Understanding ‘rectification’ in a share purchase agreement

Courts are generally reluctant to interfere with commercial agreements entered into by well advised parties. But, in some circumstances, they may be prepared to step in and ‘rectify’ or correct a contract so that it reflects the parties’ contractual intention.

Here we consider the criteria that must be met before a court will order rectification and the lessons that have been learned from the rare court decisions where rectification has been granted. 

Rectification

Rectification is a remedy developed to address inaccuracies in agreements that are due to a mistake, or human error – the stuff of nightmares for any legal adviser. Broadly, mistakes that can be rectified include:

• misdescription: where the definition of the properties being sold did not correctly identify the land being acquired;
• omissions: where the document fails to reflect the intentions of the parties because words, or even whole provisions, have been missed; and
• errors: which result in the document failing to reflect the actual agreement between the parties.

There is no limit on the number of mistakes a court can rectify in an agreement but it becomes less likely that defects will be rectified as they become more numerous or severe.

Grounds for rectification

Rectification is available to correct two categories of mistake: 

1. a common mistake: where both parties believe that the document accurately records their agreement; or
2. a unilateral mistake: where one party believes that the document accurately records the agreement while the other is aware of the mistake and unfairly takes advantage of it.

The intention of the parties at the time of execution of the document is crucial and any mistake will be considered alongside this intention – to what degree does the document fail to represent the agreement between the parties?

The courts will look at the correspondence and any recorded communications between the parties when determining intention, including any previous drafts of the agreement. 

Lessons from the Court of Appeal

Whilst rectification orders are rare, decisions from the Court of Appeal upholding such orders are very unusual and, therefore, are of much interest when they do emerge.

Persimmon Homes Ltd v Hillier [2019] EWCA Civ 800 is one such Court of Appeal decision which involved the rectification of a share purchase agreement (SPA) and its associated disclosure letter, on the basis that the SPA did not include the whole of the land intended to be the subject of the sale.

Facts

The facts of the case were that a developer agreed to acquire a site owned by various entities. To do this, the developer purchased the shares in two companies, one of which had a subsidiary which held options over four parcels of land lying within the site. It emerged that the site actually contained six parcels of land and two of these were held by a third company whose shares the developer did not acquire.

The land acquired therefore contained a ‘ransom strip’ and this significantly reduced the potential value of the finished development. So, the developer sought rectification of the SPA so as to reflect what it was claimed was the common intention of the negotiated deal between the parties – i.e. that the developer would acquire all six parcels of land. This would mean that the sellers were in breach of warranty as they did not own the two plots of land. 

The developer also applied to rectify the associated disclosure letter so that the sellers’ liability for breach of warranty was not disclaimed by the disclosure letter.

The developer’s claim was successful and the sellers appealed to the Court of Appeal on two grounds:

1. that, based on the evidence, the first instance judge was wrong to order rectification of the SPA and disclosure letter; and
2. the disclosure letter was incapable of rectification as a matter of law.

Court of Appeal decision 

The Court of Appeal upheld the first instance decision, finding that the judge had been entitled to conclude that the SPA and disclosure letter did not accurately record the terms of the agreement between the parties and that the requirements for rectification had been satisfied. When construed objectively, the evidence suggested that the sellers had held out that the entire development site was to be included in the purchase and that both parties had proceeded with the SPA on the common understanding that it included all six plots of land.

The fact that the heads of terms reflected a different position to that in the SPA did not affect the decision. The Court held that the heads of terms did not have contractual force and were merely to be considered as part of the negotiations leading to the agreement (and not part of the agreement itself). 

The Court of Appeal also upheld the rectification of the disclosure letter. It found that the disclosure letter was an integral part of the suite of documents designed to give effect to the parties’ intended transaction and, in the particular circumstances, there was no reason why it should not be capable of rectification. It did not matter that the disclosure letter was a unilateral document as unilateral documents could be rectified if they did not give effect to the intention of the maker. The same mistake had informed both the SPA and the disclosure letter and there was no difficulty in principle with rectifying both contractual documents to give effect to the common intention of the parties.

Comment

While the grounds for rectification may be well established, it can be difficult in practice to prove what the intention of the parties was at the time of execution. It is this evidential hurdle that will often make an application for rectification a last resort for a party seeking a remedy.

There is also a risk that the rectification granted may not be entirely what was sought. In the Court of Appeal decision, the court refused to vary the SPA to such an extent that would allow the developer to acquire the parcels of land that were omitted. Instead, the rectification of the SPA and the accompanying disclosure letter, meant that the sellers were liable for breach of warranty.

Although the developer was successful on this occasion, the process of pursuing a rectification claim to the Court of Appeal is a lengthy and expensive one – nothing beats a well drafted document. Taking the time to consider the transaction and clarify what is and isn’t being included in any potential sale or purchase is crucial, and is a task that should be repeated throughout negotiations.

That being said, the remedy of rectification is available to rescue a transaction when other options have failed. But it should only be viewed as a safety net when things go wrong (albeit an unpredictable one), rather than a crutch to lean on.