19 Jan 2012

Rectification: How to prove your "contract" is not your contract

by Julie Granger, Danielle Briers

Whether you're making or defending a rectification claim, it's important to be aware of what evidence is admissible and what defences might apply (and how you can use them to your advantage).

In our last article on rectification, we outlined the requirements for rectification and gave some practical tips for those seeking to rectify a written contract that does not reflect what they intended.

In this follow-up article, we look at some of the key evidentiary principles that apply in rectification cases, and defences and discretionary factors that can defeat such a case.

Obtain evidence of the parties' subjective and objective intention

Rectification is a discretionary remedy and will only be granted if the Court is satisfied, by clear and convincing evidence, that the parties held the necessary intention at the time of executing the document (and were not then aware that the document failed to record that intention).

Unlike claims for interpretation/construction of a contract, rectification claims are concerned with the parties' subjective intention – what they actually intended (as opposed to what the document suggests they intended). This makes rectification a very powerful remedy, but it also makes it crucial to obtain documentary and oral evidence from all relevant people (including those who negotiated, drafted and approved the contract) as to what they (and their organisation) intended the document to say and achieve.

Of course, evidence of the parties' objective intention, contained in documents passing between the parties and records of their conversations, is also relevant and should be diligently gathered and analysed.

Post-execution conduct admissible to show pre-execution intention

In a rectification case (unlike a mere contractual interpretation/construction case), evidence of communications and conduct which occurred after execution of the document is admissible – but only to the extent that it sheds light on what the parties intended at the time of executing the document. What they intended after execution is irrelevant.

Entire agreement clause no bar to rectification

Commercial contracts often contain a clause which states that the document executed by the parties constitutes their "entire agreement". These clauses do not prevent rectification of the document, nor do they prevent a court from looking at extrinsic evidence of the parties' intentions to determine whether rectification should be granted. This is not to say that entire agreement clauses are irrelevant to rectification cases. They may be supportive (though not conclusive) of an argument that there is no basis for rectification because the parties intended to be bound by the document as written.

Defences to rectification

Even if the elements of rectification are established, a defence may apply to the rectification case, or a court may (in exceptional cases) refuse rectification on discretionary grounds. For example, rectification may be refused if:

  • The party seeking rectification has acquiesced to the document in its unrectified form, or waived or released the right to rectification.

It is an essential pre-condition of these defences that the plaintiff knew of the error in the document at the time of the alleged acquiescence/waiver/release. For example, if a party to a loan agreement discovered that the interest rate of 5% specified in the agreement was a mistake, but told the other party it was content with 5%, or just continued to proceed on the basis of 5%, it could be held to have acquiesced to the incorrect interest rate.

  • There has been delay amounting to laches by the party seeking rectification.

Delay alone is not sufficient – it must be combined with acquiescence, or cause such prejudice to another party (usually the defendant) that it would be unjust for rectification to be granted.

  • An estoppel has arisen.

There are various types of estoppel, but essentially it applies where a defendant has relied on an assumption induced by the plaintiff and would suffer detriment if the plaintiff were allowed to depart from the assumption. So, in a rectification case, a plaintiff might be estopped from obtaining rectification if the plaintiff said or did something which led the defendant to believe it could rely on the document as written.

  • Rectification would give rise to an illegality, or would be futile (for example, where a document has already been interpreted by a court and fully performed in accordance with that interpretation, it will be too late to claim rectification: Caird v Moss (1886) 33 Ch D 22).
  • Rectification would prejudice an innocent third party who purchased an interest under the contract in good faith and without notice of the mistake in the contractual document.

Practical tips

Obtain evidence of the parties' (subjective and objective) intention: It is crucial to obtain clear and convincing evidence of the parties' relevant intention. As in interpretation cases, documentary evidence will be crucial – identify all potentially relevant documents and analyse them carefully. In addition, obtain statements from individuals involved in the negotiation, drafting and approval of the contract – these are pivotal to proving the necessary intention in a rectification case. Contemporaneous documentary evidence of what the parties actually intended is always the most convincing evidence in a rectification case. At the drafting stage, keep notes of discussions and ensure minutes of meetings and other documents exist which clearly record what the company or party executing the contract intended.

Don't forget the post-execution conduct: Remember to look at what happened after the document was executed – if it sheds light on the parties' intention at the time of executing the agreement, it may be relevant and helpful to your case (whether you're plaintiff or defendant).

Consider the effect of any entire agreement clause: While not decisive, an entire agreement clause may be relevant to the question of whether the parties intended the contract as written, or in the proposed rectified form. Particularly if you're the defendant, carefully review any entire agreement (or similar) clause and consider how it can be used to your advantage. If you're a potential plaintiff, don't assume you can't obtain rectification just because the document contains an entire agreement clause.

Be aware of the defences (even if you're not the defendant!): Be aware of potential defences to rectification. Even the plaintiff needs to be aware of the defences – particularly those based on conduct of the plaintiff, such as acquiescence, waiver, laches and estoppel. Ifyou find a clause which you may need to rectify, be careful not to do anything that could later help establish one of these defences – for example, anything that might be acquiescence to, or encourage the other party to rely on, the clause as written.

Thanks to Michelle Barraclough for her help in writing this article.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.