HomeInsightsMichael Vaughan Caught Out by High Court’s Refusal to Allow Rectification to Secure a Tax Benefit

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This article was first published in Entertainment Law Review, Issue 8, 2020.

In MV Promotions Ltd v Telegraph Media Group Ltd,1 the High Court declined to exercise its discretion to allow rectification of a contract where a rectification deed had resolved all issues between the parties and the only effect of rectification would be to secure a tax benefit that the parties had not contemplated at the time of the contract.

The decision provides a useful summary of the current state of rectification: a clear guide helped by the fact that the judge—HH Judge Hodge QC—is the editor of the leading textbook on rectification. The court considered not only the concept of the correction of mistakes by applying principles of construction, but also the application of the equitable remedy of rectification. Whilst the case highlights that the equitable remedy of rectification might not be available in certain circumstances to secure a tax benefit, here this was not because equity demands that the claimant must “come with clean hands” but because “equity does not act in vain”. The rub was that the parties between themselves had corrected their mistake, but their private fix did not bind a third party, HMRC.

The case will also probably become well known for being one of the first, if not the first, case to use a Covid-19 pandemic scenario as a means of illustrating a point, as to which more below.

Background

The circumstances in issue were simple, involving a high-profile cricketer, Michael Vaughan. Mr Vaughan had entered into a contract with the Telegraph Media Group in 2008, through his personal service company (PSC), to write newspaper articles. When that contract ended, the arrangement had been extended under a new contract in 2011, stated to be between the Telegraph and the cricketer himself (not the PSC). HMRC assessed Mr Vaughan to additional taxable business profits for the services he had personally provided under the 2011 contract: the tax claimed was far higher than the tax that would have been paid by the PSC had the 2011 contract actually been between the Telegraph and the PSC (rather than with Mr Vaughan). So, the case was brought not because of any dispute between the parties but because the effect of the 2011 contract as entered into was to deliver a significant tax bill for Mr Vaughan.

Indeed, in 2018 (possibly on realisation of the tax consequences for Mr Vaughan of the 2011 contract wrongly being in the PSC’s name), the parties had themselves entered into a Rectification Deed confirming between them that the 2011 contract should have been between the PSC and the Telegraph. This of course did not bind HMRC, hence the application to the court. However, as HH Judge Hodge QC concluded “the remedy of rectification may … be withheld where the parties have sought by themselves to correct any relevant mistake in the underlying document by entering into a deed of rectification”. As explored below, there could be no rectification if the only effect was to secure a tax advantage that was not originally intended. The Rectification Deed itself had resolved any commercial issues between the parties, and so there was effectively nothing left for the court to rectify.

The claimants sought a declaration from the court that either (i) on its true interpretation the 2011 contract had since its inception been between the PSC and the Telegraph; or (ii) that the contract should be rectified to the same effect.

Decision

On the first point, HH Judge Hodge QC confirmed that it was possible to correct mistakes in documents by applying the principles of construction:

“Two conditions must be satisfied: first there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”2

Interestingly, notwithstanding the phrase “on the face of the instrument”, since the exercise is part of the single task of interpretation, extrinsic evidence in the form of the background and context—but not the subjective intentions of the parties-can be taken into consideration. As Lord Hoffmann said in Chartbrook Ltd v Persimmon Homes3:

“All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood that parties to have meant.”

HH Judge Hodge QC held, however, that it would not be clear “to the literary embodiment of the man on the Clapham    omnibus—the    reasonable    reader—that something had gone wrong with the language of the 2011 contract”. There was no clear mistake on the face of the 2011 contract permitting it to be interpreted as being between the PSC and the newspaper.

The court then went on to consider the claim for rectification for mutual mistake. As Leggatt LJ clarified recently in FSHC Group Holdings Ltd v GLAS Trust Corp Ltd4: to succeed in rectification “it is necessary to show… 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”. But HH Judge Hodge QC confirmed that the communication necessary to establish such a common intention need not be expressly stated: the shared understanding could be tacit, namely so obvious as to go without saying “… just as, in the time of social distancing necessitated by the Coronavirus pandemic, shoppers joining a queue … know to stand two metres behind the person immediately in front of them”. Hence, the test for rectification is subjective, not objective, which is why one can examine the parties’ pre-contractual negotiations.

