Tuesday, June 8, 2010

Contracts - Rectification

What is Rectification?

  • Equitable remedy for alteration of documents
    • Can be any document, cheques etc.
  • If ordered, retrospective operation
    • So can be taken as effective from the date of execution.

When might it apply?

  • When parties have actually reached agreement on the terms of their contract BUT
  • Terms mis-recorded:
    • Accidental inclusion of term
    • Accidental omission of term
    • Other errors or absurdities
  • Only used in the context of written agreements.

Legal Options

  • Inherent power to correct or interpret terms to avoid absurdity or inconsistency
    • Fitzgerald v Masters; Secured Income
      • There was an attempt to incorporate terms from a real estate contract to the extent that they were inconsistent with the parties’ terms
      • The court said that was a mistake and read it as consistent
  • Order for rectification

Essential Requirements

  • Clear common intention subsisting up to execution of written contract Pukallus v Cameron
  • So a clear common intention for a term that continues all the way to the date of execution
    • Must be consensus as to substance and detail but exact wording not necessary-Liebler v Air NZ
  • Intention to record common intention in written contract
    • So not enough to simply discuss something – the parties need to have intended to record that term in the written contract
  • Mistake in giving effect to common intention = mistake in recording those intentions.


  • Gives effect to parties’ joint subjective intentions by making contract conform to that intention
  • So makes the written part of the contract conform to the parties’ joint subjective intention at the time the document was agreed
    • Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, 350.
  • So rectification is a clear, substantive exception to the PER
  • A court will also receive evidence in the case of a rectification argument to determine its availability.
  • It is also an exception to the objective rule. It looks at what the parties subjectively intended.
  • The justification is that it would be unconscionable for a party to try and enforce/rely on a term known to contradict the parties’ subjective intentions
  • Eg-Bosaid v Andry [1963] 2 QB 465
    • Contract for the sale of lands
    • Parties intended for number 75 to be sold but accidentally wrote 15
    • Court rectified the document because the parties’ joint common subjective intention was to sell no. 75

Burden of Proof

  • Rests on party seeking rectification that contract not reflective of common intention
  • Must present clear and convincing evidence of the parties’ common understanding and the fact that a mistake has been made.
    • Otherwise the written agreement will be presumed to be the true agreement.
  • Common intention established by:
    • Words or conduct Pukallus
    • Evidence of subject intentions Rydelar v Euphoric
    • By inference NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 [do not read]

Change of Heart

  • Evidence of change of heart and intended to sign the written agreement in its final form prior to formation will preclude rectification
  • Slee v Warke
    • Parties entered into a three year lease of a hotel
    • The unusual feature of this lease was that it contained an option for the purchaser to buy the property
    • The particular option properly construed provided that the option could only be exercised after the expiration of the first year.
    • However, during negotiations the parties had agreed that the lessee would have to option to purchase but only during the first year of the lease
    • So, initially the parties had a common intention but the lessor then decided that he would like a full year’s rental before the contract of sale was settled
    • So the contract for sale could be initiated in the first year but not settled until the end
    • The vendor then told his solicitor to alter the terms of the proposed option and got things wrong
    • The lessor did not read the contract and thought it would be consistent with his conversations with his solicitor
    • The lessee liked the changes
    • He didn’t exercise the option until the final year, the lessor refused, so he brought an action for specific performance
    • The landlord sought action for rectification
    • Court HELD:
      • No common agreement/intention
      • Mistake was one-sided
    • SO court just gave it its plain and ordinary meaning.

Knowledge negates Common Mistake

  • A party who signs an agreement with knowledge that it does not reflect a prior common understanding will not be eligible for rectification
  • Maralinga Pty Ltd v Major Enterprises Pty Ltd
    • The auctioneer read out the written terms prior to the auction and they included the ability to pay the purchase price in instalments
    • Between the hammer and the signing, the owner changed his mind about the terms
    • The purchaser was asked to sign the written agreement with terms different from those read out at auction
    • He wasn’t happy but he knew what the changes were so no common understanding.
    • SO this demonstrates why rectification wasn’t available in Equuscorp – the director read the written agreement.
  • Cf Hoyt’s v Spencer and Equus Corp v Glengallan

Form/Effect Dichotomy

  • Traditional view - common intention must relate to form (wording) rather than legal effect (meaning) of terms
  • Courts have traditionally refused to rectify a mistake about the interpretation of a contract
    • Frederick Rose v Pim [1953] 2 QB 450
      • Sale and purchase of “Tunisian horsebeans”
      • Both think wrongly horsebeans are “feveroles”
      • On the traditional approach, the contract could not be rectified to be changed to feveroles because the phrase was specifically ‘horsebeans’
      • So it was a mistake to effect, not form
  • SO, even if the effect conflicts with intentions of the parties, courts will still give a term its ordinary and plain meaning.
  • Pukallus v Cameron (1982) 42 ALR 243 – Key case
    • Sale and purchase of land - subdivision 1 of portion 1154
    • Mistake as to what portion contained – both parties believed that this portion included 27 acres of pastoral land and a boar
    • In fact all of this land lay within the part of land retained by the seller
    • The contract was settled and the subdivision 1 lay within the area set aside for the purchaser
    • High Court of Australia refused to rectify the agreement
      • HELD: There was no common intention to purchase 27 acres + a boar
      • Rather, the intention was to buy and sell subdivision 1 of 1154
      • SO, the parties were in agreement about the form of the contract, but they were mistaken about what that included (the legal effect)
      • Thus the vendor received a completely inflated price for the portion of land conveyed to the purchaser

