Rectifying mistake possible despite entire agreement clause
SURGICRAFT v PARADIGM BIODEVICES [2010]
Generally, contracting parties cannot extricate themselves from a poorly drafted contract because they later have second thoughts. However, the Courts can assist where there is a genuine mistake in the agreement and to give effect to the intentions of the parties.
facts:
- S was negotiating to appoint P as an exclusive distributor. During the negotiations it transpired that S wanted to use P’s sales to increase its chances of selling the company. P was worried its agreement would be terminated following the acquisition so it was agreed P would be paid compensation should there be a change in control of S and P’s contract terminated. However, the contract was signed without a clause reflecting this.
- There was, nonetheless, the usual entire agreement provision providing that the contract contained the entire understanding between the parties with respect to its subject matter and superseded all prior agreements, negotiations etc.
- Some time later, P’s concern materialised and the distribution agreement was terminated by S after a change in its control.
- P asserted that the contract did not represent what the parties had actually negotiated and therefore contained a mistake. P argued it had been the common intention of the parties that S would pay P compensation if S terminated the agreement following a change in its control and sought rectification of the contract (where a court amends a written agreement to accurately reflect the true intentions of the contracting parties).
- S denied this had been the parties’ intention. It also maintained that the entire agreement clause barred rectification.
decision:
- It was held that both parties had indeed made a mistake (a ‘common’ mistake), as the Court was satisfied they had both intended that P would receive compensation if S went through a change of control and terminated the contract but that by mistake they had left out a term to that effect.
- The argument by S that the entire agreement clause prevented P’s claim for rectification was fully rejected. The purpose of that type of clause was only to limit possible contractual claims arising from dealings outside the contract, not to override the Court’s ability to put the contract right where there had been a common mistake.
- This confirmed a ruling in a previous case where it was held that an entire agreement clause, being a provision that says “all the terms are in the document”, cannot be read as meaning “all the terms are in the document when it is in the wrong form”. The judge here agreed with that reasoning and extended the scope of that judgment to common, as well as unilateral, mistakes.
points to note:
- This case highlights the importance of precisely recording in the final signed contract all the points that have been agreed during negotiations. This cannot be emphasised enough as, although the mistake was rectified here, it is likely to be difficult and expensive to satisfy the high burden of proof imposed on the party seeking rectification to prove:
- the written contract did not accurately record the parties’ mutual original intentions; and
- what those original intentions actually were.
- Contemporaneous evidence is critical in proving those intentions and documentation created and received during the pre-contract negotiations should therefore be retained, at least for a reasonable period of time.
- A claim for rectification is one of the exceptional cases where the courts will specifically look at evidence of pre-contract negotiations. Such evidence cannot, strictly, be considered in a claim concerning the interpretation of the words used in a contract.
- An entire agreement clause is unlikely to prevent a claim for rectification. Relying on the usual boilerplate wording where you know or suspect something has been omitted from the final version of a contract may be a risky strategy.