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 correct a mistake.
In a recent case a share purchase agreement was rectified as it did not include the whole of the land intended to be the subject of a sale.
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 share purchase agreement so that it correctly reflected the owners of the parcels of land.
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 – as in the current case where the definition of the properties 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 a relief which can “correct a written agreement because it does not reflect the terms of the true agreement at the time it was made”.
The inaccuracies in the written agreement must be due to either:
- a common mistake (where both parties believe that the document accurately records their agreement); or
- 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. In this case, the judge was satisfied that the communications between the parties provided all, or almost all, of the material necessary to establish the parties’ common intention required for rectification.
When rectification is granted
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 this case, the court refused to vary the share purchase agreement to such an extent that would allow the developer to acquire the parcels of land that were omitted. Instead, the variations made to the share purchase agreement, and the accompanying disclosure letter, merely allowed the developer to bring a claim against the sellers for breach of warranty.
It should be clear that nothing beats a well drafted document (though I suppose as lawyers we would say that!). 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 can be used to rescue a transaction. 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.