Developments in contract: Rectification

Principles

• Where there has been a clear mistake in the drafting of a contract, parties may rely on the equitable remedy of rectification to correct it to reflect the parties’ contractual intention. To do so, the Claimant must establish that there has been a common mistake or a unilateral mistake.

• A claimant must establish the following to obtain rectification for common mistake:
  •  a prior accord
  •  that on an objective construction of what the parties said and did, that accord continued up to the contract’s conclusion, and
  •  that the Claimant was subjectively mistaken as to the terms of the contract concluded.
• A claimant must establish the following to obtain rectification for unilateral mistake:
  • the Claimant believed mistakenly that the contract included or omitted a particular term or provision
  • the Defendant was aware of that mistake
  • the Defendant failed to notify the Claimant of that mistake
  • the mistake must be one calculated to benefit the Defendant, and
  • the Defendant’s conscience was affected.

Recent Developments

• In CDS (Superstores International) Limited v Place Road Properties Limited, the Court considered the Claimant’s claim to rectify two key terms of a commercial lease that had been included in a different form for over six years until shortly before completion.

• One month before completion, the Defendant’s solicitors sent the Claimant’s solicitors a track-changed version of the lease that changed the two key terms. The cover letter gave the impression that only routine changes were made to the draft. Completion occurred while the Claimant’s solicitor was abroad, and he relied on the Defendant’s solicitor to take him through the changes by phone. The Defendant’s solicitor did not mention that he had changed the two key terms.

• The court found that there had been a common mistake. There was a prior accord (the two key terms) that, objectively, remained in place when completion occurred. The Claimant was subjectively mistaken that the key terms had not changed. The fact that it was the Defendant’s clear subjective intention to complete on the revised terms was irrelevant. The Defendant’s track-changed version, accompanied by the anodyne cover letter, failed objectively to bring that change of mind to the attention of the Claimant.

• The court also found that there had been a unilateral mistake. The Defendant must have known that the Claimant was subjectively mistaken as the Claimant had refused other changes that were much less financially detrimental to the Claimants. The circumstances of the Claimant’s solicitor trusting the Defendant’s solicitor to identify the changes to the contract meant that the necessary degree of unconscionability was present.

What this means

• Parties cannot rely on a "caveat emptor" approach to incorporate a sudden change to an established draft contract. "Glossing over" contentious terms or relying on track changes alone is inadvisable, as the consequence may be the costs of defending a rectification claim and being bound to the original term.

• Where there is general accord as to the terms of a contract being negotiated (particularly one that has been negotiated for some time), any party seeking a material change should draw that change to the other party’s attention.

• This onus is even more pronounced where the amending party is aware that the other party believes the understanding between them has not changed and is acting on that belief.