Rectification revivified

In an economic environment where businesses are frequently re-examining the extent of their contractual obligations, lawyers are confronted on almost a daily basis with the question: ?what does my contract mean? Not infrequently, the uncomfortable answer may be different from the client's expectations and the lawyer is left reaching for the corrective toolbox.

The fact that there has been a run of cases in the sphere of contractual interpretation highlights the level of activity on the front line. Accordingly, the recent decision in Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736 offers further welcome guidance on what tools are available to achieve the client's desired commercial outcome.

Many had proclaimed the death of rectification at the hands of the expansive possibilities allowed by corrective interpretation not least in the light of Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 WLR 1101. However, in Cherry Tree, the Court of Appeal (Arden LJ dissenting) argued that reports of rectification's death were much exaggerated, and there was still a role for it. More significantly perhaps, in doing so the majority sought to restrict the impact of relevant background material in construing certain contracts.

R

easonable interpretation

The case concerned a deed of charge. By statute, a charge includes a power of sale, but that power can be extended by the parties in the charge itself (section 101(3) of the Law of Property Act 1925). The parties didn't do this. However, they did try to extend the power of sale in the facility agreement that created the debt secured by the charge. The facility agreement might have indicated that the parties, mistakenly, thought that they had also included the extension in the charge. A question arose which turned on whether the facility agreement's extended power of sale was available. C argued that the deed of charge should be construed as including the extended power of sale allowed by the facility agreement.

The CoA accepted that the facility agreement was admissible evidence on the construction of the charge. However, the question was what weight the reasonable person would give to that evidence. A deed of charge must be registered and is available to third parties wishing to check title. The register is intended to be near conclusive. The registered documents are therefore addressed (see, The Starsin [2004] 1 AC 715) to anyone who wishes to inspect the register. It would not have been apparent to those third parties that they should ask after the facility agreement (nowhere mentioned, nor given to the Land Registry) in order to understand the deed of charge. In those circumstances, the majority considered that the reasonable reader would not give any weight to the facility agreement in interpreting the charge.

It might have been more convincing if the CoA had concluded that the facility agreement was inadmissible because it was not reasonably available to addressees of the deed, but the majority felt unable, in the light of binding authority, to reach that conclusion. Nevertheless they reached their desired outcome that if there was to be an extended power of sale, rectification ?was the only way.

This case could be confined to public registers, like the Land Registry. But the majority were conscious that it went wider than that. Longmore LJ said that the approach extended not just to public documents but also to 'negotiable contracts', which he thought were different from contracts that could only affect parties to the contract. The question is how far this goes. For example, standard LMA loan agreements contain provisions about transfer: does that mean that the background '“ to the extent not apparent to a potential transferee '“ should be disregarded? If so, the words once more take centre stage. In this instance, the words were missing altogether and as Lewison LJ observed, even the staunchest advocates of the court's ability to consider extrinsic evidence stop short at saying that by the process of interpretation the court can insert whole clauses that the parties have mistakenly failed to include. Unfortunately, no doubt influenced by assertions of its demise, no claim in rectification had been advanced. The lesson, therefore, is clear: notwithstanding the charms of corrective interpretation, lawyers must think long ?and hard before leaving rectification in ?the toolbox.