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Rectifying mistakes within contracts

October 2017 - Issue 98

Mistakes happen. We all appreciate that it is part of human nature. Although, it could be presumed that once an agreement is in writing, the terms are binding, as it is the responsibility of each party to be satisfied of the terms prior to agreeing to the contract.

However, the recent case of Milton Keynes Borough Council v Viridor (Community Recycling MK) Ltd [2017] has demonstrated that mistakes within a contract may be rectified on the basis of common or unilateral mistake. Terms, or lack of terms, could therefore be altered within a contract if there is deemed to have been a mistake that permits rectification.

Milton Keynes Borough Council (MKBC) contracted Viridor to conduct the waste recycling in Milton Keynes for a period of 15 years. During the tendering process, Viridor included an Income Generating Payment Mechanism (IGPM) of £500,000 per annum “indexed for inflation”. However, in preparing the final contract documents, MKBC’s consultants failed to include the correct version of the IGPM. No mention of the index for inflation was included. MKBC subsequently claimed a rectification of the contract on the terms of a mistake but Viridor argued that rectification should not take place, on the grounds of the entire agreement clause and because of delay.

The court dismissed Viridor’s arguments and held the contract could be rectified, due to common mistake, or alternatively, unilateral mistake.

Common mistake

Common mistake occurs where both parties believe that the contract gives effect to their common intention, in error. Following the principle set down in Swainland Builders Ltd v Freehold Properties Ltd [2002], the following must be established:

The courts held that common mistake took place because:

  1. There was a common intention that the fixed payment was £500,000 per annum “indexed for inflation” as this was what was stated at the time the tender was accepted. It was offered by the company and subsequently accepted by MKBC’s consultants, confirmed in a written letter. It was considered this clearly amounted to a common intention.
  2. The intention continued at the time of execution as the error was not noticed until after the contract had been entered into. There was no evidence that there was any further negotiation between the parties, and the courts dismissed Viridor’s argument as “hopeless”. Alterations to the contract had been made, but they were not extensive enough to amount to a different agreement.
  3. Neither party spotted the mistake and both signed off the contracts under the impression the contract reflected the common intention.

Unilateral mistake

Unilateral mistake occurs where one party makes an error which is known to the other party.
Lord Justice Buckley in Thomas Bates & Son Ltd v Wyndham’s (Lingerie) [1981] set out the following requirements to establish a unilateral mistake:

Unilateral mistake was considered an alternative reason for rectification being permitted because had the mistake been spotted by MKBC before the signing of the contract it would have been amended, Viridor failed to draw attention to the error to the council, and it would result in a financial advantage to Viridor. It was further considered by Lord Justice Buckley in Thomas Bates & Son Ltd v Wyndham’s (Lingerie) [1981] that it may be considered inequitable if rectification is not allowed when all the requirements are satisfied. In this instance, MKBC would have financially benefited by avoiding the tender offer of indexation, which is arguably inequitable.

But surely the Entire Agreement Clause applies?

Viridor argued that the entire agreement clause prevented rectification of the contract, but the court was not willing to accept this.

The court submitted that the entire agreement clause would apply in some instances, but in this case, there was such a strong argument for rectification, that it did not apply. The court cited the decision in LSRF III Wight Limited v Mill Valley Limited [2016]  in that where there is a strong case for rectification, the entire agreement will be found in the contract as rectified and not in the original contract, as the rectified contract will reflect the parties’ common intentions.

The defence of delay was also disregarded because MKBC notified the company immediately once the error had been spotted. Subsequent delays were therefore deemed a shared responsibility.

The need for accuracy

Hon. Mr Justice Coulson commented how there “is no doubt that it was sloppy work” by all parties involved. Due to the size and nature of modern contracts, especially within construction projects, he said the mistakes are “perhaps a sad reflection” that contracts are “so complicated that nobody… bothers to check the actual documentation being signed”. It was re-enforced that just because a mistake is so “glaring”, it does not mean it cannot be a mistake.

Due care and attention is therefore required to avoid mistakes when drafting contracts as it can be a very lengthy and difficult process to resolve any situations which may arise when incorrect schedules are attached to a contract. Detail consciousness is a key pre-requisite skill for the individual to be tasked with reviewing and checking the accuracy of all engrossment documentation prior to signing so as to avoid the expensive and inconvenience of mistakes at the final hurdle.

If you require any assistance, please do not hesitate to contact Rebecca Palmer on 01473 298274 or rpalmer@prettys.co.uk.

 

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