Property Litigation column: Ralph v Ralph: no rectification where no agreement

Andrew Skelly considers Ralph v Ralph [2021] EWCA Civ 1106, in which the Court of Appeal held that a TR1 could not be rectified as the joint purchasers had never considered or agreed how the beneficial interest was to be held, and whether the decision might make it easier for settlors to seek rectification of voluntary settlements on the ground of mistake.

Rectification is a power to correct mistakes in recording what the parties have actually agreed. The test for rectification, in the case of common mistake, was set out by the Court of Appeal in Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560. The party seeking rectification must show that:

• the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
• there was an outward expression of accord;
• the intention continued at the time of the execution of the instrument sought to be rectified;
• by mistake the instrument did not reflect that common intention.

In the recent case of FSHC Group Holdings Ltd v GLAS Trust Corp Ltd [2019] EWCA Civ 1361, it was considered necessary to reconsider the legal test for rectification, and the Court of Appeal altered the test for common intention (the first bullet point above). As a result of the judgment of Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, the assessment had previously been by way of an objective test. While Lord Hoffman’s opinion should be commanded immense respect, it was expressly acknowledged to be obiter dicta and not binding authority.

Further, the Court of Appeal’s decision in Daventry DC v Daventry and District Housing Ltd [2011] EWCA Civ 1153 did not prevent the court from deciding whether a subjective approach should be adopted in determining whether the parties had a common continuing intention, because the parties in Daventry had proceeded on the assumption that Lord Hoffman’s analysis was correct. A court is not bound by a proposition of law which was not the subject of argument because it was not disputed in an earlier case (see Joscelyne v Nissen [1970] 2 Q.B. 86 and Hetherington (Deceased), Re [1990] Ch.1).

The justification for rectifying a contractual document to conform to a continuing common intention is not to be found in the principle that agreements, as objectively determined, have to be kept. Rather, it rests on the equitable doctrine that a party would not be allowed to enforce the terms of a written contract, objectively ascertained, when to do so was against conscience because it was inconsistent with what both parties in fact intended those terms to be when the document was executed. That basis for rectification is entirely concerned with the parties’ subjective states of mind (paragraph 146, FSHC). There is therefore no anomaly in applying an objective test where rectification is based on a prior concluded contract and a subjective test where it is based on a common continuing intention (paragraph 153).

The requirement of an “outward expression of accord” was also explained in FSHC (paragraph 176):

“…we are unable to accept that the objective test of rectification for common mistake articulated in Lord Hoffmann’s obiter remarks in the Chartbrook case correctly states the law. We consider that we are bound by authority, which also accords with sound legal principle and policy, to hold that, before a written contract may be rectified on the basis of a common mistake, it is necessary to show either (1) that the document fails to give effect to a prior concluded contract or (2) that, when they executed the document, the parties had a common intention in respect of a particular matter which, by mistake, the document did not accurately record. In the latter case it is necessary to show not only that each party to the contract had the same actual intention with regard to the relevant matter, but also that there was an ‘outward expression of accord’ – meaning that, as a result of communication between them, the parties understood each other to share that intention.”

The outward expression of accord therefore requires that the common intention was not merely an inward thought, but was communicated. It is not essential to produce “documentary evidence” of the continuing common intention or expression of accord. The true intention of the parties may be established both by evidence of their acts, as where for a long time they have observed the true agreement and not the words of the instrument, and also by oral evidence of their intentions and states of mind.

In Ralph v Ralph [2021] EWCA Civ 1106, the Court of Appeal was required to consider how these principles apply to a TR1 form by which a property is transferred.

Ralph v Ralph

In Ralph, to enable his father to buy a property, the son obtained a mortgage and the father paid the balance of the purchase price. The property was conveyed into their joint names. The TR1 form was completed by placing a cross in the relevant section, Box 11, indicating that the transferees were to hold the property as tenants in common in equal shares. The form was signed by the transferors, but not by the father and son as transferees.

Relying on that express declaration of trust, the son sought a declaration that the property was held by them as tenants in common in equal shares. The father’s case was that that declaration of trust was made under a common mistake and that they never intended joint beneficial ownership.

The first notable aspect of this case is that there was no pleaded case on mistake and no counterclaim for rectification. In the early stages of the trial in the County Court, the judge had observed that if the father was saying that the cross in Box 11 was a mistake, that had to be pleaded. Ultimately, though, the judge decided to proceed, without a particularised counterclaim, and to “see what happens in the evidence”.

