have a common intention about it. Only then can they be said to have reached agreement.

9.74  That leaves two options—to allow rectification only where there is a congruence of objective and subjective common intention, or to rectify where there is an objective common intention. In England, the law at the moment is that objective common intention is sufficient, but there is plenty of judicial and extra-judicial support for the alternative, and it is clear that Chartbrook is not the last word on this important issue.

9.75  The strongest argument in favour of requiring both objective and subjective common intention is that to rectify the document on the basis only of objective intention gives precedence to an informal earlier agreement over a later formal one. There is therefore much to be said for the view that, in this type of case, rectification should only be available where the parties have reached both actual agreement and the appearance of agreement.

9.76  But it does not necessarily follow that rectification will therefore be refused where—as in Chartbrook itself—one party convinces the judge that he did not subjectively agree to what had apparently been agreed. A simple assertion by one party—even if believed by the judge—that he did not understand what was apparently agreed should have no bearing on the outcome. Agreement can only be reached by the parties communicating with each other. If it is clear in correspondence that one party does not agree with a particular outcome, then there can be no agreement. But, if the party keeps his disagreement bottled up within himself, then it cannot be of any relevance to the outcome.

9.77  In short, in common law jurisdictions, agreement is by its very nature established objectively. Assume that the parties enter into a written contract and one party then alleges that it fails to record an agreed term. If the parties agree that they did agree it, then they will rectify the agreement consensually.⁶⁰ If one party denies that he has agreed it and brings forward communications between the parties to prove it, then the other party cannot objectively have thought the point was agreed; and rectification will be refused. But if one party says that in his own mind he did not agree it, that is irrelevant to any question of common intention; rectification will be available if he appeared to have agreed.

(p. 188) 9.78  In practice, therefore, it is suggested that there is no real distinction between requiring objective common intention and requiring both objective and subjective common intention. When we are contracting, we cannot look into each other’s minds. All we can do is to look at what has passed between us. Individual subjective intentions can only be held in common once they have been communicated and appear to be agreed.

9.79  For these reasons, it is suggested that the approach in Chartbrook⁶¹ has much to recommend it. It is a clear test and it is consistent with basic principles of contract law. Rectification—like interpretation—should be concerned with the objective common intention of the parties.

9.80  This leads on to a related question. What is the nature of the common mistake which has to be established in order to obtain rectification?

9.81  In principle, what needs to be established in order to rectify the contract is that there has been a mistake in translating the parties’ common intentions to the page. It should not be enough that they had a common misunderstanding about the effect of the words in the contract.⁶² What is required is a common mistake about the words used—they intended to say x and the contract says y.

9.82  Take Rose v Pim⁶³ as an example. The parties agreed to sell and buy horsebeans. They may both have thought that horsebeans were feveroles, but they agreed on horsebeans and that is what the contract said. There was no mistake as to the terms of the contract, only a mistake as to their underlying assumptions. As David McLauchlan has said, the key question is to decide what was the term which the parties agreed.⁶⁴

9.83  In Pukallus v Cameron,⁶⁵ the parties were agreed on the identity of property to be transferred, but shared a common mistake about what the property contained. The High Court of Australia decided that the mistake was insufficient to enable the contract to be rectified. The written contract described what the parties intended to transfer, even though they were mistaken as to what it contained.

(p. 189) 9.84  The position was described by the New Zealand Court of Appeal in these terms:⁶⁶

9.85  But there have been cases in which the courts have rectified a contract which, although it expressed what the parties had agreed, did not give effect to what they had intended. In Re Butlin’s Settlement Trusts⁶⁷ Brightman J said that:

9.86  An example is Jervis v Howle & Talke Colliery Company.⁶⁸ The consideration for the grant of a lease was expressed to be a royalty of three pence per ton ‘free of tax’. This reflected the oral agreement of the parties, but they had misunderstood the effect of the tax legislation, which required the payer to deduct tax. Clauson J held that the parties had intended that the payee would get three pence per ton and should not have to bear any of the tax on it. He accordingly rectified the contract so that it had that effect, even though the words actually written in the contract were what the parties had agreed.

9.87  This approach is difficult to reconcile with the underlying principle that rectification is concerned with the objective intention of the parties. It runs counter to the approach in Chartbrook.⁶⁹ It remains to be seen whether, in the future, the courts will rectify a contract which expresses in words what the parties intended, but does not reflect what they thought the effect of that intention would be.⁷⁰

9.88  It is a requirement of rectification that the common intention of the parties continued at the time of the execution of the instrument which is sought to be rectified.⁷¹ (p. 190) The importance of this requirement can be seen from the Daventry case,⁷² where one of the key issues was whether the drafting of a different approach to the payment of the deficit was to be regarded as a mistake or simply as a change of position. Two judges went one way, two the other. That illustrates very clearly the factual difficulties involved in cases of this type.

