Court of Appeal sets out new test for rectification

Terra Firma has successfully upheld in the Court of Appeal the judgment it obtained from the High Court allowing rectification of the terms of a private equity financing transaction completed in 2012, concerning the Four Seasons care homes business.

The Court of Appeal’s judgment is now the leading decision in this complex but important area of the law. 

The transaction required the Parent company to provide security over a particular shareholder loan which was part of the overall funding package. Having belatedly spotted, in 2016, that the relevant security documentation had either never been provided or could not now be located, an attempt was made by the Parent to provide that security by way of two Accession Deeds. By a mistake, far more onerous obligations were undertaken by the Parent than were required.

The Parent sought rectification of the Accession Deeds, but this was opposed by Barclays Bank as the security agent, on the instructions (at least primarily) of H/2 Capital Partners, a privately-owned US based hedge fund which holds the vast majority of the relevant debt.

At first instance, Mr Justice Henry Carr ordered that the Accession Deeds be rectified. Having heard witnesses for both the Parent and Barclays, he was satisfied that there was no intention on either side for the Parent to undertake the additional obligations; the intention was only to make good the missing security over the shareholder loan. It would therefore be inequitable not to rectify the Accession Deeds. The Parent’s claim for rectification therefore succeeded.

The judgment of Mr Justice Henry Carr can be found here.

In the Court of Appeal, Leggatt LJ (with whole Flaux and Rose LJJ agreed) revisited the test for rectification and concluded that a subjective element - that the party had actually been mistaken - was required. The appellant’s argument, that the test was entirely objective, was rejected. 

The judgment of the Court of Appeal can be found here.

David Wolfson QC acted for the successful Parent at first instance and was again successful as respondent to the appeal. He was instructed by Allen & Overy.