Britoil plc v Hunt Overseas Oil Inc: CA 1994

After the failure of the attempt by the Texan oil tycoon, Nelson Bunker Hunt, in the 1970s to corner the world silver market, his fortune collapsed and his companies were forced to sell off assets. In 1979 two of those companies (the defendants in the subsequent litigation) entered into a contract by which they assigned to the plaintiffs (then the British National Oil Corporation, which subsequently became Britoil plc) their interests in a licence to produce petroleum from a North Sea oil field. Under the terms of the contract the Hunt companies had a right to receive a share of the profits if the exploitation of the oil field was sufficiently successful. A dispute later arose as to whether this right had been triggered. This depended in the first place on what the relevant terms of the contract meant. That question of interpretation was decided in the plaintiffs’ favour. The defendants made an alternative claim for rectification. The contract had been preceded by non-binding ‘heads of agreement’. The defendants contended that it was the common intention of the parties that the definitive written contract should in the relevant respects give effect to the heads of agreement and that, under the terms of the heads of agreement, their right to a share of profits had been triggered. In so far as the contract on its proper interpretation had a different effect, the contract should be rectified so as to have the same effect as the heads of agreement.
The defendants further submitted that for this purpose the parties’ states of mind were wholly irrelevant. They argued that the heads of agreement should be construed objectively, in exactly the same way as a contract is construed.
Held: (Hoffmann LJ dissenting) The appeal failed, and rectification was refused. The defendants had failed to establish that there was a prior common agreement or intention in terms that the court could ascertain or that the definitive agreement failed to reflect that prior agreement. Hobhouse LJ noted that Saville J ‘did not base himself upon any consideration of the evidence as to the actual state of mind of the parties’.
The parties must actually be mistaken about the content or effect of the contractual document which they executed to allow equitable rectification.
Hoffmann LJ, in dissent, accepted the defendants’ argument. In his view, which he thought was supported by the authorities relied on: ‘The purpose of rectification of a contract (as opposed to rectification of a unilateral instrument like a will or voluntary settlement) is not to make the instrument accord with what the parties subjectively intended but with what they actually agreed. Agreement in English law does not require a meeting of minds, a consensus ad idem. It is an objective fact, requiring only the appearance of such a consensus. If therefore the parties both intended a written instrument to embody their agreement and it does not do so, the necessary common mistake exists. It does not require that the written instrument should actually mean something different from what each of the parties thought it meant.’
Hoffmann LJ accepted that there could be cases in which the proper inference is that the final document represents the true agreement of the parties even though it means something different from prior heads of agreement. However, in the Britoil case Hoffmann LJ thought it clear that: ‘the common intention was that the definitive agreement should reflect the meaning of the heads of agreement, whatever that might be. So far as it failed to do so, it was in my judgment a common mistake which should be rectified.’
Hobhouse LJ rejected in clear and emphatic terms the defendants’ contention that the heads of agreement should be construed wholly objectively, in the same way as a contract, and that what the parties subjectively intended was irrelevant: ‘Further, there must be a reality to the allegation of common mistake. It is a factual allegation, not a question of law. On the defendants’ argument before us no actual common mistake is required. The parties are to be treated as if they were bound by the objective interpretation of the, ex hypothesi, non-binding heads of agreement. Where the relevant document is a legally binding document, it is appropriate and just to hold the parties to the objectively ascertained meaning of the words used. But where they are not bound and where the court is only looking at the previous document to help it answer the factual question whether or not there has been a mistake in the preparation of the legal document, the matter becomes one of fact not law. The claimant must prove the mistake and he must prove that it is a common mistake. The answering of that factual question is assisted by considering what is the natural meaning of the words used in an earlier document – people normally mean what they say – but strictly it cannot be concluded by it. It cannot be right to treat as conclusive evidence of the existence of a mistake in the execution of a carefully prepared and clearly expressed later contract the fact that language has been used in an earlier document which is bona fide capable of being understood in more than one way.’
Glidewell LJ and Hobhouse LJ, Hoffmann LJ
[1994] CLC 561
England and Wales
Cited by:
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. .
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CitedFSHC Group Holdings Ltd v Glas Trust Corporation Ltd CA 31-Jul-2019
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CitedFSHC Group Holdings Ltd v Glas Trust Corporation Ltd CA 31-Jul-2019
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These lists may be incomplete.
Updated: 08 February 2021; Ref: scu.472863