9.89  If a different provision is contained in the signed document from that which had previously been agreed, the most likely explanation is that the deal has changed.⁷³ But that will not always be the case since, otherwise, no claim for rectification could ever be brought. It must be possible for one party successfully to argue that the amendment was a mistake. But the courts have always made it clear that the burden of proof is a high one. Faced with a document which he has signed, a party needs to provide compelling evidence that it does not reflect what had been agreed.

9.90  It has been seen under Principle 4 that, when a court is interpreting a written contract, certain materials are excluded from the background facts. In particular, evidence of prior negotiations is not generally admissible for the purpose of interpreting the contract.

9.91  In contrast, prior negotiations are available in an action for rectification.⁷⁴ This is necessary because it will be from the negotiations that evidence will be available that the parties reached a common understanding on something which was not then properly reflected in the written document. But, as has been seen, what the court is seeking to find is the objective intention of the parties, and therefore subjective declarations of intent are as irrelevant to a claim for rectification as they are in the process of interpretation.

9.92  The similarities between rectification and what might be described as ‘creative interpretation’ have been discussed under Principle 7. There is a strong body of opinion that the courts should only be able to rewrite the contract as a matter of interpretation where there is a clear typographical error, and that other cases of mistake should be left to rectification.

(p. 191) 9.93  There are two main reasons why it is considered that it is better to proceed by way of rectification than interpretation. One is that rectification requires clear proof of the continuing common intention of the parties at the time the contract was entered into, and that this is a good discipline. The other is that creative interpretation could adversely affect third parties, and that this would not happen if rectification were to be ordered.

9.94  Why does rectification not adversely affect third parties? Take the case of a contract, the benefit of which has been assigned. The starting point is that the assignee takes the benefit of the contract subject to equities, whether the assignment is statutory⁷⁵ or equitable.⁷⁶ Rights of set-off,⁷⁷ and the right to rescind a contract⁷⁸ are equities, and the assignee therefore takes subject to them. It is not clear whether a power to rectify a contract is an equity which can bind third parties.⁷⁹ If not, it is a personal right, which will not affect an assignee.

9.95  But even if a power to rectify a contract is an equity, it will not affect a person who acquires a proprietary interest in the contract (even if only an equitable interest) in good faith and without notice.⁸⁰ An assignee or chargee of a contract right obtains a proprietary interest in the benefit of the contract,⁸¹ and will therefore take free of the equity if he or she takes the interest in good faith and without notice of the facts giving rise to the power to rectify.⁸²

9.96  In any event, rectification is a discretionary remedy and would not be granted if it would prejudice a third party who had acted innocently and provided consideration.⁸³

9.97  For these reasons it is suggested that rectification is not possible if it would adversely affect the rights of an innocent third party.

9.98  Rectification for unilateral mistake is very different from common intention rectification. All the latter is doing is to bring the writing into line with what was agreed. (p. 192) Unilateral mistake rectification, on the other hand, is not concerned with giving effect to the agreement of the parties but, rather, with varying it because one party is mistaken about what the contract says and it would be unfair for the other party to rely on the agreement.⁸⁴

9.99  The underlying philosophy is this: if A and B enter into a written contract and A makes a mistake about what the contract contains, it will be amended to reflect what A had thought if it would be unconscionable for B to rely on what the contract actually says.

9.100  The current case law indicates that it would be unconscionable for B to rely on the mistake if, at the time the contract was entered into, he or she either knew of A’s mistake or suspected the mistake, but nevertheless encouraged A to enter into the contract without rectifying it.

9.101  The first type of case was described by Pennycuick J in A Roberts & Co v Leicestershire County Council⁸⁵ in these terms:

9.102  In Thomas Bates & Son v Wyndham’s (Lingerie),⁸⁶ Buckley LJ added a further requirement that:

9.103  Buckley LJ expressed the principle in this way:⁸⁷

9.104  In the second type of case, although the defendant is not aware of the claimant’s mistake, he or she suspects it, and encourages the claimant to enter into the contract without it being rectified.

9.105  The principle was described by Stuart-Smith LJ in Commission for the New Towns v Cooper (Great Britain):⁸⁸

9.106  In this case, one of the parties had deliberately raised a smokescreen in the negotiations in a way which the court regarded as dishonest.

9.107  In brief, rectification will be available where one party makes a mistake about what the contract contains and, at the time the contract is entered into, the other party either knows of the mistake or otherwise acts dishonestly in relation to it.(p. 194)