Modern construction contracts are complex and frequently comprise a large number of different documents. The decision in Milton Keynes BC v Viridor (Community Recycling MK) Limited [2017] EWHC 239 (TCC) serves to remind parties of the importance of taking great care so as to ensure that the correct documentation is incorporated in the contract for execution and of the difficulties that can arise if the parties get it wrong. In this case the court found little difficulty in concluding that the documents had been incorporated in the executed version of the contract were incorrect and did not reflect the true agreement between the parties. Absent a compelling reason not do so, the court would hold the parties to their original bargain.

The Facts

In October 2009 Milton Keynes BC ("MK") engaged a company (D") to carry out waste recycling at MK's existing facility for a period of 15 years. MK's tender documentation required a fixed payment for use of the facility together with a variable payment calculated on the basis of a profit sharing arrangement between the parties. The tender documentation containing the provision for both the fixed and variable payments was incorporated in the Income Generating Payment Mechanism ("IGPM").

D's final tender included the IGPM which identified a fixed payment of £500,000 per annum "indexed for inflation". D was awarded the contract. However, in compiling the contractual documentation, MK's consultants incorporated an earlier and incomplete version of the IGPM. That document made no reference to either the £500,000 payment or to indexation.

D spotted the error by the end of November 2009, following signature of the contract documents. They failed, however, to advise MK of that fact. MK invoiced D at the rate of £500,000 per annum (in accordance with the original IGPM and notwithstanding the fact that no mention of that figure was stated in the version appended to the contract), but they made no reference to indexation. MK became aware that the incorrect copy of the IGPM had been appended to the contract following an audit in April 2012. They sought indexation of the sums already paid. D refused, and MK sought rectification of the contract to substitute the original IGPM in place of the document they claimed had been mistakenly incorporated. In their defence D claimed:

  • There has been no mistake. The correct version of the IGPM had been incorporated. Where the omission was obvious and glaring mistake should not be inferred.

  • That the entire agreement clause (which provided that the contract was the entire agreement between the parties and that it superseded, cancelled and nullified any previous agreement between the parties) prevented rectification.

  • In any event, MK had either acquiesced in the mistake or alternatively delayed in bringing the proceedings and therefore were prevented from claiming rectification.

Decision

1. Common mistake

a. In order for MK to be entitled to rectification based upon a common mistake it had to demonstrate that:

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

ii. There had been an outward expression of that accord;

iii. That intention continued until the execution of the instrument sought to be rectified; and

iv. By mistake the instrument did not reflect that common intention.

b. The court had little difficulty in deciding that the parties had intended to contract on the basis of the tender IGPM which provided for that payment of £500,000 "indexed for inflation". That intention had been expressly recorded in the tender IGPM, which had been expressly accepted by MK. There could be no doubt that there had been the necessary outward expression of that accord, which resulted in a binding contract.

c. It was the very nature of a mistake that it was not picked up. It could not be said merely because the mistake was obvious that there had been no mistake at all.

d.The court rejected D's contention that there had not been a continuing intention to incorporate the indexation provisions and that, because of the negotiation process, the indexation provision had been deliberately omitted.

e. The parties had both mistakenly signed the contract incorporating the blank version of the IGPM rather than the version originally returned as part of the tender process. The gaps in the IGPM rendered the contract inoperable.

2. Unilateral mistake

a. Whilst finding that there had been a common mistake, it went on to consider (obiter) the position had D been aware of the error but MK had not. Citing the decision in Thomas Bates & Son Limited v Windom's (Longtree) Limited [1981] 1 WLR 505, the court held that rectification for unilateral mistake was justified where:

i. One party (A) erroneously believed that the documents sought to be rectified contained a particular term or provision, or did not contain a particular term or provision which it mistakenly did contain;

ii. That the other party (B) was aware of the omission or inclusion, and that it was due to a mistake on the part of the other party (A);

iii. That B was aware of A's mistake and omitted to draw that mistake to A's notice; and

iv. The mistake must be calculated to benefit B.

b. If D had been aware of the inclusion of the incorrect IGPM into the contract and yet failed to notify MK of that fact, the necessary ingredients for rectification on the basis unilateral mistake would have been made out as it was to the manifest advantage of D.

3. Entire Agreement Clause

a. The entire agreement clause was not inconsistent with a claim for rectification where there was strong evidence of the mistake. Whilst accepting that such a clause could demonstrate that there had been no mistake, in this case there was strong evidence of a common mistake. In such a case, the agreement which constituted "the entire agreement" was to be found in the contract as rectified and not in the contract which did not reflect the true intention or agreement of the parties.

4. Acquiescence and delay

a. The court rejected D's contention that rectification should not be granted.

b. The starting point is that was that as there had been a mistake the parties should be held to their original bargain. Further, if indexation was not allowed D would have use of a facility for 15 years without indexation and without a break clause, which was contrary to commercial common sense. Accordingly, there needed to be clear evidence of delay and acquiescence on the part of MK to defeat the claim for rectification.

c. Delay: As soon as the error had come to light MK raised it. The subsequent delay in issuing proceedings was due to the conduct of both parties. In any event, D had suffered no detriment as a consequence of any delay.

d. Acquiescence: It could not be said that MK had acquiesced in the proposition that indexation could not be charged. Further, D had suffered no detriment by reason of MK's conduct.

Lessons

This case highlights the consequences of the parties' failure to properly read the various contract documents before execution of the contract and the importance of ensuring that great care is taken before contract documents are signed to ensure that they faithfully record the true agreement of the parties. Where the court is satisfied that the contract does not accurately record the intention of the parties by reason of a common mistake, or that one of the contracting parties was aware of, and sought to benefit from, the mistake of the other party, the incorporation of an entire agreement clause will not automatically serve to defeat a claim for rectification. The starting point will be that the court will uphold the true agreement between the parties. A claim for rectification will not be defeated unless there is clear and compelling evidence of either delay or acquiescence on the part of the claimant which has caused detriment to the other party.