Rectification: The view from the boundary

What can we learn from the MV Promotions Ltd case?

Michael Vaughan is a name that has topped plenty of batting orders. This particular professional cricketer's name is not one you expect to see in law reports, but a recent decision concerning him, his company MV Promotions Ltd (MVP), the Telegraph (TMG) and HMRC is one that contains some important learning points for anyone who, like Mr Vaughan, provides their services through a corporate entity or who is entering into follow on agreements based on previous terms.

Background

The decision in MV Promotions Ltd & the Telegraph Media Group Ltd & Another [2020] EWHC 1357 (Ch) saw Mr Vaughan and his company asking the court to declare that on a true interpretation, an agreement entered into with TMG in June 2011 had always been between MVP and TMG, not him and TMG, and that the court should rectify the agreement to that end.

The declaration was sought because, unlike a previous agreement from 2008 which was expressly between MVP and TMG, the 2011 agreement named Mr Vaughan instead of his company. Mr Vaughan, MVP and TMG all accepted that they had intended to make the agreement at a company level, and they had all entered into a deed of rectification to that end in 2018.

That deed was not binding on HMRC however and it became involved in the case at Mr Vaughan’s invitation because of the impact on his taxable business profits and self-assessment tax returns in respect of services provided under the 2011 agreement. HMRC unsurprisingly took the view that the contract was personal to Mr Vaughan and that the income TMG paid to MVP under it should be treated as income attributable to Mr Vaughan rather than his company.

Rectification

Rectification is one of the three main legal options for correcting a mistake in a document. Strictly speaking, it’s an equitable (and therefore discretionary) remedy that enables a judge to ‘amend’ a document to reflect the parties’ contractual intentions.

The other two are consent and construction.

Consent allows parties to correct mistakes by agreement and usually involves a deed of rectification or putting a replacement document in place, as Mr Vaughan, MVP and TMG did in 2018.

Construction applies an objective test which considers what a reasonable person armed with all of the background knowledge that would reasonably have been available to the parties at the time of the original agreement would understand that agreement to have meant.

The decision

His Honour Judge Hodge QC (who edits the leading practitioner’s text book on rectification) confirmed that “where evidence of pre-contractual negotiations, and/or post-conduct is crucial, rectification may, in principle, be available where the [process of interpreting a contract] is unable to assist the claimant”. However, after reviewing the evidence he came to the view that a reasonable reader would not have considered that there was a clear mistake with the parties to the 2011 agreement.

The judge then examined whether the 2011 agreement could be rectified on the basis of a mutual mistake. After considering previous case law regarding ‘follow on contracts’ (in which it was held that it was reasonable to assume that the parties to a subsequent contract would repeat previous terms), he accepted that MVP’s should be treated as an original party.

That was not the end of the story though and, if you’ll forgive the cricketing analogy, the tail wagged when the judge declined to exercise his discretion to rectify because in his view the 2018 rectification deed had dealt with all of the issues he was being asked to determine and there was therefore nothing left for the court to adjudicate on. As a result, the 2011 agreement remained in Mr Vaughan’s name with the consequential effect on his tax position.

Take aways - What can we learn from the MV Promotions Ltd case?

Sadly, confusion around contracting parties, particularly when personal service companies and big brand names (which are often simply referred to in documents by their brand name rather than a specific company) are all too common. HHJ Hodge’s decision shows just why the first paragraph of a contract needs as much care and attention as the last to avoid unintended consequences coming home to roost, particularly in an increasingly tough climate where undotted ‘i’s and uncrossed ‘t’s will be seized on by parties looking for points to take.

Always check parties’ names, addresses and status carefully (for example, are they trading as a sole trader, partnership, LLP or limited company?) and don’t be afraid to carry out proper due diligence on them and their signatories as well as their financial positions. It may well be too late once you’ve signed on the dotted line.

CONTACT SIMON

If you would like more information or advice relating to this article or a Commercial Litigation & Dispute Resolution law matter, please do not hesitate to contact Simon Walsh on 01727 798085.

© SA LAW 2020

Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.