On the facts, HH Judge Hodge QC found that a rectifiable mistake had been made (the evidence showed that all parties had the same actual intention that the contact should be with the PSC, i.e. a common intention to extend, not alter, the existing arrangement). Counsel for HMRC tried valiantly to persuade the court that since no explanation could be given as to how the mistake arose, the defendant’s claim should be defeated but as HH Judge Hodge QC said “it is unnecessary for the court to reach any conclusion on the precise cause of the mistake so long as the court is convinced a mistake was indeed made”.

So, Mr Vaughan must have thought he had caught the ball cleanly …

However, rectification is a discretionary remedy which must be “cautiously watched and jealously exercised”. A claimant must “come with clean hands” and “equity does not come in vain”.

As to rectification where there is a tax-based motive, the Ashcroft v Barnsdale5 and Vivian v Koningsveld6 line of authorities was considered. HH Judge Hodge QC himself in Ashcroft had stated:

“… the court cannot rectify a document merely because it fails to achieve the fiscal objectives to the parties to it. A mere misapprehension as to the tax consequences of executing a particular document will not justify an order for its rectification. The specific intention of the parties as to how the fiscal objective was to be achieved must be shown if the court is to order rectification … the court will not order rectification … if the parties’ rights will be unaffected, and if the only effect is to secure a fiscal benefit.”

There was no evidence that the terms or the entering into of the 2011 contract had been motivated by tax considerations. The 2018 Rectification Deed had resolved all issues between the parties. There was nothing between them left to rectify. The 2018 Deed did not, however, bind HMRC, which was seeking the additional tax from Mr Vaughan which would not have arisen had the 2011 contract been entered into by the PSC. Rectification was, therefore, being sought to achieve a tax benefit that, on the evidence, had not been a common intention between the parties on entering into the 2011 contract. But, since “equity does not act in vain”, the court would not exercise its discretion to rectify in this situation. Had there been an underlying tax motive at the time of the 2011 contract, rectification might have been granted notwithstanding the Rectification Deed, as there might have remained questions to be resolved as to the tax efficiency of the intended structure.

Therefore, there was to be no rectification if the only effect would be securing a tax advantage that was not originally intended.

Comment

First and most obviously, care is needed when entering into a contract: does it do what it should? If a mistake has been made, and the principles of contract construction do not assist, rectification may be available where pre-contractual negotiations and/or post contract conduct clearly evidence a common understanding between the parties. However, rectification will not be granted simply to secure a tax benefit which the parties had not contemplated at the time of the original contract. If a mistake has been made, taxpayers should consider carefully whether attempting to rectify the position inter partes resolves—or actually may weaken—the position. In this case the subsequent deed of rectification eroded any chance of the court granting rectification sufficient to bind a third party, HMRC. Taxpayers should give full consideration to the tax effects at a contract’s inception and keep contemporaneous evidence of common intentions.

1 MV Promotions Ltd v Telegraph Media Group Ltd [2020] EWHC 1357 (Ch); [2020] S.T.C. 1652.

2 per Brightman LJ in East v Pantiles (Plant Hire) Ltd [1982] 2 E.G.L.R. 111; (1982) 263 E.G. 61.

3 Chartbrook Ltd v Persimmon Homes [2009] UKHL 38; [2009] 1 A.C. 1101.

4 FSHC Group Holdings Ltd v GLAS Trust Corp Ltd [2019] EWCA Civ 1361; [2020] Ch. 365; [2020] 2 W.L.R. 429.

5 Ashcroft v Barnsdale [2010] EWHC 1948 (Ch); [2010] S.T.C. 2544.

6 Vivian v Koningsveld [2010] EWHC 3961 (Ch).