Commercial Contracts: Rectification

Commercial contracts that fail to accurately reflect what the parties originally negotiated can give rise to costly disputes. The commercial litigation lawyers at Rogerson Law have a wealth of experience advising clients on disputes arising out of commercial contact terms.

Sometimes the courts are asked to rectify a commercial contract to give effect to what one parties says is the true bargain original negotiated. The Ontario Court of Appeal recently ruled in a case where one of the parties to a commercial contract claimed that the contract did not reflect what had been negotiated, and considered in what circumstances an agreement can be corrected by way of rectification1.

This case involved a family dispute involving the sale of a dairy farm by the parents to their son and his fiancée. A valuation was undertaken and the parties signed a Memorandum of Agreement. However, the price within the Agreement was $115,000 less than the valuation price. It was not until some 19 years later that the mother discovered this price discrepancy when her son’s marriage broke down. The mother applied for rectification of the contract to add $115,000 to the purchase price. Her application was resisted by her daughter-in-law.

What was the outcome?

The Court of Appeal set out the principles of rectification and found in favour of the mother, overruling the earlier decision of the Superior Court which had rejected her application for rectification. The judge accepted the daughter-in-law’s evidence that she believed the final price agreed was the lower sum ($625,000), and that as the parties had a different understanding of the final purchase price, their common intention could not properly be determined.

Why was rectification allowed?

The Court clarified the test for rectification in light of previous cases and said the inquiry should consider whether the totality of the evidence supports the conclusion that an agreement was in place, but that an error was made in recording it.  This must include the entire factual matrix existing at the time the contract was entered into, and the parties’ testimony as to what they understood to be the terms of the agreement. The weight to be attached to this evidence would vary depending on the evidence available.

In this case, the trial judge’s exclusive reliance on the daughter-in-law’s testimony when determining whether there was a common intention between the parties was inappropriate. An objective observer would have concluded that the parties’ common intention was to agree to a purchase and sale at the fair market value of $733,255 which was provided for by the valuation.

Giving judgment, Weiler JA said: “The trial judge … erred in his approach to rectification. Instead of adopting the objective reasonable bystander approach, he relied almost exclusively on Maureen’s testimony as to her subjective intention that the total purchase price for the farming business was $625,000.”

There was, therefore, a mistake in the Agreement and the Court ordered it to be rectified.

What does this mean?

Great care must be taken to ensure all written commercial contracts accurately reflect the terms agreed between all the parties, particularly the fundamental terms such as those relating to the price agreed (consideration). Where there is a mistake in the contract, the parties face expensive court proceedings and the courts are likely to order rectification where the mistake goes to the heart of the contract – particularly if there is strong evidence to demonstrate the purported mistake.

Existing contracts should be reviewed to ensure they reflect the original bargain negotiated between the parties. Where there is any doubt, obtain specialist legal advice from expert commercial solicitors. The commercial litigation lawyers at Rogerson Law are available now to advise on your commercial contracts – whether existing contracts or those you are negotiating, or considering entering into.

Rogerson Law Group provides commercial litigation services in the entire GTA including Toronto, Scarborough, Mississauga, Vaughan, Brampton, Richmond Hill, Etobicoke, and Barrie and surrounding areas with offices located in Downtown Toronto and Barrie with an associated in Ottawa.

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Mclean v Mclean2013 ONCA 788