Softening of Approach? Pt I

  • Winks v WH Heck & Sons Pty Ltd [1986] 1 Qd R 226
  • The court ignored the plain and ordinary meaning of a term in a contract because it did not actually conform with the parties’ actual joint common understanding
  • So the court rectified the contract to accord with what the plaintiff[arties had hoped to achieve
  • The parties entered into a contract for the sale and purchase of a farm
  • Before that contract was executed, the vendor had already agreed to sell a large amount of native timber on his land
  • So when the vendor went to sell the land, he had top tell the purchaser of this other contract and was only going to do so on the condition that the third party could come onto the land for 10 years and mill the timber
    • If he didn’t provide for that, he would be in breach of his contract with the third party
  • The vendor’s solicitor drew up a contract and included a term that acknowledged that the purchaser was aware of the other contract
  • As a matter of interpretation, that clause was totally ineffective because knowledge ≠ agreement – it especially doesn’t mean that the sale is conditional upon that
  • But they actually agreed that the third party could do what he had contracted to do and this went on for a few years
  • But the timber guy had a road and was causing erosion, so the purchaser sought to terminate the agreement
  • BUT the court HELD that it was perfectly clear that the parties had always intended for the third party’s rights to be protected – so it rectified the agreement to accord with that common intention.

Softening of Approach Pt II

  • Commissioner of Stamp Duties v Carlenka Pty Ltd
  • A deed of trust was rectified to remove an unintended power in the trust document
  • The first time since Winks that a contract could be rectified to take not of intention.
  • But cf Equuscorp and Toll
    • Where High Court of Australia has come out so tstrongly in favour of an objective approach to written agreements.
  • And note limits imposed in Club Cape Shank ResortCo Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526, 540 [discussed in notes]

Rectification for Unilateral Mistake

  • Unilateral mistake=one party mistaken as to terms [previously subject to consensus] And
  • Other party aware of that mistake And
  • Failure to inform by non-mistaken party – this is the part that makes it unconscionable.
  • Mistake to benefit of non-mistaken party or detriment of mistaken party Liebler v Air New Zealand Ltd (No 2) [1999] 1 VR 1, 14
  • SO – work through it like this
    • Initial consensus of what the terms should be
    • It isn’t like that
    • One party notices and fails to inform the other

Unilateral Mistake- Omissions

  • Can include:
    • Mistaken belief that term included – something in it when it is not.
      • Thomas Bates Ltd v Wyndham’s Ltd [1981] 1 WLR 505, 515 [3rd party arbitration clause in rent review clause omitted with lessee’s knowledge]
      • FACTS
      • The parties negotiated a new lease pursuant to renew clause contained in their original lease
      • The original lease also contained a rent renew clause which enabled an arbitrator to settle the rental under the new lease if the parties couldn’t agree
      • BUT when the new lease was executed, this clause was accidentally left out
      • So when they prepared the new lessee, the lessor wasn’t aware of the absence, nut the lessee was
      • Arbitration clause necessary so it wouldn’t be an unenforceable agreement to agree.
      • Later, when the time came to renew, the lessee argued that the renew clause was unenforceable
      • BUT court saw it as an unfair attempt to get the contract to operate in favour of the lessee and of which the lessee was aware.
      • SO contract was rectified.
  • Leibler v Air NZ [right of pre-emption clause in contract for sale of shares in Jetset Travel deleted by mistake with vendor’s knowledge]
    • Leibler v Air New Zealand
      • Contract for sale by Leibler of 50% of shares in Jetset Travel to Air New Zealand
      • Air NZ wanted right of pre-emption = right to buy remainder of shares in Jetset should Jetset decide to sell
      • Parties agreed to vary term but was deleted by mistake
      • Because one party failed to speak up
      • HELD
      • The court rectified the contract to give Air New Zealand right of pre-emption

Unilateral Mistake - Terms included by mistake and the other party is aware of it.

  • E.g.-additional floor in lease of building
  • Wrong rent
  • Lack of awareness that term included and intention by other party to include and conceal Commissioner for New Town v Cooper (Great Britain) Ltd [1995] 2 WLR 677

Mistake not Known to other party

  • No remedy Slee v Warke (1949) 86 CLR 271
  • Not high-minded but does not activate equity Thomas Bates Ltd v Wyndham’s Ltd [1981] 1 WLR 505

Rectification and Uncertainty [Not covered in lecture-see notes]

  • Rectification can cure uncertainty
    • Sindel v Georgiou (1984) 154 CLR 661
    • Thomas Bates Ltd v Wyndham’s Ltd [1981] 1 WLR 505

Relationship with Construction [Not covered in lecture-see notes]

  • Objective intentions versus actual intentions Codelfa (1981) 149 CLR 337, 346 per Mason J
  • Rectification and interpretation can be alternative arguments Rydelar v Euphoric
  • Rectification usually fails because no mistake
  • Future problems-what constitutes a mistake?
    • See eg Cheshire and Fifoot 9th ed, 2008, para 12.43

Entire Contracts Clauses and Rectification [Not covered in lecture-see notes]

  • Entire contracts clauses cannot defeat rectification claim McDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152

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