Rectification – correcting mistakes in contracts containing an entire agreement clause

Introduction

The English courts have used the equitable doctrine of rectification as a remedy to amend the terms of a written contract where such terms do not accurately reflect what was agreed between the parties. This is usually because one or both of the parties has made a mistake in stating the terms of the contract or because certain terms have been excluded from the contract altogether.

In recent years the courts have had to consider the impact that entire agreement clauses may have on the ability of a court to grant an order for rectification on the grounds of mistake. In 1995 the High Court established the principle that rectification is available for a unilateral mistake (i.e. where one party makes a mistake which the other party knows about) even though a contract contains an entire agreement clause. The High Court has now had a further opportunity to consider the ability of a court to rectify a mistake in a contract despite the existence of an entire agreement clause in that contract.

This article briefly examines the judgment of the High Court in this recent case which will be particular interest to those involved in drafting and negotiating contracts.

Facts

The case concerned an English manufacturer of medical products who had appointed a distributor to distribute a new type of spinal implant in North America. The parties entered into a distribution agreement in October 2004 which was subsequently re-signed in March 2005. Both versions of the agreement contained the following clauses:

Clause 18:

“This Agreement constitutes the entire understanding between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements, negotiations and discussions between the parties relating to it.”

Clause 26.1:

“The signing of this Agreement implies acceptance of all clauses stated herein.”

Both versions of the agreement did not, however, contain a clause permitting the distributor to receive compensation if the agreement was terminated as a result of a change in the ownership of the manufacturer. The distributor had requested for such a clause to be inserted into the contract following concerns, which had come to light during the course of negotiations, it had about the intention of the manufacturer to sell the company that was a contracting party under the distribution agreement. The distributor argued that the omission from the 2004 version of the agreement was a mistake which had been repeated in the 2005 version. The manufacturer, on the other hand, argued that the inclusion of the entire agreement clause in the agreement prevented the distributor from asserting that a mistake had been made and therefore entitled the distributor to ask the court to rectify the contract. The manufacturer stated further that on its proper construction, the purpose of the entire agreement clause was to prevent a party asserting an ‘understanding’ which was contrary to the terms set out in the agreement. Prior agreements, negotiations and discussions between the parties were therefore irrelevant. The manufacturer also argued that clauses 18 and 26.1 either created a contractual estoppel to any rectification or prevented a claim for rectification. Alternatively, the inclusion of the entire agreement clause showed that the parties intended to be bound by the terms set out in the contract regardless of prior or other intentions between them.

High Court decision

The High Court rejected the submissions of the manufacturer regarding the effect of clause 18 of the agreement. The deputy judge, Christopher Pymont QC explained that the scope of an entire agreement clause had been defined in a previous case which had stated that its purpose was to limit possible contractual terms arising from dealings outside the contract. A claim for rectification was quite different. The deputy judge saw such a claim arising out of the fact that the parties had made a mistake in expressing their true agreement. The judge stated that there was nothing in the case which defined the scope of an entire agreement clause to support the manufacturer’s claim that a clause (such as clause 18) could prevent a claim for rectification.

The deputy judge referred to the 1995 case establishing the principle that the existence of an entire agreement clause in a contract did not prevent a party from making a claim for rectification of unilateral mistake. In particular the judge pointed to the judgment of Roger Cooke J who had stated that ‘a term that says “all terms are in the document”…cannot be read as meaning “all the terms are in the document when it is in the wrong form”.’ The deputy judge held that although this case was concerned with a unilateral mistake this was immaterial and the principle applied equally to common mistake (i.e where both parties make the same mistake). Accordingly, an entire agreement clause could not prevent a successful claim for rectification of a mistake (whether common or unilateral).

Interestingly, the deputy judge also stated that the existence of an entire agreement clause could affect a court’s consideration of the parties’ actual intentions and was therefore not entirely irrelevant in the context of mistake and rectification. He held that it was important, looking at evidence, to identify the effect of the entire agreement clause on the parties. This would depend on whether there was any evidence to suggest that the parties had actually considered the nature and effect of the entire agreement clause as part of their negotiations or whether it was part of the travelling drafts of the agreement. In the particular case, there was no evidence to suggest that either of the parties had actually considered the entire agreement clause.

The deputy judge also rejected the manufacturer’s argument in relation to contractual estoppel. He held that the purpose of an entire agreement clause was not to prevent rectification either as a contractual term or by creating a contractual estoppel. He saw rectification as a remedy available to parties who had made mistake in a contract (whether common or unilateral).

Conclusions

It is clear from this case that parties will not be bound by the terms of an agreement which does not accurately reflect what was agreed between them. It also emphasises the importance ensuring that all points agreed between the parties in negotiations are accurately and clearly recorded in the agreement. Due consideration must be given to the nature and effect an entire agreement clause during the negotiation of a contract so as to ensure that parties have included all terms which they wish to be bound by.

It is important to note that although the High Court in this case did grant an order of rectification, relying on rectification as a remedy is not without its challenges. The court will only rectify a contract where there is ‘convincing proof’ or a ‘high degree’ of conviction that there was a mistake in the contract. The burden of proof is on the party seeking rectification and it may be necessary to retain documents created during negotiations to establish that there has been a mistake. It is therefore advisable to make sure that a contract is properly drafted in the first instance in order to avoid any issues of uncertainty as to the terms agreed between the parties and the expense of having to make a claim for rectification.