Commerciality and rectification – Victorian Supreme Court rectifies contract to avoid commercial absurdity

This article discusses the equitable doctrine of rectification as a way of correcting a contract where its written terms do not accurately reflect what was initially contemplated and agreed between the parties.

Summary

The Supreme Court of Victoria in Melbourne Property Group Investments (MPGI) Pty Ltd as trustee for the MPGI Trust v. Knight 43 Martin Street Pty Ltd [2022] VSC 41 considered whether a contract should be rectified on the basis that, there was a clear, common and continuing intention of the parties which was mistakenly not expressed accurately in the drafting. Consequently, the drafting created an unworkable and nonsensical outcome. The Court ordered the rectification of clause 8.1 to reflect the common intention of the parties and highlighted the importance of precise drafting.

What happened?

In Melbourne Property Group Investments (MPGI) Pty Ltd as trustee for the MPGI Trust v. Knight 43 Martin Street Pty Ltd [2022] VSC 41, the plaintiff, Melbourne Property Group Investments (MPGI) as trustee for the MPGI Trust (‘MPGI’) sought rectification of clause 8.1 of a variation deed as it asserted that the clause was subject to a drafting error. MPGI submitted that, at the time of executing the variation deed, it was the parties’ common intention that the guarantee would be in favour of MPGI as the lender, and not in favour of Knight 43 as the borrower.

In seeking the rectification of clause 8.1, MPGI relied on the fact that:

1. there was a clear, common and continuing intention of the parties which was mistakenly expressed in clause 8.1 of the variation deed;
2. if Knight 43 were both the principal debtor and the beneficiary, the arrangement would be circular and serve no purpose; and
3. the guarantee terms in clause 8 of the variation deed contemplates the guarantee being given for the benefit of MPGI.

The defendants relied upon and submitted that:

1. the words reflected in clause 8.1 are not inconsistent with the intention of the parties and therefore there is no mistake;
2. oral evidence should not be relied upon to reform a contract;
3. the requirements for rectification are not satisfied; and
4. the extrinsic evidence does not assist with clarifying ambiguity in whom the guarantee was supposedly meant to be given to.

What did the Supreme Court of Victoria say?

The Court ordered the rectification of the guarantee in clause 8.1 so that the phrase “guarantees to the Borrower” is replaced by the phrase “guarantees to the Lender“.

The Court held that it was the parties’ common intention that the guarantee in clause 8.1 would be in favour of MPGI, and therefore it would be unfair and unjust if rectification of clause 8.1 of the variation deed was not granted by the Court. In other words, the Court held that the drafting of clause 8.1, at the time of signing the variation deed, does not accurately reflect the true agreement between the parties.

In Simic v New South Wales Land and Housing Corporation, the High Court held that rectification is an equitable remedy in which the purpose is to make a written instrument conform to the true agreement of the parties. In order to pursue relief by rectification, the party seeking rectification must demonstrate that, at the time of executing the document, there was an “agreement” between the parties in the sense that the parties had a “common intention”, and that the document was to conform to that agreement.

In this instance, the claim for rectification of the guarantee clause is based on the clauses of the agreement executed by the parties as well as the correspondence between the parties’ solicitors prior to executing the deed. The amendment to clause 8.1 is merely to correct a reference (error in the description of a party) in the guarantee clause to the “Borrower” which it is said to be the “Lender”. To a large extent, the correspondence between the solicitors’ summarises the instructions and the negotiations between the parties. Therefore, the Court ordered rectification of the variation deed as the requirements for rectifications were met and it was in the interest of justice to rectify the deed.

Why is this case important?

Rectification of a document is a discretionary remedy. Generally, a court will only grant rectification if the court is satisfied that the parties held the necessary intention at the time of executing the document, and by mistake, that intention is not reflected in a document. The purpose of rectification is merely to amend and rectify the wording in a document to conform to the true agreement and intention of the parties.

When considering whether rectification is necessary, the court must also evaluate the parties’ true intention at the time of executing the document. Therefore, prior to executing a document, it is important to consider what a reasonable person would have understood those terms in the document to mean and contemplate on the common intention of the parties.

With rectification claims, a court will usually construe terms and determine them objectively. Therefore, when considering a request to rectify a document, a court will heavily rely on documentary and/or oral evidence from the relevant parties (including those who negotiated, drafted and approved the contract) as to what the document was intended to achieve. An example of such evidence include correspondence between solicitors. For that reason, it is crucial that both parties maintain precise, accurate and effective note taking skills throughout the negotiation and drafting process of a particular document. This will assist with determining the true intention of a party, should a dispute or inconsistency arise at a later date. In this instance, the Court relied upon the chain of emails between the parties’ solicitors prior to executing the deed.

In summary, the party seeking rectification must prove and demonstrate that the following three elements are satisfied:

• Intention: The parties held a common intention, which continued until the time the document was executed.
• Mistake: By mistake (as to the effect of such words), the document does not accord with the parties’ common intention.
• Rectification would correct the mistake: If a document is rectified in the manner requested, the mistake would be corrected, and the document would accord with the parties’ common intention. The party seeking rectification must clearly demonstrate to the court exactly how the words of the document should be amended to reflect the true intention.

This article was written by Leighton Moon, Partner, and Jashrin Whitehead, Solicitor.