The dangers of dropping an E

What happens if your contract does not say what you thought it did? Where it is shown that both parties were mistaken as to the meaning, the court will rectify the contract if doing so reflects the true intentions of both. But in cases of unilateral mistakes, the task for the court can be more complex.

The Hurst Stores case, discussed in the 18 June and 2 July issues of Building, looked at whether a compromise agreement, signed by both parties, ought to be corrected to remove terms that (arguably) gave it final and binding effect. The final and binding effect was contrary to the intention of one of the parties to it. If the offending words stood, the mistaken party could not pursue various disruption claims submitted against the other some months after the compromise agreement was reached.

In Hurst Stores, the court decided that the agreement ought to be rectified. That decision was, obviously, not popular with the defendant to the rectification action, as was apparent from the first of the Building articles.

Despite a general reluctance by the courts to interfere with commercially negotiated agreements, another recent case demonstrates judges’ willingness to interfere, where to do otherwise would allow one party unfairly to take advantage of its own inequitable behaviour.

In George Wimpey vs VI Components, a judgment given at the end of June, the High Court ordered the rectification of a contract

for the sale of land by the defendant VIC to Wimpey. The contract included a complex formula for calculating the estimated selling price of residential units that Wimpey was to build on the land. The formula was to be used to calculate the price to be paid for the land. It took into account, among other things, any increases in footage of unit space and the value of enhancements, such as a river view.

Wimpey signed the contract without noticing that an important component of the formula – “E” for “Enhancements” – was missing. VIC had apparently dropped “E” from the formula, a move much to its benefit.

The judge decided that, on the evidence, Wimpey had clearly made a mistake in executing the document without “E”. Although the judge did not find as a matter of fact that VIC knew that Wimpey was mistaken, crucially he found, at best, that the seller wilfully shut its eyes to Wimpey’s mistake. That is enough to allow rectification if it would be inequitable to allow the contract to remain unaltered.

The judge’s view was that omission of part of the formula had initially come about by error, but that VI Components’ representatives had picked up and run with the error once they had realised its value. As the judge put it: “I do not accept that Mr Youens [representing VIC] deliberately dropped “E” before sending his fax to [his associate] Mr Daykin, although they both deliberately decided that the formula should be put to Mr Ketteridge [of Wimpey] without “E” to see what happened”.

In fact, nothing happened, as neither Wimpey nor its lawyers noticed the change.

By definition, in unilateral mistake cases, the parties’ subjective intentions differ at the point of contractual commitment, although the contract document appears to show mutual agreement and understanding.

It is a draconian step for the court to alter the meaning of a contract. A claimant will need to establish that it was, in fact, mistaken and that the other knew of the mistake, or was blind to it.

The court must also be persuaded that it would be inequitable not to rectify. Here, the court has competing claims to fairness: that of the party which insists that an agreed contract ought to be upheld, and that of the party which says it would not have signed the contract document had it been aware of the mistake.

There is a way round all of this. Proceedings like this can be avoided by observing good practice in negotiation and contracting procedure. Good practice, fairness and courtesy dictate that you should point out to the other party any changes that you may make to a document.

This cuts both ways. If you clearly indicate any changes to a document, there is less scope for the other party to claim that he was mistaken or that you shut your eyes to a mistake. The moral is always spell out any contract changes.

Simon Goss heads the construction team at TLT Solicitors