Practical Law

Commercial and construction contracts can be complex and fairly voluminous and the documents forming the contract can often run to a number of files, or more. During the tendering process, various documents often pass backwards and forwards between the negotiating parties and it is very common for multiple versions of the same document to be shared. The upshot of this is that by the time the parties have reached an enforceable agreement, some hundreds of emails will have passed and people within the various party organisations will have read and commented on many drafts of different documents. Then, when everything has been agreed and formalised, it will often be the responsibility of a person or a small team within each organisation to finalise the contract documentation. It is here, at this stage, that the scope for human error is potentially huge. It is quite easy to see how someone might include the wrong (or wrong version of) documents within the finalised contract and how such an error might go unnoticed for some time. Indeed, in Milton Keynes v Viridor (Community Recycling MK) Ltd, Coulson J remarked that such an error:

“… is perhaps a sad reflection of the fact that modern day contracts of this kind are so complicated that nobody… bothers to check the actual documentation being signed.”

Where such an error creeps in, what options are available to the parties?

In reaching his judgment in Milton Keynes v Viridor, Coulson J helpfully set out and summarised the principles applicable to the law on rectification.

Borough of Milton Keynes v Viridor (Community Recycling MK) Ltd

By a contract dated 1 October 2009, the claimant engaged the defendant to carry out waste recycling at the claimant’s facility for a period of 15 years. Under the contract, the defendant was required to make to the claimant fixed payments (that is, to pay rent) and variable payments (a profit-sharing arrangement). The tender process was governed by the Public Contract Regulations (SI 2006/5) (PCR 2006).

The claimant circulated an invitation to final tender requiring the tenderers to complete an income generating payment mechanism (IGPM). In May 2009, the defendant produced its final tender bid. This included a completed IGPM that provided for a fixed payment of £500,000 per annum “indexed for inflation”.

The claimant’s consultants prepared a detailed evaluation report on the final tender bid received from the defendant and one other tendering party. That report noted that the proposed fixed payment was to be indexed for inflation.

The final contract documents were assembled by the claimant’s consultants and sent to the claimant’s lawyers. The claimant’s consultants included within the final package an earlier and incomplete version of the IGPM, which contained gaps and made no reference to indexation. It was this version that was subsequently included in the contract.

During the proceedings, it was common ground that the IGPM included in the contract was not the version that the defendant sent out as part of its final tender but the earlier version that had been sent out with the invitation to tender.

In 2012, the claimant was audited. At this stage, it became apparent to the claimant that the wrong document has been included in the contract. The claimant issued proceedings claiming rectification of the contract and relied on the grounds of common or unilateral mistake.

Reminder on the law of rectification

Coulson J had to decide whether the claimant was entitled to rectification of the contract on grounds of common or unilateral mistake. In reaching his judgment, he very helpfully set out and summarised the current law on aspects of rectification.

Common mistake

In respect of rectification of a written contract on the grounds of common mistake, Coulson J set out and referred to the applicable principles set out in Swainland Builders Ltd v Freehold Properties, which stated that:

“The party seeking rectification must show that:

(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2) there was an outward expression of accord;

(3) the intention continued at the time of the execution of the instrument sought to be rectified;

(4) by mistake the instrument did not reflect that common intention.”

This formulation was expressly approved by Lord Hoffmann in Chartbrook v Persimmon. 

Further, Coulson J expanded on the test in Swainland by adding:

“… I should however note that, in my view, the word ‘continuing’ in Peter Gibson LJ’s first requirement seems to me to be superfluous: it is more accurate to say that there needs to be a common intention (requirement 1) which was continuing at the time that the contract was executed (requirement 3).”

Unilateral mistake

In respect of rectification of a written contract based on unilateral mistake, Coulson J referred to the ingredients set out in Thomas Bates & Son Ltd v Wyndham’s Lingerie Ltd [1981] 1 WLR 505, where it was held:

“… first, that one party (A) erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain: secondly, that the other party (B) was aware of the omission or the inclusion and that it was due to a mistake on the part of (A); thirdly, that (B) has omitted to draw the mistake to the notice of (A). And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit (B). If these requirements are satisfied, the court may regard it as inequitable to allow (B) to restrict rectification to give effect to (A’s) intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake.”

Summary of Coulson J’s judgment

Coulson J found that the claimant was entitled to rectification of the contract to include the correct IGPM. Applying the relevant legal principles on rectification (as set out above) to the particular facts, he found:

• Common intention. There was a common intention at the time that the tender was accepted that the fixed payment was indexed for inflation. The defendant’s fixed payment figures were set out in its completed IGPM.
• Outward expressing of accord. There was no doubt that there was such expression as “there was a binding contract at that date to that effect”.
• Continuing intention. The common intention to use the completed IGPM continued until the contract was signed.
• Mistake. There was compelling evidence as to how the mistake happened and that it was not spotted by either side. This was sufficient to demonstrate that a mistake was made. The next question was whether it was a common mistake or a unilateral mistake:
  • there was a common mistake because both parties had made precisely the same mistake. They both signed off on a contract that included the wrong version of the IGPM;
  • alternatively, if on the facts the defendant noticed the gaps before the contract was signed but did not alert the claimant to this problem, a case for unilateral mistake was made out. This was because the defendant’s failure to alert the claimant of the gaps would be because the defendant considered “the mistake was calculated to benefit the defendant” or “that he could gain a financial advantage by avoiding the tender offer of indexation”.

Further, the defendant was not entitled to rely on a defence of laches. Any delays in commencing proceedings were a shared responsibility and there was no detriment to the defendant. There was also no evidence of acquiescence.

Seeking rectification

Parties often engage in arguments about the proper construction of complex contracts and, in particular, which documents form part of the contract. However, this case is a helpful reminder that it is always important to look at the facts surrounding the formation of the agreement to see whether the documents ultimately included within the contract reflect what the parties actually agreed. If not, the appropriate course of action may be to seek rectification of the contract rather than to advance arguments as to the proper construction of the contract. In order to successfully advance such a claim, the party claiming rectification will need witness evidence from the relevant people who were involved in negotiating and finalising the contract and its documents.