Lloyds TSB Bank Plc v Crowborough Properties Ltd & Ors

Rectification requires an objectively ascertainable common continuing intention, an outward expression of accord, continuation of that intention when the instrument is executed, and a mistaken failure of the instrument to reflect it. The parties need not have agreed the precise words or legal mechanism needed to give effect to their common intention. A drafting error caused by an erroneous assumption about the effect of altered wording may therefore be rectified. The court should identify the agreed objective, including its commercial substance, rather than assume that one formal legal mechanism is the only means of achieving it.

Crowborough Properties Ltd owed approximately £29 million to the Bank. Mr and Mrs Kaushal had guaranteed the debt, secured by charges over land in their names, although those charges secured only their liability as sureties. Proceedings concerning the enforcement of the charges were compromised by a Tomlin order. In return for payment, the Kaushals were released from their personal guarantees.

The Bank later discovered that the release also removed its ability to rely on the charges over the Kaushals’ land in recovering Crowborough’s debt. It sought rectification of the settlement terms. The High Court found a common mistaken assumption but held that no continuing common intention to grant a new charge had been shown. The central issue was whether rectification required proof of an intention to adopt that particular legal mechanism.

The Court of Appeal, in a judgment delivered by Lewison LJ with which Rimer LJ and Mummery LJ agreed, allowed the Bank’s cross-appeal.

1. Rectification requirements. The court adopted the four requirements stated in Swainland Builders Limited v Freehold Properties Limited [2002] 2 EGLR 71: a common continuing intention concerning the relevant matter; an outward expression of accord; continuation of the intention when the instrument was executed; and a mistaken failure of the instrument to reflect that intention. Lewison LJ noted that the statement had been approved by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101.
2. Form and mechanism. The precise form of words is immaterial if the common intention can be ascertained in substance and detail. Rectification is not precluded because the parties did not agree the particular mechanism by which their intention would be achieved. The court must identify the substance of the agreed objective.
3. Drafting error caused by assumption. An erroneous assumption that changing wording would not affect other rights does not place the resulting drafting error outside the scope of rectification. Erroneous assumptions and drafting errors are not separate, watertight categories.
4. Application. The objectively expressed common intention was that the Bank would retain the ability to sell all the charged properties and apply the proceeds towards Crowborough’s indebtedness. A new charge was only one possible mechanism. The High Court had therefore asked the wrong question by concentrating on whether the parties intended to grant a fresh charge. Harlow Development Corporation v Kingsgate (Clothing Productions) Ltd (1973) 226 EG 1960 was distinguishable because, in that case, no intention concerning the relevant option had been found.
5. Disposition. The limited release of the Kaushals’ guarantees had been undermined by a drafting error which removed the necessary limitation. Rectification was consequently available. The Bank’s cross-appeal was allowed, and it was unnecessary to determine the Kaushals’ appeal.

1. Court of Appeal (Civil Division): In [2013] EWCA Civ 107, allowed the Bank’s cross-appeal and found that rectification was available.
2. High Court of Justice, Chancery Division: His Honour Judge Purle QC found a common mistaken assumption but held that the Bank had not established a continuing common intention to acquire a new charge over the Kaushals’ land, and refused rectification.