The judge noted that a properly completed and executed TR1 is and remains conclusive as to the parties’ beneficial interests in property unless and until either a new declaration is made or unless the TR1 can be impeached on the ground of fraud, undue influence, mistake or proprietary estoppel: see Goodman v Gallant [1986] Fam 106 and Pankhania v Chandegra [2012] EWCA Civ 1438. Where one of these vitiating factors is established, it may lead to the setting aside or rescission of the document or transaction or to the rectification of the document, so as correctly to record the intended transaction: see Taylor v Taylor [2017] EWHC 1080 (Ch). The judge thus identified the central question as being whether the father had shown that the declaration in the TR1 was of no effect for one of those reasons.

In the event, it did not matter that there was no particularised counterclaim seeking rectification, despite the same having been twice directed. The son was not taken by surprise because the assertion that Box 11 had been completed by mistake had been live since the father’s first statement, and the skeleton argument served on his behalf dealt with the issue of alleged mistake.

The judge made the following findings of fact:

“34. … it was never intended by either [son] or [father] that they should be joint owners in equity. In my judgment, the position was this. [Son] became a joint owner purely to assist with the purchase, so that the mortgage advance could be obtained. There was no discussion with the solicitor about how the property should be held. However, and whenever the cross in box 11 came to be placed there, it did not represent the true intention or understanding of the parties. I do not accept that [son] would not have become a joint owner unless he was acquiring a beneficial interest; I do not accept that [father] told him that it was a good investment for him, although it may have been that he agreed to be a joint purchaser because the purchase was a good and sensible investment for the family as a whole. I do not accept that [son] made payments towards the mortgage. It is right of course that [son] was liable for the mortgage, but I am not convinced that he would not have become an owner unless he was acquiring a beneficial interest. [Son] made no contribution to the purchase price and no contribution to the mortgage (save indirectly). There is no evidence of any legal advice having been given by the solicitor; neither [son] nor [father] say that any was given. In my judgment, the cross in box 11 was placed there because it was assumed that since this was a joint purchase, the property would be held jointly in equity. In fact, that assumption was plainly a mistake; it did not represent the true and enduring intention of the parties. This is not a case of the parties simply being mistaken as to the consequences of their agreement, as in Gibbon v Mitchell … ; this is a case where there was no agreement as to sharing the beneficial interests, and no intention on either side that they would be co-owners in equity. 35. In my view, it is wholly improbable and unlikely that [father] would have been making an immediate gift to [son] of half of the property, to the exclusion of any interest which [son’s] siblings or their mother might otherwise have, giving [son] the immediate right to a half share and to an occupation rent from his parents. If it was intended that [son] was acquiring an interest because of his liability under the mortgage, then [son] would have paid a share of the mortgage from the outset; in my view, his payments whilst he was living at the property were not payments towards the mortgage at all.

37. In my judgment, [father] has satisfied me on the facts on balance of probabilities, to the necessary convincing standard, that the TR1 was completed by mistake. The declaration in the TR1 cannot stand. It must follow from my factual findings that [son] has no beneficial interest in the property; in my judgment, the property is held beneficially for [father] alone. [Father’s] contention that it should be held on trust for “his family” is too vague and amorphous to result in any other finding…”

Thus, in the County Court, the judge found that it was never intended by either party that they should be joint owners in equity; neither party had intended joint beneficial ownership. He concluded that the declaration of trust in the TR1 form was completed by mistake and that the property was held beneficially for the father alone. There was no express agreement as to how they were to hold the beneficial interests, and no evidence of any continuing common intention in that regard; they had simply given the matter no thought. Indeed, the evidence was that there had been no discussion as to the beneficial ownership, and no advice as to the consequences of the TR1.

Appeal to the High Court

On appeal to the High Court, the son contended, amongst other things, that (i) in the absence of any claim for rectification or rescission, the parties were bound by the express declaration of trust in the TR1; and (ii) the facts found by the judge were, as a matter of law, insufficient for the court to rescind or rectify the TR1. Those facts did not establish either a “common mistake” or an “outward expression of accord” sufficient for rectification. The judge made no finding of a positive commonly held agreement or intention at the time of the execution of the TR1 form.

As to the first issue, Morris J held that whilst normally it should be raised in the pleadings, there is no absolute rule of law that the court will not rectify a document for common mistake in the absence of a pleaded counterclaim. It will do so where not to do so would mean that the other party would be getting something to which they would have no right. The court may still go behind the express declaration of trust where a party had raised, as a defence, (and the court had adjudicated upon) a vitiating factor and a ground for impeaching the validity of the express declaration of trust (paragraphs 45, 50 and 54).

