In this case, the NSW Supreme Court considered whether a contract could be rectified where the terms did not achieve their intended effect.
The Court indicated that, as part of the process of construction, it had the power to correct mistakes that were “obvious” on the face of the document. This power was separate to the Court’s equitable jurisdiction to rectify the contract in order to align its meaning with the original intention of the parties. A party seeking rectification as a remedy may rely on prior negotiations between the parties, parol evidence, or the actual intention of the parties, but will require “convincing proof” of the parties’ intention to achieve a precise and specific particular effect.
The plaintiff, W & K Holdings NSW (Pty Ltd) (“WK”) leased various machinery and commercial equipment for use in its business from Laureen Mayo (“Mayo”), an administrative assistant at the company. Because WK had been unable to obtain finance through traditional lenders to purchase the equipment due to its poor financial situation, Mayo borrowed against her home to purchase the equipment, and then leased it to WK. Mayo had a strong personal friendship with the managing director of the company, William Leonard (“Leonard”).
The plaintiff argued that the lease agreements should be construed as applying a reducible rather than a flat rate of interest. A reducible interest rate meant that the plaintiff would pay less interest, as the rate would apply to the ‘reducing’ balance of the principal sum owing throughout the term of the loan. In contrast, a flat interest rate would apply to the initial principal sum over the whole term of the loan. Alternatively, the plaintiff sought an order to have the terms of the lease agreements rectified to provide for the reducible rate of interest.
The leases were prepared by reference to standard lease documentation previously provided to the company. The plaintiff argued as a matter of construction, the leases actually provided for a reducible rate of interest because the words “diminishing value” appeared immediately beside the specified rate. This was despite the monthly rental payment figure, also set out in the agreements, being calculated on a flat basis. The Court found that there was no ambiguity in the agreements, only an inconsistency in its terms. The Court chose to give greater weight to specific monthly payment figures, accepting that the words “diminishing value” were left in by mistake, and on the face of the agreements, interest was to be calculated on a flat basis. Accordingly, on construing the words actually included in the agreements, a flat rate of interest would apply.
The Court then considered whether, notwithstanding the construction given to the agreements, the leases could be rectified in the way the plaintiff suggested, so that a reducible rate of interest would apply. The plaintiff needed to provide “convincing proof” (on the balance of probabilities) to show that, at the time of executing the agreements, the parties held a common intention which was inconsistent with what was ultimately written. That evidence needed to be specific, and needed identify the parties’ precise common intention. In this case, rectification was granted on the basis of evidence that showed the parties’ actual common intention was that interest should be charged on a reducible basis. It was also significant that the method by which this common intention was to be achieved was not controversial and could therefore be executed precisely – it simply involved a single alternative mathematical calculation.
To see the full judgment in this case, please click here.