On the second issue, Morris J held that the position was that there was no agreement between father and son as to beneficial interests. In the absence of agreement or discussion as to the beneficial ownership, the parties must have intended that the TR1 would be silent on the issue. The best way to reflect what they did actually agree (namely, joint legal title only) was to remove the cross from Box 11, it not being a question of what they agreed about what should go into Box 11, but of what they substantively agreed about the beneficial interest and whether what was in Box 11 properly reflected that agreement. It was not appropriate to vary the TR1 such that the property was held on trust for the father alone, but it could be rectified simply by deletion of the cross from Box 11, because neither party had intended it, with the result that there was no express declaration of trust at all. The appeal was thus dismissed.

Appeal to the Court of Appeal

The son brought a second appeal to the Court of Appeal on the ground that rectification was inadmissible because at the time of the declaration of trust, there was no positive subjective common agreement, and no sufficient outward expression of accord.

The Court of Appeal noted that the parties had proceeded in both appeals on the assumption that the principles relevant to the rectification of commercial contracts enunciated in FSHC are applicable in law to the question of whether a TR1 can be rectified. Sir Geoffrey Vos, Master of the Rolls, expressed doubts about the correctness of that proposition, but dealt with the appeal on the working assumption, without deciding, that those principles applied. Thus, the Court of Appeal declined to decide whether the test in FSHC is the correct test for claims to rectify a TR1; the question was expressly left open in case it arises again in future.

Neither was it necessary for the Court of Appeal to consider whether or not there is a need for an outward expression of accord, or whether an expression might be taken to have occurred tacitly. That is because, on the facts found by the trial judge, there was no continuing common intention at the time of completion of the purchase of the property as to the beneficial interest.

Further, Sir Geoffrey Vos noted that the trial judge had proceeded on the basis that HHJ Paul Matthews had decided in Taylor v Taylor that it made no difference to the validity of the declaration of trust if the TR1 was signed by the transferor, but not by the transferees, because a properly completed TR1 could only be impeached on the grounds of fraud, undue influence, mistake or proprietary estoppel (see Pankhania). Sir Geoffrey Vos expressed further doubt about the correctness of HHJ Paul Matthews’ decision on that point. However, as it was not a point raised or argued in Ralph, for the purposes of the appeal he simply assumed the validity of the declaration of trust. The question was expressly left open in case it arises again in future. So much for what the Court of Appeal decided not to decide.

Continuing Common Intention

The trial judge had not found any continuing common intention, shared by father and son, at the time of completion of the purchase of the property, as to the beneficial interests. At its highest, they had not agreed that the property should be held in equal shares. Such a finding of fact did not allow a conclusion that they had agreed anything, or that they shared a common intention. Indeed, nothing at all had been discussed.

There is plainly a distinction between the absence of agreement and an actual agreement. For the purposes of rectification, absence of agreement is not the same as actual agreement. A court still needs to find a mutual and subjective intention on the part of both parties before it can order rectification of a deed to include a particular term.

The law does not make contracts for people unless they had agreed to them or shown a continuing common intention as to the terms. Because the trial judge had not found a “continuing common intention” for the TR1 to contain no declaration of beneficial ownership, but only an absence of agreement, the TR1 could not be rectified.

Rectification of Voluntary Settlement

Perhaps one of the most interesting features of Ralph is that whilst it did not itself concern a settlement, it raised the question of whether a settlor seeking rectification of a voluntary settlement needs to establish common mistake. The Court of Appeal held that different considerations apply to settlements and to declarations of trust. In the former, the settlor and trustees may not need to share a continuing common intention. Sir Geoffrey Vos referred to Re Butlin’s Settlement Trusts [1976] Ch 251 where Brightman J had rectified a voluntary settlement to include a clause that had been mistakenly omitted, despite the fact that at least two trustees were ignorant of the settlor’s intention to include the provision. It was not necessary to prove that the mistake was mutual. Common intention may still be relevant, however, if there was an actual bargain between the settlor and the trustees, or between the settlor and another party.

It seems likely, then, that Ralph eases the path for a settlor seeking rectification of a settlement on the ground of mistake, as it may be only his intention which is relevant.

Written by Andrew Skelly in August 2021. First published in Practical Law’s Property Litigation Column.